Global Macro Monitor

Excellent video on China’s demographic bomb.  An outsized cerebral return on your 15-minute investment. Must view, folks.

QOTD = Quote of the Day

Traders apply the term widow maker to financial investments that cause catastrophic losses or are risky enough to do so…Another famous example of a widow maker trade occurred in natural gas futures, which professional traders have long considered widow makers because of their price volatility.  – Investopedia

Jaysus (h/t CG),  U.S. natural gas (Nattie) futures are down 76.7 percent from last August’s peak.  Moreover,  European Nattie prices are down 87 percent from the highs. 

Remember the pundits predicting Europe was going the way of Pompei as the Russians cut off their natural gas supplies?  

Europe may be about to experience its first winter without Russian gas, risking even higher prices, gas shortages, and a major recession. – IMF

Not so fast. Mother nature had different plans. 

Warm weather and a sharp downward shift in demand have contributed to the fall in prices in Europe. Unseasonable warm weather in Europe – about 1°C higher than average this winter – reduced demand for natural gas used for residential heating.  At the same time, higher prices also sparked efficiency gains, lower consumption among businesses, and in some cases reduced industrial activity. In the United States, warmer weather also reduced the demand for natural gas. – World Bank

California Reamin’

It is said that everything is bigger in Texas.  We will match and raise that and tell you everything is [more] expensive in California, including Nattie. 

California imports 90 percent of its gas from other states and Canada, so it’s reliant on pipelines. But many of those pipelines were closed for unplanned maintenance in November and December, limiting supply flowing to California and other Western states… A pipeline explosion in 2021 had already reduced capacity to move gas from Texas and neighboring states, where much of California’s supply comes from.

Additionally, the past few months in California have been especially cold, creating an unusually high demand for heating…That came after a historically hot summer strained the state’s electricity grid, which is largely powered by natural gas… NY Times

Thank You, Natttie 

We do owe Nattie a big debt of gratitude.  The widowmaker, after almost causing us to have a widowmaker, forced our trading book into retirement. We now sleep better at GMM.  Thank you, Nattie! 

Here is a follow-up on last week’s chart with some excellent granular detail.   

Interest payments on the national debt during the current fiscal year (October to February) are up 29 percent y/y, one of the fastest-growing expenditure components of the Federal budget (see table). 

Revenues are down, especially individual income taxes, which may reflect the slowing economy.  Theory dictates (ceteris paribus) that government tax revenues should be rising with inflation, however.  Hmmm. 

The fact income tax receipts are lower but self-employment tax revenues (1099 employees) are higher, coupled with what is happening with the employment data, can we hypothesize that high income earners are leaving the workforce (or getting fired) and starting their own businesses, such as consultants, for example?  Or could it be just a timing issue? 

The overall deficit is exploding, btw, up 50 percent.  

If the current situation normalizes and Treasury securities lose their flight-to-quality bid, interest rates are going to spike faster than one of Elon’s rockets. 

Must view, folks!

Tough week, especially for European banks and equities.  

After normalizing post-COVID, the U.S. budget deficit is starting to turn up again.  The 12-month trailing deficit was $1.62 trillion at the end of February, or around 6.14 percent of GDP.   Good luck bringing inflation down to 2 percent, given those digits and trend. Moreover, financing the gaps during normal times without the Fed and a flight-to-quality bid for Treasury securities will be a challenge for the markets and will put upward pressure on interest rates. 

The U.S. Deficit As the 15th Largest World Economy 

For context, the current U.S. budget deficit in nominal dollar terms is larger than the economies (gross domestic products) of 178 of the 192 countries in the IMF WEO database.  That is, the difference between what the  U.S. government spends and takes in is greater in dollar terms than 93 percent of the world’s economies, or about the size of the Australian economy and more than 3x Ireland’s GDP, folks.  Stunning.

Prepare to hear all about it as the debt ceiling debate heats up.  Tax hikes or spending cuts to reduce the hole is the political question…or just ignore it and wait for the mother of all crises to wash ashore. Most likely, the latter. 

After last September’s budget debacle in the U.K. and the resulting market turmoil,  which ultimately forced the prime minister’s resignation,  we now know deficits do matter.