Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Weeks 03/04. January 16 - January 29, 2023
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Macroeconomic indicators
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Analytics
The Chinese economy
The Chinese economy's growth is considerably disrupted in 2022, owing partly to "barbaric" and ineffective anti-COVID tactics that failed fully and completely.
The total economic loss from the lost income of Chinese economic organizations is more than 3.5 trillion dollars over three years, from 2020 to 2022.
The economy suffered substantial deformation, particularly in the consumer-oriented service sector. What China has been striving to push with tremendous effort and debt load since 2009 has been nearly destroyed by large-scale and largely meaningless anti-covid "horror" in the form that it was done in China.
The "emergency" abandonment of the Zero-COVID policy at the end of 2022 resulted in massive infections and an uncontrollable surge in deaths due to the Chinese nation's weakened immune system, which was the primary cause of excess mortality, rather than COVID itself, which transformed in three years, reducing virulence.
The Chinese experiment to try to rein in the laws of nature failed, and with it, they nearly overwhelmed the economy, overburdened with debt, because the margin of safety has almost been depleted, which has enabled balancing the expenses of the Zero-COVID policy for three years. Changed out quickly.
Now China is attempting to relaunch the economy.
The great Chinese revolution
Anti-COVID policy in China is only a small part of the problem, it can be fixed by abolition, which was done, although it paid trillions of dollars in economic damage, hundreds of thousands of excess deaths (if not more) through the destruction of the immune system over three-year harassment with an attempt creation of "clean zones".
World experience has proven that vaccination combined with limited (within reason) lockdowns are sufficient measures to stabilise the situation (as seen in India), but China chose a different road and failed. It is not about population density or population density, but about attempting to "bridle the laws of nature." It didn't pan out.
Another issue is demographics, which affects us from both sides.
The "one family - one child" demographic policy was implemented in 1979 in order to control the birth rate due to concerns about resource scarcity (primarily for food, after fresh memories of mass famine in China in the early 60s).
China was a backwater rural country with no developed industry in the late 1970s. The Chinese authorities, with the help of "Western allies," feared that uncontrolled births would cause a slew of issues, including political ones. There is insufficient housing, no equivalent energy, municipal, or transportation infrastructure, and no access to education or medicine for such a big population.
The implementation was "Chinese" in style. The rules were extreme (up to and including sterilisation), severely restricting the Chinese population's reproductive rights and prospects, and the influence of inertia is far too powerful.
Only in 2015 were the limits modified, and since 2016, Chinese families have been allowed to have two children, with another relaxation and the possibility to have three children coming in 2021.
However, the effects of 36 years of another experiment are felt. In 2022, China's birth rate fell to 6.77 births per 1000 population, or 9.56 million people, while the death rate was 10.41 million people (7.37 per 1000 population), resulting in a natural drop of almost 850 thousand people.
This is China's first population fall since 1960 when the natural decline amounted to 241 thousand persons during the three-year Chinese famine. The numbers do not go back to before 1950, yet we can safely state that this is the most substantial population decline since World War II.
The demographic element, as well as other societal standards and priorities, were dramatically affected for two generations by the policy of "one family - one kid," which created a "vacuum" of the reproductive population, i.e. immediately before the age of 46.
As a result, the next generation in China could face a mass extinction that could number more than 100 million people in 25 years.
With demography, the disaster is complete; active industrialization was completed ten years ago, and urbanization is depleted, as almost 45% of the people went from towns and villages to cities between 1980 and 2023. The rate of urbanization is now approaching zero.
Since 2009, China has decided to place its bets on domestic demand and the expansion of the middle class. This should sustain long-term growth, but this development resource is nearly depleted after exceeding a reasonable threshold for the national debt, which surpassed 300% of GDP in comparison to 265% in the United States and the Eurozone.
The anti-COVID horror has threatened to annihilate the middle class by 2020.
It is crucial to remember that the Chinese economy will continue to grow because the home market is large and technical development in China is only beginning, but the rate of growth will vary.
Europe's inflation: misplaced optimism
Eurostat has issued final inflation figures, indicating that the inflationary impetus that peaked in October 2022 has continued to fade (10.6% y/y for the Eurozone and 11.5% for the EU). In November 2022, inflation was 10.1%/11.1%, while in December, it was 9.2%/10.4%.
These figures are identical to those released in early January, but they are complemented with the structure of inflation and all European countries that were previously missing.
Extremely high inflation (above 15%) in seven European countries: - In Slovakia, inflation is 15%;
Surprisingly, Hungary is the only country in Europe with a purely upward inflation tendency, whereas most countries' inflation highs will be in September-November 2022.
Spain has the lowest inflation rate among the major European countries, at 5.5%, due to the low participation of gas and coal in the energy balance and the absence of evident food shortages. Inflation in France is 6.7%, Germany is 9.6%, and Italy is 12.3%.
You must comprehend how large the inflation difference is in just one year. From 2001 to 2007, pan-European inflation in December was 2.6%, and from 2010 to 2020, it was 1.3%. (half as much). Last year, the figure was 5.3%, and it is now 10.4%.
