Category Archives: Economics/Statistics

Underestimating the Russian Economy

by Emmanuel Todd via Marianne

Why did the West underestimate the Russian economy? The problem is the false calculation of GDP, — Marianne

▪️ Why is the Russian economy not collapsing? After all, all the sanctions that the West was capable of have been applied against it. Why, on the contrary, is the European economy in danger of collapse on the eve of winter, as evidenced by a record surge in inflation, asks French Marianne

▪️ The answer, according to Marianne, is that economic power, measured on the basis of GDP calculated according to the current rules, is fictitious. This tool for measuring the economic success of a country is outdated. It no longer measures the aggregate production of steel, cars, refrigerators and televisions, that is, real goods. It measures primarily the production of intangible assets, which some sometimes (and others very often) they are considered useless. And therefore they represent only nominal value

▪️ As an example of the fictitiousness of the GDP indicator, Marianne cites the example of the US economy, whose GDP is 40% of the GDP of the entire West. Healthcare in the United States “sucks in” 18% of “national production”, which is almost 2 times more than in other Western countries. But let’s look at the efficiency indicators of these costs, Marianne suggests: life expectancy in the United States is only 77.3 years compared to 80.9 in Germany, 82.2 in France, 82.4 in Sweden, 84.6 in Japan.

▪️ How can this be explained? And the fact that more than half of American health care costs (from 10 to 13% of the total GDP) are the unreasonable incomes of their doctors (which account for fewer residents than in France), as well as the insane cost of medicines offered to Americans (half of world spending)

▪️ Reverence for the dollar and reverence for the euro make the West mistake banknotes for real wealth. But these money bags will not change the fact that wheat production in America fell from 65 to 47 million tons between 1980 and 2021, and production in Russia increased from 36.9 to 80 million tons from 1987 to 2020

▪️ Wheat together with gas give Russia more power than the notorious “intangible assets” give the United States, Marianne believes. This is the whole problem of reserve currencies: they can be created for cheap (in fact, for nothing), but what can you buy with them in the countries producing these currencies if they sacrificed their industry on the altar of globalization?

▪️ The false system of assessing economic potential leads to the fact that now we resemble a military pilot who flew on faulty instruments and thought he was flying at an altitude of 10,000 m. Until he saw that it was actually at an altitude of 350 m. And there is no runway visible on the horizon,” Marianne concludes

Russian Corporate Profits Jump 25% as Sanctions Hit Muted

  • Net income gain came despite economic contraction, inflation
  • Data are latest sign of economy’s resilience amid sanctions
Moscow's International Business Center. 
Moscow’s International Business Center. 
Source: Bloomberg
Russian corporate profits jumped 25% in the second quarter, even as sweeping US and European sanctions imposed over the Kremlin’s invasion of Ukraine pushed the economy into recession.
Profits jumped to 9.5 trillion rubles ($144 billion at the average rate for the period), with the year-on-year increase outpacing the 17% rise in consumer prices over the period, according to Sberbank CIB calculations based on data from the Federal Statistics Service. 

“The second quarter results were very good, demonstrating the resilience of the Russian economy,” analysts at the state-owned lender wrote. “The solid profit growth provides hope for a revival in corporate investment.”

Profits Surge

Russian corporate profits jumped in 2Q, defying sanctions

Source: SberCIB, Rosstat

Percentage increase from previous year

The manufacturing sector, which was hit especially hard as sanctions cut off key imported components, still managed a 44% profit gain, while transportation and storage were up 168%. Profits in real estate and construction surged, as did earnings in hotels and catering, as Russians stayed home as international air service was limited. 

Putin’s War Sends Russian Economy Back to 2018 in Single Quarter

Wholesale and retail trade suffered with the drop in sales, with profits off 13%, the report said, while earnings in mining were down 51% as sanctions hit key producers. In the tech sector, where western companies pulled out en masse, profits were down 48%.

— With assistance by Benjamin Harvey

The Vassal Europe in Numbers

The main buyers and sellers of US securities over the past 4 years.

