Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 7/4/22.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
Table of Contents
A Year in a Week
UK’s Boris Johnson Resigns
Shinzo Abe Assassinated
Chinese Bond Defaults
FOMC Minutes
US Employment
Crypto Macro
Price Action
Mechanical Liquidations
Conclusion
1. A Year in a Week
At the start of the week, I said “This is a relatively slow news week.” Funny how wrong that turned out. Between the UK government having a massive shakeup, the previous PM of Japan being assassinated and, major credit defaults ongoing in China, it seems as if a lot of instability is still ruling the day in the global macro.
UK’s Boris Johnson Resigns
At the start of the week, several of the prominent ministers in the UK government submitted resignations.
It seemed significant, so I bookmarked these presuming I might be commenting on some of the economic instability leading to resignations.
Of course, I had completely missed the bigger picture. Boris Johnson, who was serving as the Prime Minister of the United Kingdom was about to resign and did so the following day.
Why? I asked around to people who said they saw it coming and they stated the following reasons as why he stepped down. He knew that a party member he appointed to a position in the UK parliament had previously had a complaint of groping and sexual misbehavior against him. You might be saying “so what,” as the era of Me-Too might have desensitized you to suspending judgement when it’s just hearsay. But apparently, the same guy was thrown out of a club a week ago for becoming a drunken mess and groping several men.
'He was frogmarched to the door and poured into a black cab. The guy was so drunk that he could barely speak and was unable to tell the driver where he lived. We had to look it up for him. That was how bad it was.'
Seems as if it’s a serious repetitive problem for this guy. But is that resign-worthy?
Other reasons for his resignation that I was given is that while the government was enforcing lockdowns, Boris Johnson was hosting lockdown parties that were in violation of the laws being enforced on the citizenry.
I’ve heard other murmurings that he had a personal phone he maintained a group chat with his personal friends in, which is supposedly a violation of security protocols for the Prime Minister.
There are probably more reasons why pressure for him to resign was growing. I’m not aware of them. In the US, none of this stuff is really resign-worthy, it’s not even impeachment worthy. I suspect that the reality is that Boris Johnson probably violated decorum and rubbed his colleagues the wrong way to the point where they were just looking for reasons to get rid of him. The truth is that when it comes to politics, work, and any other endeavor where people collectively come together to work towards something, how the people around you and below you feel about you is all that matters. If they don’t like you, they’ll take the first excuse they have to toss you out and they’ll use it. And if they do like you, well, you can get away with murder (up to a point). My guess is that Boris was just not liked. But it’s also possible that British politics go deeper than this and I’m just an out of touch American.
Shinzo Abe Assassinated
Shinzo Abe is the previous Prime Minister of Japan. He had to step down in 2020 due to his ailing health and complications from an ongoing diagnosis of ulcerative colitis. He was fairly popular in Japan and was responsible for the reinterpretation of Japan’s constitution to allow for them to build up their military again, as a defense force.
His expansions of Japans Navy and Army are one of the main detractors of a Chinese invasion of Taiwan as it provides the West with an additional player who can increase our combat abilities if such an invasion were to occur. Thanks to Shinzo, Japan’s first aircraft carrier since WW2 set sail in 2021. Of course, if you read my substack quite a bit, you know that there are deeper financial instabilities underneath it all for Japan that went unaddressed by Abe’s government.
So he was a decent leader. Not the best, but not the worst, and fairly popular during his time in Japan.
After stepping down due to his health he still participated in Japanese politics and campaigned on behalf of his party, the Liberal Democratic Party of Japan (Americans, take note, these terms mean different things in Japan). It was at one such campaign on Friday July 8th in Nara, Japan that he was assassinated. Below is a video of Abe being shot, if you don’t want to watch it, don’t click on it.
The assassin used a home-made double-barreled shotgun, the first shot either missed, or wasn’t loaded properly, while the second shot hit him in the back. His neck, lung, and heart were pierced by the shot and doctors did their best to save him but he died due to blood loss and was pronounced dead around 3am CST.
The assassin was apprehended at the scene, a 41 year old Japanese citizen.
His home-made firearm can be seen here. Japan has extremely strict gun-control and is an island nation with fairly rigorous import controls. It is fairly difficult to get a gun illegally in Japan, same as it is difficult to get one legally. As such, gun-crime is rare in Japan. But guns are a technology that have existed for over 1,000 years in some form or another. Anyone with access to a home-depot or similar hardware store can cobble one together as evidenced here, it’s a piece of wood with two steel rods taped to it.
The shooter likely made his own bullets as well. That may sound daunting, but making gun-powder is fairly easy and straight-forward as this wiki-how article demonstrates. From there you just need to pack the barrels with projectiles (maybe ball bearings) and use an electric charge to ignite the gun-powder.
