Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Weeks 19-20. May 8 - May 21, 2023
INDEX
Macroeconomic indicators
Analytics
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Macroeconomic indicators
This could be owing to decreasing costs in intermediate industries, or it could be due to increased competition and falling demand. Or in the end industries, there was a decline in demand due to greater competition from imports, so prices rose.
A very typical scenario: high-quality American-made goods began to sell poorly, while low-cost Chinese imports surged in sales. Sellers have raised their pricing in response to growing demand. In any event, this is a strong indicator of the escalation of the American economy's crisis processes.
It is worth noting that identical processes are occurring in the Chinese economy or Europe.
The speed of crisis processes is increasing, and politics is having a detrimental impact.
If we take into account the systematically underestimated inflation, then we get a gloomy picture of a structural crisis in all its glory. Theoretically, the decline should be about 1% per month or 10% per year, but taking into account the colossal budget subsidies, it turns out to be less, a 7-8% decline.
Deflationary trends in China against the backdrop of constant economic stimulus are a sure sign of very serious problems!
Note that this is all against the backdrop of understated (albeit not as much as in the EU and the US) inflation.
Analytics
Stock market growth in industrialized countries is fictitious
This is not a long-term design.
Activity in the share placement segment, both primary and secondary, is one of the most dependable indications of risk appetite.
Previously, stock market growth was linked to IPO/SPO activity, but not now. In April, the total volume of placements of all levels and types of shares in the US market amounted to a measly $1.6 billion
(for the US market, this is literally "dust"), which is 24 times lower than the average volume of placements in the previous phase of market growth from April 2022 to December 2021.
The amount of placements in relation to market capitalization has reached a historical low, at least since the beginning of statistics in 1987.
This is, by the way, quite important. The US market's pitiful attempts to reach new highs are crushed by the hard reality of a gravely wounded capital market.
When we look at the trend of changes in company capitalization, we see that the system is not working as it should. This implies that there is no long-term risk appetite in the market, so growth is "artificial."
The stock market is supported by two factors: corporate buybacks and a stampede from deposits, on the trajectory of which liquidity transfers to a different state of aggregation and a small portion goes to the stock market.
Problems with liquidity. The average daily (on a working day) trading volume of shares on all US exchanges was $448 billion, a four-year low. This is, of course, a different universe than the Russian market, where even $500 million is regarded as a fantastic day, but it is a modest sum in the US market.
Trading volume averaged $502 billion per day from January to April, compared to $694 billion in 2022, $597 billion in 2021, and $493 billion in 2020. However, after 2020, market capitalization has increased dramatically. Since 2012, the trading volume to capitalization ratio has been at its lowest.
There is little liquidity, no trading activity, no market interest, and the capital market is deformed, if not destroyed.
It could abruptly burst.
The corporate bond market in the United States
The US corporate bond market is failing, despite improved demand as inflation falls (actual rates close to zero) and deposits run out.
The corporate bond market was unable to achieve balance. Demand was a problem in 2022, while supply was a problem in 2023. The company's goal is to sell as many floating-rate bonds as possible. anticipates a drop in the Fed's main rate.
No one believes that high rates will last for a long time.
Businesses do not want to lock in high rates for an extended period of time, increasing the cost of debt payment to ludicrous levels, whereas investors want to pile up as many bonds as possible at high fixed-income rates.
As a result, corporate bond placements with an investment rating failed considerably in April, while junk bond placements surged.
Average monthly junk bond placements were $7.5 billion from February to December 2022, compared to $42 billion from April to December 2021, when risk demand was high. Junk bonds are being placed at a rate of $15 billion per month from January to April 2023 (twice as much as in 2022, but nearly three times less than at the peak of the investing frenzy in 2021).
Even doubling demand for trash bonds in 2023 will not be enough to match the payback volume, which is currently around $20 billion, but the gap is closing.
The market is devouring junk bonds at exorbitant fixed rates, and investment-grade corporate bonds are delaying placements for the time being in order to find demand for floating-rate securities.
If over 21% of placements in 2022 were with adjustable rates and only 10% in 2023.
Because the present number of bond placements with an investment rating is insufficient to cover repayments, they have resorted to debt reduction mode.
The problem is tricky since zombie companies raise the cost of debt servicing, while more resilient firms can increase cash shortages. Everything has gone to a mess.
The US debt market
The US debt market is undergoing incredible shifts, and while each section has its own set of issues, the overall outlook is negative.
The total volume of placements of all types of dollar bonds with maturities of more than one year was $4.9 trillion in January-April 2021, $3.4 trillion in 2022, and $2.7 trillion in 2023 (the lowest since 2018).
However, as compared to the number of debt in circulation, the present volume of placements is at a 20-year low. That's extremely horrible.
A minor increase in junk bond placements, but a failure in investment rating due to businesses attempting to place at floating rates while investors create demand at fixed rates.
The treasury market has reached its debt ceiling, and there is a transfer of placements of varying lengths. The Ministry of Finance is dumping expensive bills and, within limits, is primarily issuing bonds with maturities of 20-30 years, when interest rates have not risen significantly.