The list is divided into two parts, first buyers with cumulative purchases of all types of bonds over 5 billion dollars in 4 years, below the main sellers with cumulative sales of more than 1 billion over 4 years. For shares, the change in market value is the main factor in the revaluation.

All bond purchases occur only in the first 12 countries and offshore zones: the UK, Japan, Canada, Belgium, the Cayman Islands, Luxembourg, France, Taiwan, South Korea, Singapore, Hong Kong and India. This means that all other countries have integrally zero balances. It also shows that the main flow of purchases is concentrated from American allies.

Sales come from Russia, which is the absolute leader, then Ireland (as part of tax maneuvers and repatriation of assets back to the US), China, Turkey, Saudi Arabia and Kazakhstan.

Therefore, the United States can only count on its allies in terms of the accumulation of financial flows.


https://t.me/ZradaXXII/6149

ZradaXXII, [Jun 22, 2022 at 11:52 PM]

So far, the main losers in all this geopolitical fuss are the EU countries – it is they who pay the highest price, and they pay all the bills. They are the main provider of capital in the US, buying back US securities. The EU is subsidizing Russia like never before – they crashed their exports and increased their imports from Russia to a record and took full support of Ukraine.

Confirmation of accumulated imbalances came out the other day – record trade deficits across all countries.

In Germany, there is still a surplus of 2 billion euros against the norm of 18-20 billion per month, but the Germans have not had such a low surplus since the formation of the Eurozone. France, Poland, Romania, Hungary, Czechia, Belgium, and Portugal have all-time-high trade deficits, with Belgium and Czechia usually running surpluses. Italy and Spain hit their trade deficit lows.

All the leading EU countries have lost. This is a wonderful example when, instead of your own interests, you begin to serve the interests of the USA.

https://t.me/ZradaXXII/6151

So far, the main losers in all this geopolitical fuss are the EU countries – it is they who pay the highest price, and they pay all the bills. They are the main provider of capital in the US, buying back US securities. The EU is subsidizing Russia like never before – they crashed their exports and increased their imports from Russia to a record and took full support of Ukraine.

Confirmation of accumulated imbalances came out the other day – record trade deficits across all countries.

In Germany, there is still a surplus of 2 billion euros against the norm of 18-20 billion per month, but the Germans have not had such a low surplus since the formation of the Eurozone. France, Poland, Romania, Hungary, Czechia, Belgium, and Portugal have all-time trade deficits, with Belgium and Czechia usually running surpluses. Italy and Spain hit their trade deficit lows.

All the leading EU countries have lost. This is a wonderful example when, instead of your own interests, you begin to serve the interests of the USA.

US Oil Reserves Running Low – Bloomberg

The stockpile is forecast to dwindle to a 40-year low by October

Washington has been actively selling from its Strategic Petroleum Reserve (SPR) over the past year to keep energy prices from rising even higher, Bloomberg reported on Friday, noting that the government can’t keep tapping the reserves forever.

According to the report, over the past year almost 115 million barrels were released into the market. Those sales have soared to a record high of nearly one million barrels per day since mid-May. At the current rate, the United States is selling more barrels from its reserve than the production of most medium-sized OPEC countries, such as Algeria or Angola.

The SPR contains two kinds of crude: medium-sour, which is the quality of crude pumped by Russia, most Middle Eastern countries and Venezuela, as well as light-sweet crude.

Bloomberg’s analysis of official data showed that 85% of the oil sold from the SPR over the past year has been medium-sour. Those sales have reduced the amount of crude inside the reserve “dramatically.”

If Washington sticks to its current pace, the reserves will shrink to a 40-year low of 358 million barrels by the end of October, when the releases are due to stop. A year ago, the SPR, located in four caverns in Texas and Louisiana, reportedly contained 621 million barrels.

“As the oil market looks today, it’s difficult to see how Washington can halt sales in October. Removing that additional supply would mean commercial inventories quickly deplete, putting upward pressure on oil prices,” says the report.