What should you pay attention to here? While inflation is slowing, non-energy inflation continues to soar to new highs! Inflation without energy was 2.8% a year ago, 6.9% in October, 7% in November, and 7.2% in December, indicating that the rate of increase has reduced but growth has not stopped.
Furthermore, prices climbed by 0.6% month on month, for an annual rate of more than 7%.
What should be the first step? Due to the base impact in 2021 and the reduction in energy prices in 2023, energy inflation may make a negative contribution to the overall price change by Q2 2023; nonetheless, non-energy inflation remains stubbornly high. There are still issues!
Retail Sales in the United States
Retail sales in the United States fell for the second month in a row, and quite sharply - 2.2% for two months in a row, but at a relatively high annual rate of 6.7%.
Since the previous pre-pandemic month (February 2020), retail sales in the United States have increased by an astonishing 29% in 33 months, the most rapid growth in at least 35 years.
This became one of the primary sources of inflation: a fundamental imbalance between supply and demand caused a natural price adjustment in a new configuration of effective demand, and demand was primarily distributed through helicopter money (the period of inadequate monetary and fiscal incentives 2020-2021).
Nominal sales increased by 9.3% at the end of the year, above inflation, but real sales have been mixed over the last two years. There is no crisis, but there is also no growth - only prolonged stagnation.
Retail sales in actual terms have fallen by 3.8% since the peak in March 2021, but you must remember that the "blowout" was totally fueled by helicopter money.
Retail sales increased by an insufficient 10.5% from February to March 2021 (in just one month), hence the recent fall is a correction to the frenzy.
As a result, real retail sales increased by 1.2% towards the end of the year and will balance at zero at annual rates between March and April 2022.
The excess departure of retail sales from the equilibrium trend of 2010-2019 is 7%, however, due to the labour market structure, the deviation is closer to 10%. (sales should fall at least so much to balance the market).
Further decreases are likely as funds diminish and lending momentum dwindles (major factors supporting retail sales at current inadequate levels).
Meanwhile, US gasoline prices have decreased 35% from summer highs, reducing societal pressure - the share of gasoline spending has fallen to 8.8%. (the usual range over the past 10 years).
US industrial production
US industrial production has fallen for two months in a row, a cumulative 1.3% drop, although the year has been strong, with growth above 3.9% for the year and plus 1.6% from December 2022 to December 2021.
The pattern in industrial production is identical to the trend in consumer demand in the goods segment (https://t.me/spydell finance/2661), which has also been declining for two months. Is there a break in the trend, and is all the anguish caused by the corrosive effect of rising interest rates expressing itself?
Interestingly, the US industrial production index has not altered since March 2022, but which industries support American industry?
Positions in high technology products are highly strong from January to December 2022:
In general, the industry in the United States is relatively stable, and the military-industrial complex offers support, but orders have been small thus far, and are more likely to balance the withdrawal of commercial orders.
From September 1939 to March 1945, industrial production in the United States expanded by 110%. There is no need to discuss this "achievement," but the military-industrial complex is visible.
China's demographic breakdown
The birth rate in China in the next 15-25 years will be determined by the new generation aged 0-14, which is quickly dropping.
In the mid-1970s, the Chinese government was obliged to consider birth control. Over 40% of the population was under 15 years old at the time, and 45 years later, the share of the population 0-14 has reduced to 17.7% in 2021 and, according to preliminary estimates, to 17.4% in 2022.
On the contrary, the number of pensioners (those aged 65 and up) is rapidly increasing. They were 5% of the population in the early 1990s, 7% at the start of the 2000s, 8.6% in 2010, and 13.1% in 2021. By 2030, about 19% of the population will be pensioners, greatly increasing the social burden on the budget and the economy.
The biggest issue is the working-age group of 15-64, which accounts for about 96-97% of all occupations in China.
What is the key to China's economic success? Industrialization, urbanization, working-age population growth, and globalization until 2009, then an unprecedented debt impulse, a gamble on technology, and domestic demand beginning in 2010.
To put this in context, the population aged 15-64 rose from 55.7% to 72.9%, or from 502 million to 976 million, between 1975 and 2009. 2022, and 68.2% in 2023, the lowest level since 1999. China currently has approximately 982 million people of working age.
Add to that the fact that between 1980 to 2023, nearly 700 million people moved from rural to cities, including the creation of towns from nothing. The rate of urbanization has now slowed dramatically.
In terms of population decline. The first decrease since 1960 occurred in 2022, and the annual growth was an average of 8 million people between 2015 and 2017. The Great Chinese Famine of the 1960s killed approximately 37 million people in China.
Demographic projections indicate that the population could be reduced by 100 million over the next 25 years, considerably reducing economic potential. As a result, China is entering a new era.
American farce with a debt ceiling
Again, this inane mouse commotion and the American clowning tour with a debt ceiling. Terrible emails from US Treasury Secretary Yellen about the urgent need to lift the debt ceiling or face default.
The media is discussing the US default scenario and other such topics. All of this is ridiculous rubbish. Let's look at some data to better grasp the situation.
The concept of forced borrowing restriction was suggested for the first time in 1939, and the system was implemented a year later, in 1940. The debt ceiling has been lifted 92 times throughout this time! There have been 24 promotions since 2000, with 17 episodes following the 2009 financial crisis.