MBS placements have dropped dramatically (more than four times in a couple of years!) There are two causes for this: the Fed's exit from the market as the primary buyer, and a dramatic drop in demand for mortgage loans.
Municipal bonds have been in a permanent freeze for more than ten years, and the only action here is depositing what has been redeemed.
In terms of placements, agency bonds increased dramatically. I can't comment on the explanation, although it's most likely due to rising demand from non-residents, this needs to be confirmed.
When we look at the debt market as a whole, we can see that it is currently in the mode of decreasing liabilities (MBS and corporate bonds) or, at best, supporting debt (treasuries and municipal bonds), when they place all that is repaid.
Something is certainly broken in this system. The main reason is unreasonably high-interest rates, as well as supply and demand distortions. Issuers are hesitant to lock in obligations at present rates for many years. All of this has far-reaching effects (cash shortfalls, investment collapse, and so on).
US Inflation
In the United States, inflation has fallen to 4.9% year on year (the lowest since May 2021), while inflation excluding energy and food is 5.5% year on year, virtually steady since December 2022.
The yearly inflation evaluation reflects the time of exceptionally high price rise rates from May to June 2022, while the 6-month price impulse shows a more significant decrease.
The headline CPI increased by 1.6% in six months (3.3% annually), whereas the core CPI increased by 2.4% (4.8% annually). In June 2022, the top 6-month price rise rates were 4.9% and 3.1%, respectively, indicating that in 10 months, energy has become the main disinflationary component, and food products have been linked since December 2022.
In the United States, inflation is highly variable. Annual rates below 2% are held by components with a weight of roughly 27% in the inflation structure, according to the 6-month trend.
These include mostly gasoline, gas bills, electricity and utility bills, vehicles (used cars are increasing by 1.6% in 6 months, while new cars are increasing by 1.6%), public transportation, medical services, educational goods, digital equipment, and gadgets. A lengthy list of components. A year ago, there was only one item on the list: telecommunications services.
Price growth of 2% over 6 months is already evident in components with a weight of over 42% in the CPI. Food, education, information, and communication have been added to the list above.
Prices for furniture and products for the garden and home life are decreasing as demand for real estate falls - a 6M impulse of 2.3% compared to 6.3% at the start of 2022.
The main source of inflation is centred in services in the cultural, sports, and entertainment industries, as well as in household and personal services, where price rise continues abnormally high in the 5.7-7% y/y range. However, the weight of these services in the CPI is small and does not surpass 9%.
Rent makes the greatest negative contribution, accounting for about a third of the CPI with a rising rate of up to 8% y / y - a lot, plus this is the most inertial component in the CPI.
Rentals are influenced by real estate prices, which are falling but with a 12-15-month lag.
Budget issues
In the United States, budgetary challenges are worsening, with falling income and rising costs. Revenues were $4.6 trillion (down 6% year on year) while expenses were $6.54 trillion (+7.4% year on year), resulting in a $1.94 trillion deficit (a year earlier - $1.2 trillion).
Revenues have fallen by 10% since the start of the fiscal year 2023 (October 2022-April 2023), while expenditures have increased by 7.9%, resulting in a dramatic increase in the deficit to $924 billion, up from $360 billion in the same period last year.
In terms of fees, April proved to be a dismal month. This year, they collected $638 billion in a month, a 26% decrease from the previous year, but expenses had to be trimmed to $462 billion (a 17% decrease year on year). The fiscal surplus shrank from $308 billion to $176 billion.
Adjusted for inflation, the budget deficit is comparable to the worst phase of the 2009 crisis, i.e. the United States resumed an aggressive stimulus policy on a scale comparable to the crisis periods. They were quickly engaged in fiscal consolidation. The state must step in to replace diminishing private demand.
The highly rising net interest expense, which went from $255.3 billion to $363.7 billion in the fiscal year, is one of the major shifts in expenditures. Because of the pullback of anti-COVID efforts, total healthcare spending declined from $978.2 billion to $940.2 billion.
Defence budget increased from $438 billion to $465 billion, with Ukraine fully supporting the entire increase. Loan programs expanded from $10 billion to $41 billion, with everything going to cover the FDIC's loss after bailing out three banks.
Subsidies and programs aimed at helping the people fell by about $100 billion, or 20%, while social security climbed by 10%, or $74 billion - indexation of old-age pensions.
There are now three vulnerable budget categories in the United States:
The economy has not yet begun to crumble...
Inflation in the United States in depth
In terms of impact, the key component reducing inflationary pressure in the United States is wholesale pricing for raw materials (oil, gas, agricultural products), which are reflected in retail prices in the United States with a lag of 2-3 (fuel, gas, electricity) to 5-6 months (food).
Second, the primary issue in 2020-2021 was the normalization of logistics, supply networks, and production. This is reflected in the prices of automobiles and other vehicles, as well as durable items such as computer components (particularly video cards).
Local variables, such as medical care subsidies, contribute to deflation.