According to OilX estimates, cited by Bloomberg, by the end of October the SPR will hold only 179 million barrels of medium-sour crude. This means that during the period from June 2021 to October 2022, the US is likely to sell about 180-190 million barrels of medium-sour crude from its reserves.

Alarm About Dwindling Global Energy Capacity

Authored by Bryan Jung via The Epoch Times,

Saudi Arabia and the United Arab Emirates warned earlier this week that their spare energy capacity is decreasing in all energy sectors as key producers reduce investment in fossil fuels, pushing oil, diesel, and natural gas to trade at near-record highs.

Brent oil was trading at around $102 a barrel as they spoke.

“I am a dinosaur, but I have never seen these things,” said Saudi energy minister Prince Abdulaziz bin Salman to Bloomberg on May 10, at an OPEC conference in Abu Dhabi.

The prince was referring to the surge in prices for refined oil products, in particular in the United States, where gas and diesel prices are hitting a record high, causing problems for the Biden administration.

“The world needs to wake up to an existing reality. The world is running out of energy capacity at all levels,” said the Saudi minister.

Suhail al Mazrouei, the UAE’s energy minister, said to Bloomberg at the same conference, that without additional global investment, OPEC+ would not be able to guarantee sufficient supplies of oil for its customers as the world economy fully recovers from the pandemic.

“We’ve been warning about the lack of investment,” said al Mazrouei, and “that lack of investment is catching up with a lot of countries.”

The two ministers also hit back at new U.S. congressional legislation intended to target the oil cartel and regulate energy output, claiming that the bill would bring greater chaos to already strained energy markets.

Of the major producers, Saudi Arabia and the UAE are among the few producers investing in greater output and together, are spending billions of dollars to boost crude capacity by 2 million barrels a day by the end of this decade.

The other producers are struggling with investments, as Western shareholders and governments push for a transition from fossil fuels to “green” energy.

OPEC+ announced a 432,000 barrel-a-day increase for June at its meeting on May 5, but it’s struggling to reach even that monthly target, as many members are producing below their quotas.

The 23-nation energy alliance fell short of its production quotas by 2.59 million barrels per day in April, according to the latest OPEC+ survey by S&P Global Commodity Insights.

The UAE minister still believes that there is no serious market crisis at the moment and that OPEC has little urgency to boost oil production.

However, several key importers disagree, especially the EU, U.S., and Japan, which have been demanding a more rapid increase in output from OPEC+ since last year.

The same nations have at the same time imposed sanctions on Russia a lead OPEC member, after its invasion of Ukraine at the end of February.

The EU has recently announced an even more punitive ban on Russian energy imports this month.

Crude prices have risen more than 35 percent this year to a high of around $105 a barrel since sanctions were placed on Moscow over Ukraine.

The G7 nations have lobbied OPEC+ to punish Russia, but the Saudis and the UAE reiterated that the cartel would not allow geopolitics to affect its decisions.

Al Mazrouei blamed the politicization of the oil market for the latest rise in prices and declared that OPEC+ was unified and that all members have pledged not to hike output on there own.

“We are together,” he said. “Trust me. No one can unilaterally increase production unless they’re intending to break the alliance,” said the UAE minister.

“We are getting a fraction of what the companies and governments are making from those extra taxes,” he said.

The minister said that it was wrong to blame crude oil producers and that high taxes in consuming nations were to blame for skyrocketing fuel prices.

He also told CNBC that the revival of a proposed bill in Washington could push oil prices by as much as 300 percent.

Top OPEC ministers have hit back at new U.S. legislation intended to regulate oil output and that OPEC was being unfairly targeted over the energy crisis, saying that such efforts would bring chaos to energy markets.

A U.S. Senate Committee greenlighted the new bipartisan No Oil Producing and Exporting Cartels (NOPEC) bill on May 5 with a 17-4 majority, the first step towards passage of the decades-old proposal.

It now needs to be passed by the full Senate and the House, before being signed into law by the president.