This is nowhere near the first time a home-made gun has been used in an attack before and probably will not be the last. Guns are an extremely basic technology, and anyone can build one from scratch if they are capable of basic home improvement tasks.
It’s a sad thing to have occur in the world, and may or may not be a sign of the times. The assassins motive is still unknown at this time, and it’s possible we may never know why he did it.
It’s uncertain what sorts of regulatory or legislative impacts this may have on Japan in the future moving forwards, or on foreign relations, but I would expect to feel some impacts from such an event in the way Japan carries itself on the global stage. The way world leaders react to this event will impact their relationship with Japan, and such could inflame how Russia and China currently relate to Japan, which can impact geo-politics moving forward. Putin himself issued a timely statement offering condolences to the family and the nation despite the current ongoing dispute between Russia and Japan over the northern islands. While China’s ambassador to Japan has issued a statement but Xi Jinping has not yet done so himself. China and Japan are also in dispute over the size of their EEOZ in the South China Sea, and claims over certain uninhabited islands. Chinese citizens on Weibo seem to be gloating over Abe’s death, which may indicate how the Chinese state feels, as citizens are mindful of what they do and don’t say in public due to its impact on their social credit score, which controls their ability to travel, take loans, get jobs and be considered for promotions. So typically when certain speech is seen as mainstream in China, it can be understood that such speech is tacitly being encouraged by the Chinese government.
I don’t know what sorts of impacts this assassination will have on Japanese-Chinese relations, but it is certainly worth watching if any rhetoric emerges tying the shooter to China, or if anything emerges about China not giving this event the respect it deserves. But in reality, the geo-political chances of an eventual Chinese invasion of Taiwan are high, and Japan is currently in-line to be on the front-line of that conflict if it emerges.
Chinese Bond Defaults
Another Chinese property developer has defaulted on it’s bonds. I don’t cover China too often on here as it’s markets are fairly opaque and tightly controlled in a number of ways. But we have discussed previously how they have been manipulating GDP by encouraging what are essentially condemned developments.
China will never admit how bad their shadow banking crisis is, nor how much wealth was vaporized building empty cities and the shells of half completed buildings. That is not in their culture and any leadership that did admit to such would be viewed as weak. When China made some initial admissions about how large the shadow banking sector is they valued it at exactly 25% of total banking reserves. You can see why, they were making a tacit admission that total loans from banks were equal to total reserves, with 75% being loaned out the traditional way, and 25% loaned out under the table. To the lay-person, these easy numbers fit together very well and few questions needed to be asked.
The truth however, is that the debt is fractal. At each level of lending and borrowing officials were likely acting under the table. In truth, I suspect the shadow debt within China is likely several times larger than reserves. As these major real estate companies collapse, we are finding that their corporate bonds are actually trading at 10 cents on the dollar, implying a 9:1 debt:reserve ratio. Below is a video from the perspective of a South African and an American who have lived in China for over a decade. They give first hand accounts of what these properties look like and how these entities are swindling money out to never even complete their constructions.
I suggest you read the entire linked section above and not just these two paragraphs to really understand what was (is) going on. The government looks the other way when a developer builds what they claim to be a $100 million dollar property development. The developer then puts out a bond and offers to pay 5-6% interest for anyone willing to invest in the development. The Chinese government then claims $100 million is being added to the GDP.
But in truth, the construction company did little more than pour some cement, used bamboo as rebar and then disappeared with the money.
Many parts of China are covered in these incomplete, crumbling structures. The west generously called this a “real estate bubble,” but it was far more significant than this. Because most of what was built can barely even be called real estate as you can see in the video above.
As the bonds these developers offered have begun coming due last year and this year, the developers simply don’t have any real property or income coming in to actually pay off the notes. Evergrande was the first major such developer to miss their interest payment obligations last year because most of the property they built was completely uninhabitable and empty. Evergrande is now taking pre-orders for an Electric SUV that they are promising to build. They are obviously never going to actually make any of these SUV’s and probably don’t even have a factory tooled up to make the components, but this is China’s scam economy in action.
Another major Chinese real estate developer Shimao has just defaulted on a $1 billion dollar bond.
Investors in Shimao’s bonds started losing faith in their investment back in October of 2021, and it has been trading below its issuance price ever since then, with it now having lost 95% of it’s value. I’m sure that yesterday’s default on repayment has now confirmed that they were essentially worthless.
At some point the shell game in China has to end and they will be left seeing just how many people are left holding an empty bag and who is left holding all of the money. But I don’t know if there is any incentive for the Chinese government to really move against these companies to identify fair market value of the assets they have actually built. The impact on GDP might be too much for China to bear at the moment.
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