Due to decreased demand for real estate, the disinflationary impact on demand is clearly localized only in furniture and household products. Products for sports, hobbies, and distinctions are fragmentary.
Price increases are concentrated in areas with the greatest lack of staff, such as mass and personal services, and are largely low-paid services with no ability to scale.
Information services can be scaled because there is a deflationary trend, but what about animators or barbers? Clearly not. There are dozens and hundreds of such professions, and there is a downward pressure on wages in low-paid services, which has a direct influence on prices because the wage fund share in this sector is relatively significant (particularly in personal services).
There are two primary approaches to adjusting for the inflationary impulse: the influence on demand (through demand suppression) and the increase of goods and services supply.
When it would be reasonable to boost supply, the Fed is affecting demand. However, the consumer boom in 2020-2022 did not result in an increase in output or an increase in capital investment. The entire reserve was used to accumulate cash or to use liquidity through dividends and buybacks.
In this way, businesses in the United States are largely resistant to the amount of accessible liquidity, regardless of its size and availability in the direction of growing issuance, thus the Fed's options are limited to affecting demand through repression.
Inflation in the US is expected to fall to 4-4.4% in the near future due to the base effect, when prices grew extremely fast in May June 2022; however, there are doubts that the US will be able to return to the target level of 2% because both housing prices and demand must fall. However, because these processes have a considerable impact lag, it will be required to keep rates high for an extended period of time.
Given that the system is already failing (particularly in the financial sector) and the primary safety margin has been depleted, we should expect many fascinating events in the near future...
The reality and perception of the American economy
The impression of reality (with a projection into the future) and what is actually happening in the American economy is startling.
Most leading indicators, which are mostly based on business and population surveys, show a progressively deteriorating trend, indicating the implementation of crisis processes; yet, actual macroeconomic statistics reveal that the American economy is stable.
At least the major macroeconomic indices, such as employment, real income, industrial production, and consumer demand for goods and services, are either growing (as in employment) or stagnating (income, demand, and production).
With a 3-4 month lag, indications based on household and business surveys formed the most likely estimate.
It's been about a year since leading signs began to indicate a drop, but no negative predictions have been implemented in actuality.
The root of the fear is "general indignation" - an unparalleled inflationary shock (only the 55+ generation in a conscious state faced this in the early 1980s). Fear of the unknown is amplified by the impact on the capital market (stocks and bonds) of the largest asset market rout in the last half-century.
Inflationary pressures are easing, and the stock market has levelled off in comparison to 2022.
Why were negative expectations not realized? The most significant factor is the accumulated record financial buffer for the population and business, which took only a year to partially neutralize, closing the gap in unsecured supply and demand when the business did not have time to fulfil orders and is only now closing the formed obligations.
In practice, are negative expectations realized? Rather, yes, since there are objective constraints: the depletion of the financial cushion, overly rigorous financial conditions, and the actualization of previously detailed structural difficulties.
Turkey's presidential elections
Erdogan did not receive more than 50% of the votes cast, denying him victory in the first round.
Erdogan has 49.3% of the votes after 98.7% of the ballots have been counted as of 07:30 Moscow time, whereas Kilicdaroglu has 45%.
The voter turnout is at an all-time high of 87.6%.
It was 86% in the 2018 elections, 74.4% in 2014, 84.2% in 2007, and 79.2% in 2002.
There is a strong likelihood of Erdogan losing in the second round, which is expected to take place on May 28, 2023 (unless Erdogan fully utilizes the administrative resource).
Erdogan's impending defeat stems from his fight with the collective West for practically the entire period of his administration in an attempt to develop Turkey's geocentricity and subjectivity in the region.
The longer Erdogan controlled, the fewer connections he had with American and European elites. The United States was fed up with Erdogan's erratic rule, despite Erdogan's attempts to strike a balance between the US and the EU.
Erdogan's electoral base consists of low and middle-income portions of the population, primarily in small towns.
It's different with Kl?daroglu, who has a strong liberal bent. Kl?darolu and his party vigorously push to "protect" democratic institutions, human rights, free expression, and the rest of the liberal PR / narrative.
Behind Kl?daroglu stands Turkey's political and corporate elite, who seek a closer union with Europe and the United States. One of Kl?darolu's primary political themes is to deepen ties, particularly with the EU.
It would be incorrect to speak of a lack of domestic support for Kl?darolu. It is mostly backed by affluent Turkish families and business dynasties. The spike in support did not occur out of nowhere, but rather as a result of Turkey's persistent economic fragmentation and uneven development against the backdrop of the lira's fall and record inflation.
Many people have been tired of the protracted economic crisis, even if the Turkish statistics authorities report economic progress. The earthquake has exacerbated the situation significantly.
The difficulty is that, in order to compensate for the negative effects of long-term inflation and the earthquake, Turkey requires development resources, such as external money and Western technologies, because essential cooperation with China cannot be developed.
Kl?darolu enters the elections with a political agenda capable of restoring relations with the EU and the US, attracting external resources for Turkey's reconstruction. In contrast, Erdogan's development project (economic) was largely defeated, exacerbating the negative impact of the corruption component in the construction sector (which was exacerbated by the earthquake and tens of thousands of victims).