Until 2013, there was no clowning; normally, this technique was semi-automatic.
The US government experienced a conditional shutdown in February 2013, October 2013, October 2015, September 2017, and August 2019, in addition to the limited crisis of 2011.
The previous time the cap was lifted was on December 16, 2021, by $2.5 trillion to $31.4 trillion - it is almost nearly there.
The original intent of the debt ceiling was to strike a balance of authority and resources so that the decision-making centre was not concentrated in one place (the US Treasury) and was distributed among Congress and the Senate in order to prevent an uncontrolled increase in debt.
It is no longer a political lever because the system of political balance in the United States has long been established, and the case when the political establishment in the United States creates the appearance of contradictions, gaining political points for the next elections while simultaneously solving the purely practical task of developing new areas of lobbying.
Government spending in the United States surpasses $6.3 trillion, which can be directed in part to green energy concepts, information technology, biotechnology, the defence industry, or elsewhere. American firms generously pay for lobbying as a type of authorized corruption in order to create a priority direction.
It is silly and meaningless to discuss a US default in the context of a debt ceiling. If the United States defaults, it will be due to circumstances beyond the control of the American elite.
How long will the undercover commotion last? As much as it takes to extract the media resource of a fictional political contest between Democrats and Republicans that does not and cannot exist. Why?
Decisions on strategic problems of national security are made quickly and without debate or complaint.
The most dramatic example is March 2020, when a $2 trillion fiscal stimulus plan (several hundred pages long) was written completely from the first to the last page within 6 working days of the first hard lockdown. The paper then went through all instances of approval, approval, and adoption through the Senate and Congress without a single complaint and was signed by the President of the United States on March 27, 2020, and the pumps have been running at full capacity since April. A spectacular aid package was created and implemented in just two weeks – incredible speed. Then there were modifications and additions (expenses climbed by 3 trillion in total), but that's not the point.
Or when the concept of cooperation and support for the United States and Ukraine was agreed upon a week. In 3 days they began to integrate intelligence, after 5 days the first echelons of military assistance went, and a month later they began to create a full-fledged paramilitary structure.
This is all about distinguishing real politics and real acts from fictitious demagogy, populism, and clowning. When the button is pressed, the United States acts in an emergency mode with lightning speed and unconditional commands.
COVID in 2020 or the war in Ukraine in 2022 are examples of crises that disrupt the established balance of power and necessitate immediate action. The debt ceiling is a perfectly organized and controlled clowning.
As a result, you should not place significance on components and situations that have no value. The limit will be raised, as it has always been raised, when it is necessary to ensure the system's stability (May 2023 approximately).
Strategic oil reserves in the United States
The United States has cut the rate at which strategic oil reserves are "burned" from 75 million barrels over 12 weeks in August 2022 to 30 million barrels by mid-January 2023. However, the withdrawal of strategic reserves has ended since December 2022.
Before the oil crisis, the US had about 640 million barrels in-store; presently, there are only 371 million, the lowest level since December 1983.
They began to burn with a vengeance after February 24, 2022, with a decline in strategic reserves of over 210 million barrels, i.e. for 308 days (until withdrawals were suspended on January 1, 2023), an average of 680 thousand barrels per day were confiscated.
The supply-demand balance has returned to normal. The United States today has a substantial excess of oil; in the last two weeks, total reserves have increased by 27 million barrels, or about 2 million each day! Stocks have not changed since mid-November 2022, i.e. on average for the last two months, plus or minus the balance.
The average daily export of oil products from the United States has reached an all-time high of 6.3 million barrels per day during the last four weeks. Crude oil exports are marginally lower, but still very strong, at 3.5 million barrels per day, down from a peak of 4.3 million barrels per day in mid-December 2022.
Cumulative crude oil and petroleum product exports reached a record 9.7 million barrels per day in mid-January, up from 10.7 million barrels per day in mid-December. The United States surpassed Russia in early June and Saudi Arabia in mid-autumn 2022 to become the absolute leader in oil and petroleum product exports.
The stagnation of imports over the last three years, along with the strong rise of exports, led to net exports of oil and oil products reaching a record 2.5 million barrels per day (mb/d) at a peak in Q4 2022 (4-week average), and are now around 1.4 million barrels per day. The rise in stocks over the last two weeks is linked to a dip in net exports and a drop in demand.
Since March 10, 2022, net exports of oil and petroleum products have averaged 1.5 million barrels per day, and the fall in strategic reserves is solely due to the US energy policy to expand exports.
Energy balance
Because of the low demand for oil and oil products in the United States, it is possible to maintain the energy balance and continue to apply their energy policy in order to minimize import reliance on energy resources and fulfil their export potential.
For the past 15 years (since 2008), the United States has been steadily moving toward its goal of energy neutrality, i.e. the ability to meet oil and gas needs at the expense of its own resources, which is fundamentally different from the 1985-2008 doctrine of establishing dominance in key regions of oil and gas production and unconditional control of transport routes.