The proposed bill aims to protect U.S. consumers and businesses over the manipulation of energy prices and would allow the U.S. government to open an antitrust suit against OPEC over its control of the majority of the world’s oil supply and prices.

“If you hinder that system, you need to watch what you’re asking for, because having a chaotic market you would see … a 200 percent or 300 percent increase in the prices that the world cannot handle,” said Al Mazrouei to CNBC at the World Utilities Congress in Abu Dhabi.

“We, OPEC+, cannot compensate for the whole 100 percent of the world requirement,” he said.

“How much we produce, that is our share. And, actually, I would bet that we are doing much more.”

The UAE and Saudi energy ministers issued a joint statement, saying that both OPEC and non-OPEC members should work together to handle the ongoing energy crisis.

“I’m very concerned about the holistic energy system existing today,” said Prince bin Salman, who added that “the world needs to work collectively, responsibly, comprehensively in providing us and salvaging the world economy.”

The Economist: Russia Defies Predictions of Collapse

The Russian economy has largely shrugged off “unprecedented sanctions” from the West, The Economist noted, crediting the sharp rise in revenues from oil and gas exports. Russian consumer spending is up again, interest rates are going down, and the ruble is stronger than before the conflict in Ukraine escalated.

“Russia’s economy is back on its feet,” the British weekly pointed out on Friday, adding that it was “defying predictions of collapse” as a result of embargoes imposed by the US and its allies.

The ruble is now “as valuable” as before, says The Economist, on account of “capital controls and high interest rates.” As of Friday, the Russian currency was actually stronger – 65.8 to the US dollar, compared to 81 on February 23. Russia is also continuing to pay its foreign-currency bonds, despite US and UK attempts to force it into a default.

Russians are spending “fairly freely” on cafés, bars and restaurants once again, according to numbers from Sberbank, Russia’s largest bank. The Russian central bank lowered the key interest rate from 17% to 14% in late April. Predictions that Russia’s GDP will decline up to 15% this year are “starting to look pessimistic,” notes The Economist.

Sanctions announced by the US and its allies after Moscow sent troops into Ukraine were intended to “degrade [Russia’s] industrial capacity for years to come,” according to US president Joe Biden’s words. Biden also vowed to “take robust action to make sure the pain of our sanctions is targeted at the Russian economy, not ours.”

Since then, the US has registered the highest annualized inflation increase since 1981, a quarter of negative GDP, and skyrocketing gas prices – which Biden blamed on Russian President Vladimir Putin.

Meanwhile, according to The Economist, Russia has exported at least $65 billion worth of oil and gas, with government revenues from hydrocarbons raising over 80% year-on-year in the first quarter of 2022.

About the Sale of Russian Gas for Rubles

You have to pay to Russian banks now!

The Presidential Decree published today explaining exactly how to sell and pay for Russian gas was predictably misinterpreted.

The task, first of all, was to transfer all mutual settlements from the American and European control zones to the Russian zone. There is a need to transfer financial transactions to Russian jurisdiction in order to eliminate the risks of payment disruptions and blocking of Russian accounts.

That’s exactly what was done.

For Europeans, of course, it is technically incomprehensible, difficult and undesirable to exchange euros for rubles. Therefore, they were offered an option: they open an account with the Russian Gazprombank, payments will be received in foreign currency, converted at the exchange rate of the Moscow Exchange and transferred to the accounts of counterparties in the same Gazprombank, and from there they will be received as payment.

That is, the Russian side thus guarantees that Gazprom will receive the money. And this is a fundamental point.

The scheme, to which the same Americans pushed the Europeans, was as follows: the money goes to Gazprom’s accounts in Europe and, accordingly, is blocked there. And this is repeated endlessly until the special military operation stops. An uncomplicated financial trap.

For the Russian side, making settlements in the area of domestic jurisdiction is also a profitable step. This may not be the most thorough, but it is still a brick in building a parallel financial system, which has been talked about so much lately.