It is almost certain that US and EU lobbyists will increase pressure on the Erdogan group in the coming two weeks. Will it spark large-scale protests? It's entirely plausible.
Corporate reporting in the United States
Concerning the interim results of corporate reporting in the United States. The reporting season is nearly over - 90% of the S & P500 businesses have released data for the first quarter, and you can already see trends.
Earnings per share fell by 3.5% year on year in 1Q2023, after falling by 1.9% the previous quarter. Earnings per share increased by 5.4% in 3Q2022, 10.6% in 2Q2022, and 10.6% in 1Q2022. A downward trend with a discernible deterioration but no uncontrolled collapse.
How awful is it? Profits fell by 34% during the 2009 financial crisis, 35% during the 2020 financial crisis, and 5.7% during the 2015-2016 recession.
The drop in financial performance in 2023 is based on a relatively high baseline. Operating profit is 22-24% higher than in the third and fourth quarters of 2019.
The tendency may deteriorate in the future, as Q2 2022 is the highest point, therefore if there is no advancement in Q2 2023, the fall might reach 8-9% y/y.
Only four of the 11 sectors exhibit positive dynamics:
Due to the effects of supply chain disruption, consumer products and the industrial sector are in the process of completing the execution of previously formed but unfulfilled orders, while new orders are already dropping. The scenario of earnings growth will expire at the end of 2023.
The financial sector's profit is fictitious, and it is related to the manipulation of accounting for securities on the balance sheet in order to exclude the impact of bond depreciation on capital and profits. The issues in this sector are developing exponentially, and interest rate risk will flow very steeply into credit risk.
The banking sector is the most susceptible and troubled of the S&P 500 sectors,
thus the "bouncy reporting" in 2023 is nothing more than an impact of accounting reporting peculiarities that has little to do with reality.
Oil and gas will likewise suffer financial losses as a result of the base effect as compared to the "fat" 2Q 2022.
As a result, the degeneration continues...
Rates of Revenue Growth for S&P 500 Companies
Revenue growth at S&P 500 corporations has been falling for seven straight quarters.
Growth peaked at 24.4% in Q2 2021, owing largely to the base effect of an overnight drop in covid Q2 2020 (minus 10% yoy).
According to preliminary statistics based on S&P 500 company interim reports, growth began in Q3 2021 at 16.4% y/y, then increased to 15.8%, 13.6%, 13.5%, 12%, 5.7% in Q4 2022, and finally 4.1% in Q1 2023.
For the first time since COVID-19 Q3 2020, and Q1 2023 exhibited negative revenue dynamics in real terms. Yes, within 1%, but this is the first obvious indicator of an economic slowdown.
Why? Because there is a clear relationship between business revenue patterns and macroeconomic indices. Firms' revenue is a benchmark, because it is difficult to synchronize the manipulation of all 500 firms, and revenue dynamics reveal the genuine developments in American industry.
In terms of nominal revenue, the decline during the 2009 crisis was 14.1% y/y in Q2 2009, the decline during the 2015-2016 recession was 4.1% in Q4 2015, and the COVID crisis 2020 was a quick but one-time drop (minus 10.1%).
Nominal revenue climbed by 25% in Q1 2023 compared to Q3-Q4 2019, whereas cumulative inflation is about 18% during the indicated time, indicating substantial growth, albeit uneven across sectors.
In the first quarter of 2023, three out of eleven sectors are in the red: oil and gas, information technology, and materials (mostly metallurgy and chemistry). Leaders in growth: utilities and energy as a result of high prices in 2022, durable goods, finance (temporary), and the industrial sector.
Wall Street forecasts S&P 500 nominal revenue growth of 1.8% in 2023 (growth of 11.5% in 2022), which will be less than inflation, assuming a limited and relatively mild recession with an exit to low-intensity growth in 2024 (growth at par of 4.7% and roughly 1-1.5% in real terms).
A rather dubious forecast, notable for its foolish optimism...
Europe's economy is in free collapse
In Europe, there are unmistakable signals of a probable shift from stagnation to decline.
Manufacturing in the EU-27 countries fell by 5% each month (!), the steepest drop in the entire time of statistics, with the exception of March-April 2020 when economic activity was forced to halt (directly).
The explanation for such a devastating collapse was a 13% monthly drop in the output of capital goods of industrial and commercial importance (!). This sector of industrial production is highly variable, with a 25% increase from March to June 2022.
In retrospect, however, capital goods output in March 2023 was equivalent to 2017 - not a disaster, but a warning sign to be taken into account.
So, what is preventing European industrial production from expanding?
The consumer market.
This segment is seeing the fastest growth in EU history, with over a 17% increase since 2019 and no indicators of a recession in 2023 (the main driver being medicines and medications).
Making a phoney impression of sustainability
How can the appearance of sustainability be created? Show an increase in the current month while sharply adjusting previous data to the downside.