Under the earlier iteration of the energy philosophy, growth in the Middle East was initiated by shock tactics (in reaction to the energy crises of the 1970s and 1980s) (through wars, the overthrow of governments, and the establishment of controlled regimes in Africa and the Middle East).
Oil and gas firms in the United States and Europe have gained control of oil fields, and oilfield service companies have serviced and continue to serve all of the world's major oil exporters.
The plan is evolving now. Initially, the United States shut off/isolated imports from the Middle East, substituting them with oil imports from Canada and Mexico, and they have made headway in establishing their own oil and gas industry in the last 7-8 years.
As a result, whereas the United States was a net importer of 13 million barrels per day in 2007, it is today a net exporter of up to 2 million barrels per day. Everything changes as a result of this, but this is far too broad a topic for a simple marginal comment.
In terms of demand, the most important component is falling: gasoline demand, which has fallen by 6.5% year on year and is at 10-year lows. The spread of electric automobiles, a drop in transportation following COVID (growth in remote work), an increase in car energy efficiency over the last 10-15 years, and the actualization of crisis processes are the reasons.
Demand for gasoline is approximately 1 million barrels per day below the "average," demand for aviation kerosene is 400 thousand barrels per day below the norm, and demand for diesel fuel is stagnant. The demand for other fuels and oils climbed by 700,000 barrels per day.
Overall demand declined by 1-1.3 million barrels per day to 20 million barrels per day, causing the energy balance to unload.
The world's gas station: USA
The United States has not only surpassed Russia as the world's greatest exporter of oil and petroleum products by gross volume, surpassing it in the spring of 2022 and Saudi Arabia in the fall of 2022, but it is also on track to take the lead in gas exports.
Official information from the EIA is released with a 4-6 month delay (not because they don't know how to count, but because they need approval from superior comrades), but preliminary data for the first 9 months of 2022 show a total (LNG + pipe) gas exports from the US at 146 billion cubic meters, despite the Freeport LNG accident.
Gas exports for the first nine months of 2022 climbed by 5% in 2021 and by 40% in 2020. By the end of 2022, gas exports are predicted to increase by 9% to 200-205 billion cubic meters, putting the United States ahead of Russia, whose exports are expected to total 170-180 billion cubic meters (pipe + LNG).
The launch of additional LNG facilities in 2022, as well as the cleanup of the Freeport LNG accident's consequences, adds approximately 225 billion cubic meters of gas to the export potential in 2023.
The rate at which energy gaps shrink is astounding. The United States had an average of 90-100 billion cubic meters of net gas imports from 2000 to 2007, but since 2008, they have revised their energy ideology and began on the path of energy neutrality (reducing net imports of oil and gas to zero).
The United States achieved net gas exports at the end of 2017, but within the accuracy of the account. Since 2018, net exports have only increased - 20 billion cubic meters in 2018, 54 billion cubic meters in 2019, 77 billion cubic meters in 2020, approximately 108 billion cubic meters in 2021, and, according to preliminary estimates, more than 120 billion cubic meters in 2022, ensuring that the country will outperform previous leaders (Australia and Qatar).
In terms of net gas exports, Russia led in 2022 but will fall behind the US in 2023. As a result, the United States will be ahead of Russia, Australia, and Qatar in terms of net gas exports by 2023.
The United States continues to dominate the European energy market, and the country is attempting to shore up its position through long-term contracts at a discount ($400-600 per thousand cubic meters).
The world is changing at a rapid pace, and the turn is unexpected. The US energy philosophy has a direct impact on politics, and the focus has shifted from the Middle East to Europe.
The LNG market
The largest suppliers in the LNG market for 2021:
Europe imports LNG from five major suppliers: the United States, Qatar, Russia, Algeria, and Nigeria, which account for around 92% of total LNG supplies in 2021 and nearly 97% in 2022.
The United States is the world leader in LNG exports.
Record export of 91.2 billion cubic meters from January to October 2022, compared to 82.3 billion cubic meters in 2021, 51.1 billion cubic meters in 2020, and 40 billion cubic meters in 2019. The growth is evident and undeniable.
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It should be noted that the Freeport LNG accident cost approximately 1.4-1.7 billion cubic meters per month. The United States exported an average of 8.6 billion cubic meters each month during the accident.
Since November 2022, the US export potential has been gradually recovering as a result of the Freeport LNG accident and will strengthen on the trajectory of the introduction of additional sections of terminals in Sabine Pass (6.1 billion cubic meters of capacity) and Calcasieu Pass (6.8 billion), which were deployed last year, but they will reach 70% capacity by spring 2023 and 90-100% capacity by the end of 2023.
Another phase of the Calcasieu Pass terminal will be operational this year and will be deployed by the end of 2023, and the beginning of 2024. According to the idea, a completely new Golden Pass terminal will open in 2024, capable of charging an additional $20 billion by 2026.
If no catastrophes occur, the US export capacity in 2023 is estimated to be 125-130 billion cubic meters of LNG, greatly increasing the gap with the main competitors.
The United States has firmly seized control of the gas market and is not about to relinquish it. The strategy calls for the deployment of an export capacity of up to 150 billion cubic meters by 2026.
Market competition in the gas industry
The United States is retaking the lead from Russia, but how significant are the tectonic shifts?