An alternative payment system is being formed now. This is not a violation of existing contracts in any way. This is a way of adapting to the unprecedented pressure that the Russian side is facing.

Moreover, tying the price of gold from below to equivalent of 75 rubles per dollar (roughly equivalent to the exchange rate pre-invasion) guarantees some immutability of the exchange rate of the euro vs. the ruble. This will need further adjustments if the ruble becomes more desirable.

Hybrid Warfare and Gaseous Absurdity

The RF has demanded payment in roubles. The response of the EU states is to refuse this demand. The RF has indicated it will terminate the supply of LNG for non-payment. The EU suggests it will seek substitute LNG supply. The EU position represents an absurdist element of Hybrid Warfare. This post sets out some of the issues.

According to the IEA the EU consumed 155 billion cubic metres of LNG in 2021. Of this supply 45% was obtained from Russia ( https://www.iea.org/news/how-europe-can-cut-natural-gas-imports-from-russia-significantly-within-a-year ).

The RF 2021 EU import share was 69.75 billion cubic metres per year or 5.8 billion cubic metres LNG per month. If the EU seeks to substitute for RF LNG this is the approximate monthly quantity required.

The largest LNG tankers are the QMAX class. These can transport 266,000 cubic metres of LNG ( https://en.wikipedia.org/wiki/Q-Max ).

A simple calculation shows the monthly transport of 5.8 billion cubic metres of LNG by vessels with a capacity of 266,000 cubic metres of LNG requires a total of 21,852 shipments per month or approximately 705 shipments per day.

This volume of shipping will saturate the existing EU LNG offloading ports. These ports are already dedicated to handling other LNG imports. The time to unload an LNG cargo is approximately one day. This implies the need to construct 705 new LNG offloading ports because immediately following the day 1 arrival of 705 vessels there will be the Day 2 arrival of another 705 vessels with the same vessel traffic for Day 3 and all following days. The transit from Houston to Rotterdam takes 18 days outbound and 18 days empty return. With one day devoted to loading, and a further day to unloading, each vessel will spend 28 days on voyage. These figures make no allowance for vessel downtime for required maintenance intervals.

The transport of the required monthly volume of LNG will therefore require 705 QMAX x 31 days or total QMAX fleet of 21,855 vessels. Since the available yards are fully booked it is not clear when the full build out of the required fleet will occur. My experience in the offshore industry is that it takes approximately two years to construct an offshore drilling rig (MODU). The complexity of a QMAX may be slightly less than a MODU but even if construction were to require no more than a single year the required time to fleet completion would be 5,463 years if 4 yards were involved in the build out. At present the only yard competent in this vessel construction is in South Korea; the other three required yards would need to be upgraded, or new built. LNG tankers require a speciality steel to address thermal stress issues. This steel has a high nickel content; Russia is a major global supplier of nickel.

Since the EU has voiced the intention to fully eliminate the need for Russian LNG by the year 2030 the time to recover the investment in vessels and related LNG infrastructure is extremely limited. Within 8 years the EU seeks to fully replace the entire volume of LNG represented by Russian imports. The IEA Net Zero Emissions by 2050 Roadmap helps fulfil the European Green Deal, an ambitious plan to eliminate all FF emissions in 28 years.

In 2020, U.S. natural gas production was about 10% greater than U.S. total natural gas consumption. The volume of produced gas surplus to US demand amounts to 91.5 billion cubic feet per day or 2.5 billion cubic metres of natural gas per day. This surplus is already contracted to the following countries:

TOP 10 US EXPORT DESTINATIONS
SOUTH KOREA………………453,483
CHINA……………………449,667
JAPAN……………………354,948
BRAZIL…………………..307,714
SPAIN……………………215,062
INDIA……………………196,218
UK………………………195,046
TURKEY…………………..188,849
NL………………………174,339
FRANCE…………………..170,780

The US is therefore in the position of withdrawing supply from some of the above to punish them for lack of compliance to US demands and to reward vassal states. Looking at the list, which countries do you think will be disfavoured?