According to Census, US retail sales increased by 0.4% for the month, whereas figures for the first quarter of 2023 were revised down by 1.3%, with the depth of adjustment beginning in 2010.
The modification of data from 2010 to 2020 was not large - within the statistical error, it was revised down by 1.2% in 2021, 0.7% in 2022, and 1.3% in Q1 2023.
As a result, if not for the change, April's figures could have been 0.8% worse than March's, but they ended up being 0.4% higher.
All of this has minimal impact on the overall trend. Since March 2021, there has been no development - retail sales have been stagnant with a declining trend. April 2023 to March 2021 - a decline of 2.7%, with an increase in the fall to 3% year on year. Only during the 2009 crisis and the 2020 lockdown phase was there a greater significant reduction.
Despite a two-year negative trend (2021-2023), current US retail sales are 5-5.5% higher than the long-term average of 2010-2019 - unsecured consumption growth in 2020-2021 was so enormous (nearly 18% in real terms).
The drop in real retail sales is related to a slowdown in real income growth, depletion of reserves, and a severe slowdown in consumer lending since March as credit conditions tightened.
High cumulative inflation is wiping out all of the high-intensity growth in nominal incomes, which was 2.5 times higher on average between 2010 and 2019.
Do not speculate on the situation before time. The crisis resolution is still a long way off because the decrease in retail sales in real terms is coming from a very high base.
When real sales break through the trend of 2010-2019 (currently 5-5.5% higher), we can talk about breaking the pattern, but this is another warning that a full-fledged catastrophe is looming.
Is America not ready for a major war?
American industrial production is gradually but steadily entering a slump. The change in the industrial production index for the year is only 0.2%, and the Fed reported a gain of 0.5% m/m in April (supposedly the highest monthly increase since March 2022), having earlier understated the March data by 0.5%.
As a result, without revision, the change would be equal to zero, and they got what they got, generating yet another somewhat distorted perception of reality.
Only seven of the 22 industrial production categories have grown in the last year:
The year's biggest drop was in the woodworking sector (- 9.1%), furniture and fittings manufacture (- 8.8%), textile industry (- 8.6%), and gas distribution (- 8.3%).
It is interesting to note that the primary growth drivers in 2021-2022 - computers and microelectronics, the aerospace industry, and commercial transport equipment production - are dropping by 0.4% and 1.1%, respectively.
The most essential conclusion to be drawn from operational statistics on industrial production is that there is now no large-scale state defence order in American industry. It is present, but only as a "graceful compensation for falling stocks."
But the preparations for a major war are not obvious, implying that the US does not expect the fight to escalate...or perhaps it just cannot?
The Dynamics of industrial production in the USA
Several significant conclusions may be reached from analyzing the dynamics of industrial production in the United States over the last 50 years.
Little progress. Over the last 15 years, there has been little success in modifying the global index of American industry (growth of only 5.3%).
Strong intra- and inter-sectoral transformations. Over the last 15 years, the flagships of American industry have been:
Textile, apparel, and footwear production, printing, paper and cardboard product production, metallurgical production, and furniture and accessories manufacture are all severely reduced.
It should be noted that while a significant portion of the industry has been withdrawn from the United States, the technological and financial chains are completely under the control of the United States,
implying that the United States is profiting by dumping dirty and low-margin industries in the context of high operating costs within the United States.
Over the last three years, there has been a strong emphasis on science-intensive manufacturing, which is increasing at a far faster rate than lower and medium technical structure production.
The United States is constructing a post-industrial economy in which industrial production's importance is rapidly shrinking.
In terms of gross value added, the manufacturing industry accounts for 11.3% of the US economy, while the mining industry accounts for 1.8-1.9%, for a total of slightly more than 13%, compared to 15.4% in 2008 and more than 30% 50 years ago.
At the same time, it should be noted that at least a quarter of the economy helps industrial production directly or indirectly (transportation, construction, telecommunications, information, financial, legal, insurance, marketing, research, and many other forms of services).
If we include all of the production outsourced to foreign nations yet controlled by American businesses, the low share of industry in the US GDP (about 13-13.5%) will be significantly greater.
EU and Russian foreign trade
Foreign trade between the EU and Russia has essentially ceased. Russian goods deliveries to the EU-27 fell by 5.8 times in a year (from 23.5 to 4 billion euros). According to Eurostat, March shipments were the lowest since 2002 and were half of the worst of the crisis in 2009 and 2016.
Imports from Russia to the EU plummeted by 25% in comparison to the worst month of the COVID crisis, and by more than three times in comparison to average deliveries in 2018-2019.
With exports, the situation is slightly better, and European countries sent goods to Russia by 3.8 billion euros per month on average between January and March 2023, and 4.3 billion euros in March.
For instance, the average monthly delivery from Europe to Russia in 2021 will be 7.4 billion euros, up from 7.1 billion in 2018-2019. Approximately 40-50% of pre-crisis supplies were lost.