Gazprom's exports to non-CIS nations fell to 100.9 billion cubic meters in 2022, down from 185.1 billion cubic meters in 2021, while exports to China surged by more than 50% to above 16 billion cubic meters. Exports to Europe decreased to 67 billion cubic meters from 155 billion cubic meters expected, with Turkey taking the remainder (estimated at about 17-20 billion cubic meters).
Russia provides 26-28 billion cubic meters to CIS countries, with Belarus being the primary buyer (18-20 billion cubic meters). In 2022, Gazprom's total exports to all nations were approximately 130 billion cubic meters, compared to the norm of 200-210 billion cubic meters.
In comparison, Gazprom's exports averaged 240 billion cubic meters from 2004 to 2008, 200 billion cubic meters from 2009 to 2013, and 205-207 billion cubic meters from 2014 to 2021. The norm for Gazprom is more than 200 billion cubic meters of total exports in all directions.
Prior to the 2009 crisis, Europe took an average of 215 billion cubic meters, and 177 billion cubic meters after 2009, including Turkey and Ukraine, and in recent years, shipments have dropped to 165-167 billion cubic meters.
Unlike pipeline gas, Russian LNG exports surged in 2022 to 44-45 billion cubic meters.
As a result, Russia's total exports (pipe + LNG) to all nations in 2022 will be 173 billion cubic meters plus or minus a minor margin of error.
In 2023, Russia can boost exports to China to up to 20 billion cubic meters, neighbouring countries along the upper border to no more than 27-28 billion cubic meters, and Turkey to no more than 20-22 billion cubic meters. The pipeline will transport 66-68 billion cubic meters of reasonably "safe" export.
Because this "safe" export is basically "free" or with large discounts, it should be understood. There are three special account clients (China, Belarus, and Turkey), and the pricing is highly non-market (a very significant discount to world prices).
Current deliveries to Europe amount to 25-30 billion cubic meters per year, so pipeline exports are good if they reach 100 billion cubic meters in 2023, compared to 130 billion cubic meters in 2022 and more than 200 billion cubic meters in 2021.
Russia lost half of its pipeline exports and around 80% of its profitable exports (traded at market prices).
With LNG, the issue is compounded since more than half is shipped to Europe, and this market, like pipeline exports, can be cut off at any time. There is also uncertainty about the ability to develop new LNG terminals and service current ones, given the industry's reliance on Western technologies.
As a result, Russia's expected pipeline exports to non-CIS countries in 2023 will be 70 billion cubic meters, compared to 100 billion cubic meters in 2021 and an average of 170 billion cubic meters. Russia's LNG exports are anticipated to be no more than 40-45 billion cubic meters. As a result, only in LNG will the US (pipe + LNG) beat Russia in net exports in 2023, and the US also has pipeline exports to Mexico and Canada.
How is the United States seizing control of Europe?
LNG exports to Europe are increasing at an unprecedented rate, with volumes setting new highs. From January to October 2022, US LNG deliveries were 62 billion cubic meters, up from 24.2 billion cubic meters in 2021, 21 billion cubic meters in 2020, and 13.6 billion cubic meters in 2019.
The problem at Freeport LNG has reduced export possibilities, but the accomplishments in 2022 remain spectacular. Almost 70% of US LNG exports were destined for Europe.
American LNG exporters "just in time and very successfully" took advantage of the men-made circumstance and shifted flows from Asia to Europe, capturing the market and recouping their costs.
Europe generously funded energy modernization and decoupling from Russia, and the US became the primary and unconditional benefactor.
Redistribute all that can be redistributed to Europe within the framework of current arrangements with Asian partners. Everything that could be squeezed out of the terminal's physical capabilities and the operating fleet of gas carriers was squeezed out.
The United States skilfully leveraged Europe's disarray and disorientation to its advantage, resulting in increased exports, the seizure of a crucial market, and hefty compensation.
Excellent work; plenty to learn.
The Bank of Japan
The magnitude of the Bank of Japan's issue at the start of 2023 exceeded all realistic boundaries. The printing press has been warmed up and is being flooded with liquidity in all directions at random.
The Bank of Japan's balance sheet is expanding, thanks to the purchase of Japanese government bonds and an increase in bank lending (one thing that worked before).
The Bank of Japan's assets climbed by 23.4 trillion yen between January 1, 2023, and January 20, 2023, the most significant gain since December 1999, when 27.2 trillion yen was charged in a month, although since January 2000, practically everything has been taken away.
This time, the growth in assets occurs within the context of a continuous and coordinated policy of locking currency flows inside the Central Bank's internal circuit, virtually nationalizing the whole financial system.
During the COVID crisis, the Bank of Japan's assets increased by an average of 16.3 trillion yen each month, with a peak intensity of 19.6 trillion in March and May 2020.
From April 2012 to April 2017, when the current monetary paradigm took effect, assets increased at a monthly rate of 6.8 trillion yen.
The Bank of Japan's balance sheet remained practically unchanged towards the end of 2022, with a reduction of 53 trillion yen from May to September, mostly due to the repayment of covid loans totalling 65 trillion yen, but they resumed issuing in October 2022.