The full list of US foreign LNG exports by country is found here:
https://www.eia.gov/dnav/ng/NG_MOVE_EXPC_S1_A.htm

Any commodity gravitates toward the highest price. The peak price is set by the marginal buyer. It is expected that the EU attempt to displace Russian LNG supply will be impossible to achieve in the short term without an extreme impact on price. These price impacts will not only affect EU consumers, they will impact all consumers including those in the US.

The EU will replace dependency on Russia by dependency on the “international rules based order” as interpreted by the global hegemon.

Mea Culpa – Review of Data

I utilized IEA figures for total LNG consumption in the EU and relied on an IEA statement that 45% of this LNG consumption was derived from Russian supply.

In fact Germany receives the majority of its Russian gas as pipeline NG. My error.

The EU presently has 37 operating LNG terminals and the IEA is reporting on LNG received via those terminals. Germany has at present no LNG terminals (3 proposed) but is believed able to obtain NG from an interconnection to the EU pipeline system. I have not yet found the supporting data but suspect some of the LNG unloaded in Rotterdam makes its way to Germany. 

Germany once benefited from the Groningen gas field. It was the depletion of Groningen and problems resulting from land subsidence and earthquakes associated with gas withdrawals (See https://en.wikipedia.org/wiki/Groningen_gas_field ) that resulted in a decision to cease gas extraction by 2022. This planned cessation has now been postponed until between 2025 and 2028.

The article at this link reports on German requests for additional supply of Dutch gas:
https://www.politico.eu/article/the-netherlands-earthshaking-gas-deal-with-germany/

Gas from the Groningen field has a low calorific value due to a high percentage of nitrogen. It therefore requires a distribution pipeline different from that for regular NG. According to the Politico article, Germany is seeking additional Dutch supply which suggests Germany has a connection to the Groningen gas distribution network. This would be a distribution network distinct from the EU NG pipeline system.

The implication of the correction is that I underestimates the total German demand for LNG imports to replace the existing flow of Russian pipeline NG which flow was not included in the cited IEA statistics for LNG.

The LNG volume is about 593 times less than the piped gas volume, resulting in a requirement for nine 266,000 m3 LNG containers per week to transport the RF supplied volume of 69.75 B m2 of gas over a year. Using a turn-around time of 9 weeks for loading, shipping to EU, unloading and returning to USA, – a spread-sheet indicates that 90 LNG vessles should do the trick. This includes an additional eight ships to cover for peaks, maintenance and other mishaps. So we are looking at a minimum of 90 man years to build the required LNG fleet.

Correction:

21,852 LNG shipments per month –> 81 LNG shipments per month
705 LNG shipments per day –> 2.6 LNG shipments per day
705 new LNG offloading ports –> 3 new LNG offloading ports
QMAX fleet of 21,855 vessels –> 91 vessels
Time to fleet completion 5,463 years –> 20 years

One First Step Towards Ruble Convertibility?

“The Bank of Russia, in order to ensure a balance of supply and demand in the domestic precious metals market, will buy gold from credit institutions at a fixed price starting from March 28, 2022. The price from March 28 to June 30, 2022 inclusive will be 5 thousand rubles per 1 gram, ” the press service of the Central Bank informed.”
https://www.banki.ru/news/lenta/?id=10963561

This is only a bid price price, not an ask price, between March 28th and June 30th. Gold can be sold to the central bank at that price in ruble, but nowhere does it say that the central bank has to do this without limit. The price is also significantly below the current spot price. This is not pegging the currency to gold, as that would require an explicit guarantee that rubles could be exchanged for gold at a fixed price, an ask price, the very opposite of what the Russian central bank is doing.

This IS NOT fixed convertibility, as that would require a fixed price for “on demand” conversion of rubles to gold. The central bank is buying gold at a fixed price, not selling at it. There is no fixed price convertibility.