As a result, after a record trade deficit with Russia in mid-2022 (up to 20 billion euros per month), the foreign trade balance reached a record surplus (so far, a symbolic 271 million euros in April). With the exception of 2022, the pre-crisis deficit was 6-7 billion euros every month.
Russia's share in EU exports has dropped to 1.8% from 4-4.2% in 2017-2021, after reaching 8% on average per year in 2008.
In this sense, the gateway for Russia to Europe has closed, and Europe's reliance on Russia has dropped to a historical low - such are the geopolitical facts.
The trade balance of the EU27 & the Economy
The EU-27 trade balance has improved dramatically, moving from a record deficit in 2022 to a surplus close to an all-time high in March 2023, the largest since November 2020. The EU's highest trade deficit with the rest of the world was 66 billion euros in August 2022.
The trade gap has been growing since August 2021, when energy costs, particularly gas, skyrocketed. The trade disparity increased by exactly one year until August 2022, when the total trade deficit reached 350 billion euros. A dramatic improvement began in September 2022, against the backdrop of a decline in energy prices.
They reported a surplus of 2.8 billion euros in February 2023, for the first time since July 2021, and a surplus of 24.7 billion euros in March - this is a lot, because, in a climate of low energy costs, the surplus reached 28-29 billion euros at its peak, while the average monthly surplus for 12 months was 25 billion dollars between July 2016 and December 2020.
Rising commodity prices cost European countries a lot of money.
From the peak in May 2021 (228 billion euros of trade surplus in a year) to a deficit of 433 billion euros by November 2022, a gap of 661 billion euros!
The situation is improving due to a significant decrease in imports while maintaining high exports.
Since September 2022, imports have declined by 22%, or 61.9 billion euros per month, with the energy group accounting for 38.5 billion, or 62%, and other categories of raw materials accounting for another 3 billion, for a total of 67%.
Exports, on the other hand, have reached an all-time high, increasing by 4.3% since September, with growth occurring across the entire commodity group, with the greatest impact in the science-intensive group (medical goods, automobiles, engineering products, transportation, and electrical equipment).
Inflation, spurred in part by a surge in commodity prices, drove up prices for industrial goods, allowing the trade balance to improve dramatically - raw materials declined in price, but industrial goods continued to rise. The trade surplus could hit its peak in May.
According to Eurostat data, the recession did not continue in Q1 2023, but there is reason to think that the breaking point occurred in March-April due to the downward trend in retail sales and industrial production.
There is still no detail on the structure of GDP growth by sectors and categories (the speed of statistics in Europe is much slower than in the US), but judging by the trade balance, the trade deficit in the first quarter decreased, both in value terms and in physical terms, owing to strong exports.
The Eurozone economy has frozen over the last six months (0% QoQ in Q4 2022 and 0.1% growth in Q1 2023), whereas the EU economy has fluctuated between minus 0.1% and plus 0.2%, hovering around zero.
The comparatively strong annual GDP growth of 1.2-1.3% in the previous 12 months is entirely attributable to Q2-Q3 2022 when the inertia of the positive impulse established in 2021 against the backdrop of significant deferred post-COVID demand continued.
The resource was a high household savings rate, high real earnings (at the time), and unsold industry orders in 2021-2022 as a result of a supply chain interruption.
Europe, unlike the United States, struggled to cope with record inflation, and real earnings began to fall in Q3 2022, offset by a relatively high savings rate.
The stability of the European economy in 2022, against the backdrop of the energy, inflation, and debt problems, was related to a high margin of safety - the financial cushion accumulated by the population and businesses during the previous 10-15 years. However, everything has its limitations.
The energy crisis begins to fade in autumn 2022, the inflationary impetus is neutralized in early 2023, and the food crisis is overcome in mid-2022, but the negative impact of the debt crisis begins, and only worsens.
The downturn is predicted to begin in Q2 2023.
Real estate pricing in the United States
Property prices in the United States increased by at least 40% between December 2019 and Q1 2023, according to the S&P Case-Shiller Home Price Index, the Census Bureau, and the Federal Housing Finance Agency (FHFA). Different calculating methodologies, structure, and regional samples.
The annual price increase rate between Q3 2020 and Q2 2022 was in the range of 17-22%, which is much greater than the real estate bubble of 2004-2007 when prices rose by 12-15%.
The price rise ceased in June-July 2022, but the fall appears to be minor. Nominal prices are merely returning to zero change from the preceding year (estimates range from 0% to 4% yearly growth, depending on the agency).
Prices began to fall steadily in August 2022, implying that for 6-7 months following the last cutoff, the accumulated decline merely compensated for the insufficient price growth in the first half of 2022.
At the same time, the price fall did not stay long - the decline phase lasted until November-December 2022, and since the beginning of 2023, there have been either zero dynamics or a minor increase in prices.
Taking inflation into account, the price reduction is only 5%, which is comparable to 2011-2012 and three times less than the 2008-2009 crisis. In other words, they haven't even started to fall yet, despite the fact that the base is quite high.
Nominal prices differ by approximately 22-25% from the 2013-2019 trend, and when inflation is factored in, the variation is 12-15%, which is significant by historical standards.