From October 2022 to January 20, 2023, 41.5 trillion yen was pumped into the economy, 33.1 trillion through the purchase of government bonds and 9.3 trillion through increased lending, minus 1 trillion yen for other categories.
The present balance is 727.3 trillion yen, up from a high of 738 trillion in April 2022, indicating that while there is compensation for last year's balance reduction, the scale and speed?
The annual rate of Japanese government bond buybacks is reaching 60 trillion yen, compared to a peak of 90 trillion in the summer of 2016, however, this is for a year, and the majority of transactions occur in the last four months, with the most insufficient changes occurring in January 2023.
They acquired 14.4 trillion government bonds in the first 20 days of 2023 (the quickest pace in history) and granted 8.8 trillion loans.
The Bank of Japan has gone completely insane. What exactly does it all mean? Bond market stability has deteriorated
The issue is complicated and nuanced. Several unfavourable forces as well as particular Japanese characteristics are at work here.
To begin, the Bank of Japan is the only significant country's central bank that has refused to compensate for the inflationary gap between actual/projected inflation and current rates in the money and debt markets.
All of the major central banks raise rates in some fashion, though the timing and rate of tightening differ. In this war, the Fed leads the Central Bank of Canada, the Bank of England, the ECB, and other Central Banks, but not the Bank of Japan.
Second, the inflationary impact in Japan began around 6 months later than in the top developed countries (3% was achieved in August 2022), but inflation is growing and reaching substantial levels - 4% by December 2022, which is high for Japan ( maximum since November 1981).
Record inflation inherently distorts the debt market, hurting businesses and the government's ability to not just borrow new debt, but also refinance current debt.
Higher rates are "required" by the market, which the Bank of Japan is unable to address due to two factors: an extravagant debt burden and a unique debt structure.
In 2023, Japan's debt is expected to reach 1,100 trillion yen. The debt burden is 230-240% of GDP, which is higher than 115% in the United States and 97% in the Eurozone.
The Bank of Japan holds half of the public debt, state-affiliated Japanese banks hold 14-15%, Japanese insurance funds hold 20%, pension funds hold roughly 7%, non-residents hold 7%, and households retain 1.2%.
Over the last 25 years, Japan's financial system has entirely dried up. Everything that may go into public debt has already gone into public debt. At the same time, the generated cash flow is objectively insufficient in the amount required to finance the budget deficit.
In contrast to the dollar and eurozone, which are closed to world finance, there are no external investors in Japanese debt. Japan is a "thing" in and of itself.
Third, Japan's record trade deficit has resulted in a near-zero current account, and the rate gap between Japanese and international markets causes an outflow of capital, which hits the yen in mid-2022, causing the currency's strongest decline in decades.
In Japan, capital flight tendencies in quest of higher profitability are materializing, while the produced flow through the current account surplus (1% of GDP for the present year versus 4% on average) is insufficient to balance internal structural conflicts.
So, what is the reason for the enormous volume of QE?
This is how Japan's debt crisis appears.
The structural crisis (not a recession) in the USA
In the United States, there are increasing indications of an impending crisis. There are no questions about direction. The moment of failure (what will be the trigger?) and the magnitude of the fall are both intriguing.
So far, the situation has resulted in the United States emerging victorious from the energy crisis, skilfully navigating between crisis stages in 2022.
The Fed began reducing its balance sheet in June and raising interest rates in March 2022, eventually reaching 4.5% in January 2023. (the highest growth rate in 42 years). Simultaneously, the US budget deficit is falling, thus reducing helicopter money, which has emerged as the primary surplus and unsecured demand in 2020-2021.
The US debt issue is being resolved thanks to an unprecedented increase in corporate lending, which allows investment activity to remain at a somewhat tolerable level.
Household demand, which accounts for 70% of the US economy, is being bolstered by the depletion of savings to historic lows and extraordinary lending rates.
High lending activity was enabled by the banking sector's decoupling from the inner loop of the Fed's monetary policy when banks were able to partially disregard the increase in the Fed rate while having exceptionally inexpensive funding on deposits at rates considerably below 1%. However, this is just temporary.
A hike in the Fed rate, even if delayed, will be reflected in the economy, raising the cost of debt servicing and drowning out the lending drive. The question here is who will blow up first. A severely leveraged economy with a significant concentration of toxic junk bond industry would undoubtedly fail such a stress test. There will be a response.
The Conference Board LEI for the United States fell by 1% in December 2022, following a 1.1% drop in November (10 months of decline). The index fell by 4.2% from June to December 2022, a substantially faster rate of fall than the 1.9% decline in the first half of 2022.
On every occasion, a decrease in the index of less than 5% year on year resulted in a crisis in the United States. The drop is now 6%. A usual lag time is 4-6 months, so there isn't much time to wait.
The real estate market in the United States
The real estate market figures in the United States are dismal. There is a simple explanation for this: extreme cumulative price increases in residential real estate of more than 40% in two years, the fastest rate of growth in mortgage rates in 42 years (they are pegged to the Fed rate, unlike consumer loans), depletion of savings, and a slowdown in nominal income growth.