Machine Translation:
From Monday, (Ed. Note – March 28, 2022) the Central Bank of the Russian Federation will resume buying gold from banks, while the precious metal will be purchased at a fixed price – it is scheduled for the next three months, follows from a message on the regulator’s website.
“In order to balance supply and demand in the domestic market of precious metals, the Bank of Russia will buy gold from credit institutions at a fixed price from March 28, 2022. The price from March 28 to June 30, 2022 inclusive will be 5 thousand rubles per 1 gram,” the press service of the Central Bank informed.
The regulator emphasizes that the established price level allows for a stable supply of gold and the smooth functioning of the gold mining industry this year.
After the specified period, the purchase price of gold can be adjusted taking into account the emerging balance of supply and demand in the domestic market.
Earlier, on March 15, 2022, the Central Bank suspended the purchase of gold from credit institutions to enable them to meet the demand of the population for this asset. The regulator then noted an increased demand from the population for the purchase of physical gold bullion, due, in particular, to the abolition of VAT on these transactions. In addition, Russian President Vladimir Putin signed a law allowing banks to sell gold bars to citizens for foreign currency.
The US this week expanded its anti-Russian sanctions list to include gold from CBR reserves, and the UK followed up by clarifying that its sanctions on transactions with Russian reserves extend to gold transactions. The Bank of Russia, commenting on the new sanctions, emphasized that all gold from the gold and foreign exchange reserves is located on the territory of the Russian Federation.

The Odds of a Meltdown Continue to Rise

by David Stockman via International Man

The massive leveraging of US nonfinancial businesses over the last several decades is utterly incompatible with the stock market cap rising from 62% to 204% of GDP.

The US business economy is now carrying 13X more leverage than it did 50 years ago.

Nonfinancial Business Debt as % of Gross Production, 1972–2020

Here is what has actually happened to business balance sheets:

  • Back in 1972, total business debt outstanding of $634 billion amounted to just 46% of the gross value of US industrial production, which was $1.38 trillion.
  • By 2007, business debt had soared to $10.1 trillion and stood at 321% of the gross industrial production of $3.15 trillion.
  • By 2020 the debt figure had risen to $17.7 trillion even as the value of industrial production had remained pinned to the flat line. That is to say, at the end of last year’s Fed-fueled borrowing spree in the US business economy, the leverage ratio clocked in at an off-the-charts 592%.

With this high leverage, growth and profits-generation will become steadily weaker over time. This means that the stock market capitalization rate of the national income should be falling, not heading skyward as described above.

Indeed, since March 2009 equity investors have come to realize that any correction would lead to a bounce and a new upward run. At the beginning it took a long time before positive trading emotions and Pavlovian rewards emerged, but as the bull run accelerated, the rewards came faster and faster.

Until very recently.

Previously, all the dips — even micro-dips — were almost instantaneously bought by the herd of traders and homegamers driven by Pavlovian reflexes, thereby reinforcing the power of positive feedback loops. But as Zero Hedge observed, this loop may finally be reaching its sell-by date:

Something’s different this time.

For the first time since the collapse in March 2020, the S&P 500 has failed to rebound back to new highs after testing its key uptrend technical levels.

Source: Bloomberg

The larger problem is the risk that an external shock — a black swan — will break the entire chain of dip-buying and options-based speculation and eventually trigger a put-buying stampede, especially among the homegamers who have never experienced a down market.

Their Reddit gurus will tell them they can ride out the storm and safely hang on to their FANGMAN, Teslas, and meme stocks by buying “protection” via puts on their portfolios. That, of course, will trigger more delta hedging among options dealers, more ETF liquidations, and more temptations for the fast money to engage in open shorting of a market suspended on a sky-hook.

As one analyst pointed out, the 1987 crash is a good illustration of the risks associated with out-of-control positive feedback. In the chart below, he laid the recent S&P 500 run against the final 12-months preceding the 30% stock market meltdown in October 1987.

We have no idea whether the high has yet been reached or what “shock” might cause the present coiled spring to lunge into reverse. But with each passing episode of sharp selloffs and only partial BTFD (buy the freaking dip) rebounds, the odds of a meltdown reversal continue to rise.