Here's what's intriguing: Housing and rent account for one-third of the CPI, and historically, rent has followed home prices. The disparity hit 40% in 2006-2007 (real estate prices expanded faster than rent).
It took over 6 years to close the difference, and only in 2012 did they return to normalcy with a drop in house prices and an increase in rent. The deficit is now 53%, and it will reach 63% by mid-2022.
Rent is the most problematic component of the CPI, and given the gap, rent increases will continue, limiting the Fed's options - inflationary pressures will persist for a long time.
One of the most successful recent US ventures
The United States is bolstering its position as an oil and gas exporter. Since April 2022, the United States has maintained a consistent net export of oil and petroleum products, and the export potential has continuously increased.
From April to August 2022, the net export potential of oil and petroleum products was no more than 1 million barrels per day; from August to December, the possibilities increased dramatically to 1.5-2 million barrels per day, 3 million barrels per day by March 2023, and now around 2 million bbl/d.
In comparison, the United States was a net importer of oil and oil products by 12.5-13.5 million barrels per day in 2005-2007, but after a radical shift in energy policy, the country significantly increased oil production and refining capacity, allowing it to correct the imbalance by 16 million barrels per day (from net imports of 13 million to net exports of 3 million bbl/d).
In terms of foreign trade deliveries, the US remains a net importer of crude oil by 2 million barrels per day,
compared to 10-10.5 million barrels per day in 2005-2007 and 7-7.5 million barrels per day in 2015-2017, i.e., more than 5 million barrels per day were removed from net imports in 5-6 years, almost completely eliminating reliance on oil supplies from Africa and the Middle East.
In 2005-2007, the US was a net importer of 2-3 mb/d of petroleum products, but it became a net exporter for the first time in early 2012, and it has been continuously increasing its capacity in this area. From 2019 to 2021, net exports of oil products totalled 2-4 million (on average, roughly 3 million) bbl/d, and net exports of oil products are presently stabilizing at 4-4.5 million bbl/d.
Since 2021, the US has increased its energy mix by an average of 4 mb/d, with crude oil increasing by 2.2 mb/d and refined products increasing by 1.8 mb/d.
There were almost no changes in the structure of foreign trade flows of energy carriers in terms of imports of oil or oil products, and all of the improvement was in export flows, most notably crude oil. Europe is the major delivery direction.
In just one year, the United States successfully squeezed Russia out of the European market for gas, oil, and oil products. The countries of Europe are now even more reliant on American supplies of gas and oil, but this is a different, good, and sustaible dependence.??
The United States defence program
According to official plans, the draft defence spending project from the US Congressional Budget Office within the framework of an official document does not imply large-scale actions for the state defence order in 2023-2025.
In collaboration with the Congressional Budget Office, the US Department of Defense is preparing a draft FYDP that represents plans and intentions for the next five years. The evolution occurred in 2022, when there was complete knowledge of the existing geopolitical situation and the NWO was fully operational. This document was updated on January 2023.
The US Department of Defense has asked for $772 billion in 2023, which is 1.5% less than the amount proposed in 2022. The project is worth $784 billion in 2024 and $762 billion in 2025.
Furthermore, defence spending in 2022 was 3.6% of GDP, the lowest since 1939 and lower than in 2000 (3.8%) before the Middle East Safari. Defence spending may decline to 3.3% of GDP in 2023, revising the previous minimum.
In reality, from October to April (the new fiscal year), they spent 6% more than in 2022, which is within the inflationary scope.
How was it before?
The depth, complexity, and size of industrial growth have substantially risen over the last 80 years, so a third of GDP is no longer required for a large-scale state defence order, but they do not even reach 2010.
The United States appears to take geopolitical problems lightly and has no intention of actively engaging in a fight with Russia and/or China.
Leading indicators in the United States
Leading signs continue to point to the impending collapse of the US economy - the only question is the extent and length.
The Conference Board Leading Economic Index (hence referred to as LEI) has fallen for the 13th month in a row, and for the 16th month since it retreated from its local maximum. This is the longest downtrend since 2009, and the lowest since September 2020.
The decline occurs as the intensity increases. The index fell 4.4% in the last six months, compared to a 3.8% drop in the previous six months (April-October 2022).
The LEI combines ten forward-looking financial and macroeconomic variables. The practical application of LEI is that once the conditional barrier is exceeded, the likelihood of falling grows dramatically.
For example, from 1960 to 2020, a recession began in 100% of occasions when the LEI fell by 5% or less from the local maximum. The extent and depth of destructive processes is a different topic, although crucial predictive properties of leading indicators are highlighted here.
The current fall is 8.7%, which is the seventh biggest in the last 65 years.
The question now is, what is the lag? Between the peak of the LEI and the actual recession of the economy, 10.6 months elapse on average, and there are currently 16 months and 13 months of continuous decline.
The intersection of the leading LEI index and the current CEI economic activity index is another element in favor of the onset of a fall. Since 1980, the meeting of LEI and CEI has always resulted in a fall. At the time, the intersection occurred in early 2023, increasing the danger of falling.
