Macro Economy Weekly | Bitmidas
2022–10–18
The Black Swan Sneaks In
The third section of this week’s report will reveal the black swan sneaking in.
Repeating CPI and Market Reversal
2022–1013:20.30 (utc+8) The seasonally adjusted annual rate of the US CPI is 8.2% in September, which is higher than the market expectation of 8.1%. The high US CPI has become a long-term phenomenon, which can hardly be contained through a single monetary policy.
The market reckons that the Fed may raise interest rates drastically again to curb inflation. The probability of the Fed raising interest rates by 75BP in November has increased to 92.5%, with the highest probability of 98%.
Although the market considers that the probability of the Fed rate being set at 75BP on Nov.3 is very high, various markets have shown the opposite trend.
First, the U.S. dollar sprang up and fell back on the 114 resistance, somewhere the market does not make progress with a continuous rate hikes but rather pulled back, reflecting the market’s concerns about the failure of the Fed’s policy.
For the US stock market, the S&P 500 rebounded from the lower support of the long-term descending channel.
The third is BTC, which is very sensitive to the Fed’s policy. After the CPI data is released, BTC fell to 18000, a break-even point of miners and a concentration of speculative capital. A large amount of capital flowed into BTC and pushed up the price, similar to the scenario played on US stock market.
The reversal and rebound of U.S. stocks and cryptocurrency markets reflect that markets are expecting the Fed to take a U-turn or fail. The market seems to become immune to macro-tightening voices and makes its own choice…
Escalation of Geopolitical Conflicts & Contradiction between Energy Supply and Demand
Ukraine attacked the Croatian Bridge, causing 7 fuel tank cars of the train above it to burst into flames, damaging the bridge and transgressing the red line drawn by Russia.
The Russian Ministry of Defense launches strikes on Ukrainian military targets on 11th with land-, air- and sea-based missiles in response to Ukraine’s attack on the Croatian bridge. Kyiv’s energy system is severely damaged and Ukraine stops exporting electricity to the EU from October 11. Eversince, energy panic in Europe has rised to an unprecedented level.
In September, European crude oil and condensate imports surges to over 8.46 million barrels per day, the highest monthly intake since January 2020, partly reflecting Europe’s winter energy panic.
Despite the surge in European imports of energy in September, OPEC lowers its forecast for world oil demand growth in 2022 to 2.64 million barrels per day, a decrease of 460,000 barrels per day from its previous forecast; downgraded global crude oil demand growth in 2023 is 2.34 million barrels per day, 360,000 barrels per day lower than previously expected.
At the same time, the global economic growth forecast for 2022 is reduced to 2.7% (previously 3.1%), and the forecast for 2023 is lowered to 2.5%. Crude oil pulled back due to the expected cooling demand.
Debt Crisis, the Black Swan
As of October 6, the size of the US national debt reaches 31.15 trillion US dollars, approaching the debt ceiling of 31.4 trillion US dollars, leaving only 250 billion US dollars “quota”
Since 2002, the U.S. statutory debt ceiling has been raised 22 times, from $5.95 trillion to $31.4 trillion, an increase of 428%.
Against the backdrop of a substantial increase in public spending, high inflation, and aggressive interest rate hikes by the Federal Reserve, the United States may face a debt crisis.
As the U.S. debt ceiling has been adjusted repeatedly, in the long run, rising debt will increase the borrowing cost of the private sector and drag down economic growth. Since the 2020 epidemic, the debt-to-GDP ratio has soared, reaching a record high.
As the Federal Reserve continues to aggressively raise interest rates, many emerging market economies are forced to raise interest rates in order to prevent capital outflows and maintain exchange rate stability. At the same time, the strong dollar has led to the depreciation of emerging market currencies, which has increased the debt pressure of the public and private sectors of emerging market economies.
One-third of emerging economies currently reach the level of a debt crisis. In May this year, Sri Lanka announces a default on its debt, becoming the first emerging economy to go bankrupt during the Fed’s aggressive interest rate hikes. As the Fed’s policy of raising interest rates continues, more emerging economies may default on their debts.
Currently, according to my incomplete statistics, 30% of emerging markets and developing economies and 60% of low-income economies are in or near a debt crisis.
Overseas funds sold 6.39 trillion yen of Japanese bonds in September. This week, the 10-year Japanese government bond had no deal for 4 consecutive days and only several deals on the 5th day.
In order to maintain the upper limit of the bond yield, the Bank of Japan purchases a considerable amount of treasury bonds, and its treasury bond holdings account for about 50% of the total, which squeezes the transaction volume in a disguised form and shrinks liquidity in the market. The Bank of Japan has become its own creditor, which is more terrifying than a debt default. When the market evolves into a game of one’s own, it means that the market is dying.
Conclusion
The panic demand for energy in Europe and the decline in global demand for energy reflect the problems in supply and demand and that of supply chain. This is also the biggest reason why the CPI in the United States and Europe fail to decline.
At present, the United States only relies on monetary policy to curb inflation by raising interest rates, bringing a liquidity crisis and a debt crisis to the world, and the United States itself is also faced with the risk of defaulting on the debt ceiling.
One-third of the world’s emerging economies and the United States, the most developed country, are confronted with various forms of debt crises. This is a huge risk, but most people are not aware of it yet. The world may suddenly realize it when the black swan of the debt crisis finally breaks out.
Avoiding the black swan of the debt crisis requires mitigating geopolitical conflicts, regulating supply chains, and removing key sanctions at the national trade level. Otherwise, it is only a matter of time before the crisis erupts. However, in the current rivalry between nations, things are looking not so optimistic.
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