All of this produces the worst conditions in modern history for buying real estate - worse than in the 1970s and 1980s when interest rates were exceptionally high but offset by the comparatively low value of real estate relative to American household earnings.
All of the unfavourable factors have now converged. The numbers obviously attest to the major issues confronting the real estate market. This is significant from a political and macroeconomic standpoint because the real estate sector encompasses a large portion of the economy.
Construction services, real estate sales services, manufacturing and sale of furniture, building materials, household appliances, utilities (when connecting new residences), manufacturing of construction machinery and equipment, and many more sectors are all dependent on real estate.
Bookmarks of new homes in the United States on a 6-month moving average declined by 20% from their peak in 2021, building permits are almost the same, but the fall has accelerated in the previous 2-3 months, resulting in a 35% drop.
Because of the strong pent-up demand in 2020-2021 (this market has momentum), new house starts and building permit levels are much greater than in 2015-2019, but when adjusted for population, present levels are comparable to previous lows.
If adjusted for population growth, the significant reduction in secondary market sales to 4 million transactions in annual terms is a covid minimum and at the level of the worst period of the crisis from 2007 to 2011.
All of this should reduce the investment potential in new house construction in the next and following years.
The EU-27 countries' public debt
The EU-27 countries' public debt increased to 13.2 trillion euros (85.1% of GDP) in Q3 2022, up from 13.1 trillion (86.4% of GDP) in the previous quarter and 12.8 trillion in Q3 2021 (89.7% of GDP).
The annual debt rise is just 418 billion euros, which is close to the annual budget deficit (395 billion euros).
Almost all debt (12.2 trillion euros) is concentrated in Eurozone nations, as is borrowing growth throughout the year - 400 billion euros; nonetheless, the debt burden in the Eurozone is slightly higher than in the EU-27 countries (93%), although reducing compared to Q3 2021 (97.3%).
The debt burden has dropped in all significant countries, without exception. There are three reasons for this:
Formally, the debt problem is under control, but in the context of the debt crisis (the inability to properly and successfully place), the issue of debt structure stability in the face of rising rates and an evident scarcity of demand from the private sector is on the table.
Europe is tremendously divided, with resources concentrated in the hands of the largest and most prosperous countries, such as France and Germany. As a result, it will be essential to redeem the obligations of the weak links in the chain, which are getting increasingly numerous.
The ECB is the buyer of last resort, because overseas investors will be difficult to recruit in the context of geopolitical events, the energy crisis, and the competition for capital between the US and Europe, and domestic private demand may be insufficient.
The Debt Crisis and the European Economy
The European economy proved to be tenacious, having digested the acute phase of the inflationary, energy, and refugee crises, the brunt of which fell primarily on Eastern European countries (mainly Poland).
In terms of the budget deficit as of Q3 2022, Germany reacted most strongly to the energy crisis, which is understandable. A factor of heavy reliance on Russian energy resources, an energy balance skewed toward gas and a highly established industrial cluster.
Germany has the most generous energy subsidies. The third quarter of 2022 is not suggestive (the crackdown on subsidies having only recently begun), and a fuller picture will emerge in the fourth quarter of 2022, when spending peaked, according to official figures.
However, according to current statistics, Germany's budget deficit jumped from 1.1% to 3.8% in yearly terms in one quarter, and Germany is likely to issue a deficit closer to 6-6.5% in Q4 2022. (covid maximum).
According to the plans, Germany would begin drastically reducing its budget deficit in early 2023. (the main large-scale anti-crisis programs have been extended until the end of Q2 2023).
The situation is less dire in other significant European countries (there is no operational data for Italy). We may single out Austria, Romania, and Poland, where the budget deficit changed significantly in the third quarter. Spain has mostly recovered from the energy crisis; there is virtually no inflation (on a European scale), and the budget is unconcerned with European developments. The same is true for Portugal.
The question now is whether Europe will be able to absorb the debt crisis, which is only now beginning its "campaign"?
China in 2022 & 2023
Despite the cooling of overseas markets and the issues of the pandemic in China, total trade increased to $6.31 trillion (+4.4%). List of China's 11 largest trading partners in 2022:
The Pacific area is home to the majority of China's main trading partners; 11 of China's largest trading partners account for more than half of its foreign trade turnover. The United States contributes 12% of China's international trade, while East Asian countries account for more than $2 trillion, or 32% of China's foreign trade turnover – stagnation in Sino-American trade development can be countered by the development of commercial connections in East Asia.
South Korea surpassed Japan to become China's second-largest trading partner after the United States for the first time. Japan's position may shrink further if the two countries' rivalry intensifies: Japan's lost niches may be filled by South Korea.
Russia has joined the PRC's top ten trade partners for the first time. Trade has climbed from $88 billion in 2012 to $190 billion in 2022.
The expansion of commerce with Malaysia may be related to the country's development into a hub for the re-export of products from foreign nations. The real rise in trade between Russia and China may differ dramatically from official numbers - and may already approach the $200 billion threshold ahead of schedule.
By 2023, commerce between Russia and China may have reached the capacity of Russian infrastructure, slowing the reorientation of European goods to China. Furthering trade growth between the two nations necessitates extending trade cooperation and raising the share of high-value Russian exports to China, which is currently not happening.