Indeed, macroeconomic figures are quite good, and the economy is healthy according to formal criteria. On the other hand, various market indicators, financial conditions, the volume of new orders, company and population surveys, and consumer activity all point to an impending downturn.
Current macroeconomic figures in the United States are expected to deteriorate considerably between June and August.
Economic activity in the United States is contracting
The US ISM Manufacturing Index stands at 47 points (a reading below 50 indicates a drop in manufacturing activity).
The index has fallen to 47 points or lower 17 times since 1947, not including the present period. In 12 of the 17 occurrences, this resulted in a crisis in the US economy, while in other situations, the economy entered a "drift" with growth below 1%.
Another reason to consider the possibility of a recession in the next 3-4 months.
Since April 2022, the composite index of manufacturing activity (consisting of five sub-indices in surveys of US Federal Reserve Bank regional offices) has been continually in the downward phase, with a magnitude comparable to 2015-2016.
Although the US economy averted a recession in 2016 due to consumer demand, consumer demand may begin to contribute negatively in Q3 2023 as savings run out, real incomes fall, and lending declines.
Manufacturing firms are more sensitive to business cycle phases and respond faster to economic trends, financial conditions, and economic conditions than service firms due to the nature of their activities.
A decrease in manufacturing company indexes usually denoted a high possibility of a recession, albeit it did not always lead to one, but the mix of risk variables is increasingly shifting towards a reduction in economic activity.
Costs (purchase prices for raw materials and components, internal personnel costs) and a shortage of personnel were the main problems that businesses faced in 2021-2022, and now more and more companies are announcing a decrease in demand and too tight financial conditions (this should update the debt problem in the second half of 2023).
The crisis is escalating, and I'm not sure where it will all end up, but objective metrics point to a decrease in economic activity. Given the cumulative imbalances, it has the potential to cause a crisis.
The United States Treasury and the Debt Ceiling
As of May 17, 2023, the US Treasury's Fed accounts have fallen to $68 billion (below the minimum threshold for operations to function), the lowest cash reserve since December 16, 2021 ($42 billion).
Then, in December 2021, the cache collapsed to this level, resulting in a $2.5 trillion increase in the debt ceiling and the activation of the money pump - in the two months leading up to February 16, 2022, the US Treasury restored cash reserves by $650 billion in addition to financing the budget deficit.
The volume of borrowings for two months was 1.2 trillion dollars, causing the market to fall by 8% even before the actualization of inflationary difficulties and predictions of a tightening of the Fed's monetary policy. The lag between the start of borrowings and the market downturn was two weeks (they began to fall in early January 2022).
The impending hike in the debt limit is a very bearish market signal since it will certainly result in hundreds of billions of dollars of large-scale liquidity withdrawal from the market.
From June to December 2023, net borrowing is estimated to be at least $1.5 trillion.
In addition to significant borrowings, the Fed is selling assets. The backlog has steadied as the Fed sells 95 billion from mid-March 2023 through May 17, 2023, in accordance with the declared timetable. This is due to a big surge in bond demand from money market funds and the general public following the largest outflow of liquidity from US bank accounts in history.
They withdraw from deposits, buy stocks and bonds, and market circumstances allow the Fed to dump papers and successfully cover holdings, which is why they have been selling plus or minus at a rate of 95 billion per month over the last two months.
The S&P 500 and the quantity of liquidity in the US financial system are linked. What is the cause for the increase in liquidity in the face of the Fed's sale of securities? Lending activities by the Fed during the March banking panic + Treasury operations to sell cash from the Fed's accounts (which increases liquidity).
Treasury's actions will decrease liquidity.
Amusing statistics facts
According to the Stockholm Institute SIPRI, global military spending will reach $2.24 trillion in 2022.
In parallel, we'd like to quote the World Food Programme: "We need 40 billion dollars per year to feed all the hungry in the world and end hunger by 2030."
That is, it is sufficient for humanity to reduce military spending by a pitiful 2% in order to tackle the problem of famine. But why isn't this occurring? It's simple: the state's security is more vital.
It turns out that the possibility of a military threat is so great that countries prioritize defense before addressing the humanitarian food crisis.
As a result, if most of us believe that conflict in the twenty-first century is unimaginable, the problem is just in our expectations. After all, based on how the globe "hedges" the danger of conflict, this is a foregone conclusion. And this isn't just our view; the numbers speak for themselves; you just have to take them into account.
Military products have been designated as carbon neutral by the European Union.
The Carbon Border Adjustment Mechanism (CBAM), which levies a levy - a quasi-tax - on CO2 emissions from production, excludes military-industrial complex products.
And, no, we are not ashamed by the fact that John Deere, a producer of diesel tractors, is one among the top firms in terms of ESG.??
THE END OF THE REPORT
Stay tuned.?
Regards, Negorbis.
The key info about the financial and banking crisis can be found in three issues dedicated to this subject:
Part I "Falling Bank Chronicles"
Part II "Crisis of Confidence & Regionalization"
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