If energy prices remain steady, Russian-Chinese trade growth in 2023 is anticipated to be no more than 10-15%.
The December indicators of Chinese foreign trade are very concerning, including for the global economy: despite the fact that December was expected to show an increase in China's foreign trade indicators due to the proximity of the Chinese New Year (January 21/22) in connection with order completion, foreign trade in China has decreased. China's turnover fell by 8.9% in December 2022 compared to December 2021, with exports to overseas markets falling by 9.9% and imports into China falling by 7.5%.
The image of the fall in exports is particularly apparent given that the Chinese New Year fell on February 1, 2022, for the period of 2021, implying that the volume of order completion declined on January 20, 2022: hence, the peak value of 2022 is less than comparatively close to December 2021 median values.
The drop in exports to foreign markets is associated not only with the growing confrontation between China and Western countries, as well as the potential impact of the pandemic outbreak in China, but it may also indicate a general drop in global demand, which could signal the start of a global recession.
China's real estate crisis worsens, with new home prices down 0.2% month on month in December, the fifth consecutive month based on National Bureau of Statistics data.
China has surpassed Germany to become the world's second-largest car exporter, with Chinese mainland exports increasing 54.4% year on year to 3.11 million vehicles in 2022. Exports contributed to 11.5% of total mainland Chinese manufacturing in 2022, totalling 27 million vehicles. China is also approaching Japan's export volume and may overtake Japan as the world's largest vehicle exporter in the coming years.
China and India will process Russian oil and supply it to the EU as diesel fuel. The European Union will impose a price ceiling on Russian fuel exports beginning February 5. However, such penalties are anticipated to dramatically reroute global diesel flows, raising the prospect of higher short-term prices.
India's position in supplying Europe is notable in that the country has become one of the top purchasers of Russian oil since the conflict in Ukraine began. The large increase in Indian diesel flows almost guarantees that Russian oil is purchased and processed in India before being supplied to Europe. Such trading does not contravene EU regulations, but it demonstrates the ineffectiveness of sanctions.
United States M2 money supply
A noteworthy occurrence that the media overlooked. The US money supply (nominal) saw a negative year-over-year change for the first time since 1930 (minus 1.3%), and the previous time M2 fell to zero was in March 1993 and April 1995, however, it never crossed the contraction border.
The basis for cutting the money supply is relatively high, and it should be stressed. The nominal growth rate between December 2019 and December 2022 was 39%, which is equal to the most active periods of monetary asset accumulation in mid-1973 and in Q1 1978!
The largest three-year growth rate in recorded history, at 50%, was attained in March 2022. In the last three years, 25% of all dollars ever issued up to January 2020 have been created, and the money supply has increased by $5 trillion.
The current monetary impulse has deviated from the norm by almost $3 trillion, but it must be understood that the pressure has already been released for a year, and as of December 2021, the deviation from the norm was 3.6–3.7 trillion dollars. The normalized growth of the money supply in accordance with the current trend is 670–700 billion per year or up to 2.1 trillion dollars over three years.
As a result, the magnitude of the monetary impulse in 2020–2021 is what led to the decline in the money supply. Given that normalized growth has significantly strayed from the rising trend to $750-850 billion in M2 growth annually, normalization will take at least another two, maybe three years (taking into account inflation and changes in financial proportions).
Amazingly, the real money supply decreased by 7.3%. The anti-record of April 1980, when M2 fell 6.4% in real terms, may be changed by a sizable margin. Because there was deflation in the 1930s, the present fall is a record for all of history in contrast to the change in the nominal M2, which takes inflation into account.
Consumer demand typically, but not always, collapses when real M2 y/y declines, as it did in 1975 and the early 1980s. It was feasible to resist sometimes, as in 1970 and 1992–1995. The factors that contribute to the stability of demand in the present have been extensively discussed (depletion of savings, record lending, pent-up demand).
Prior to now, as the money supply is a derivative of credit activity, a decrease in the money supply was thought to be primarily caused by a violation of the reproductive credit mechanism. But not right now.
In general, three channels of influence—credit, fiscal/monetary, and currency—have an impact on the money supply in different ways. What is happening in the US, then?
In spite of the Fed's balance sheet reduction and a reduction in the Fed's helicopter money distribution, the present proportions and structure of the monetary system prevent this from having a direct financial impact on the actual economy. Here is a further explanation.
Although monetary and fiscal policies have had an impact on the money supply's trajectory, the crucial difference between the present market rate for corporate and government bonds and the weighted average deposit rate—which is still considerably below 1%—is the primary cause of the M2 decline.
As a result, there is a built-in incentive to reinvest the money supply in different financial products, including those found in other nations (stocks and bonds). When liquidity is forced into the debt markets due to the printing press halt, it turns out that this gap has a stabilizing effect on the US financial system.
The economy and financial system are impacted in two different ways by record inflation for the past 40 years and a record difference between bond market rates and money market rates.
Due to the banking system's surplus liquidity, which has been created over 15 years of monetary mania, the deposit rates are low.
THE END OF THE REPORT
Stay tuned.
Regards, Negorbis.
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