Posts Tagged ‘Economics’

Ukraine Export Deal: Too Little, Too Late

Sunday, August 7th, 2022

You may remember Peter Zeihan’s analysis of world agricultural output in the wake of of deglobalization and the Russo-Ukrainian War, and his forecast of famine late this year.

That was just before the Ukraine export deal was signed. Now he’s looked at the facts and run the numbers, and says it isn’t going to help much.

Takeaways:

  • “Right now the Ukrainians have about 18 million metric tons stored up in their silos at or adjacent to their ports. That’s a lot that needs to move. That is in excess of half of a normal harvest for the country.”
  • “On August 1st we got our first ship, the Razoni, to dock to load up and to leave for Lebanon. It’s carrying 26,000 metric tons. So we need 700 more ships of this size if we’re going to get that grain out.”
  • “The Ukrainian harvest starts in less than 45 days. So you’re talking about needing to get a dozen or so vessels in there every single day. So far we’ve had one. I don’t have a lot of hope for this.” (Note: Since then we’ve had four more.)
  • “Right now the Ukrainians have nowhere to put it. Their silos are full from last year’s harvest. They weren’t able to export because the war started back in February.
  • “Even if the farmers were able to work their fields and not be molested by Russian troops (and remember we’ve already had mass evacuations from eastern and southern Ukraine) the problem remains that they can’t get fuel into the country. So you’re talking about needing to harvest industrial levels of wheat without industrial equipment.”
  • “The likely end result here is that this is the last year that Ukraine participates in international grain markets. They simply don’t have the capacity to get stuff up at a scale. In fact the only place that they might be able to ship stuff is by rail and at most with significant upgrades that have not yet been done. They can probably only ship about one-fifth of their normal produce out that way the rail lines are just not designed for that kind of bulk cargo.”
  • Why not? Well, the biggest problem is Ukraine has a different rail gauge from the rest of Europe, another Soviet legacy.

    Bottlenecks have arisen due to the different rail gauge used in Ukraine, dating back to the Soviet era. That means shipments are being transferred to new wagons at the border.

    Ukrainian Infrastructure Minister Oleksandr Kubrakov has targeted the upgrading of rail infrastructure in western Ukraine as a priority the EU should focus on. “Rail transport can partially undertake all the transportation of agricultural products, particularly grain,” he said. “However, transporting goods is difficult due to western Ukraine’s low border-crossing capacity, which is not designed for transshipping such volumes.”

    “Some 768,300 metric tons of Ukrainian grain was exported by rail between May 1 and May 16.”

  • Back to Zeihan: “And a lot of them have to transit little territory called Transnistra [in Moldavia], which is under Russian control.”
  • The sobering conclusion:

    You remove the world’s fourth largest wheat exporter from the market and you’re going to look at cascading problems. Not just with food prices and malnutrition, but civil conflict and breakdown, most notably in the Middle East. The last time we had a doubling of global wheat prices, we saw the Arab spring back in 2011. What we’re dealing with is an order of magnitude more complicated and deeper rooted. And to think that we’re only going to have doubling of prices is ridiculously optimistic.

  • Well, it’s a good thing the Middle East isn’t know for having populations full of unstable hotheads looking for an excuse to kill each other at the drop of a hat…

    Top Chinese Chip Executives Arrested

    Saturday, August 6th, 2022

    Remember Tsinghua Unigroup, a wholly owned business unit of Tsinghua University and itself owner of Yangtze Memory Technologies Co. (YMTC) (Previously mentioned here.) Well, it turns out that a bunch of their top executives just got arrested:

  • The video shows a picture of six semiconductor executives, all of whom have reportedly been arrested:
    • Dia Shijing, co-president of Tsinghua Unigroup
    • Lu Jun, president of Huaxin Investment
    • Zhao Weiguo, chairman of Tsinghua Unigroup
    • Ding Wenwu, president of National IC Industry Investment Fund,
    • Zhang Yadong, president of Tsinghua Unigroup
    • Qi Lian, another co-president of Tsinghua Unigroup

    How a company runs with three presidents I couldn’t tell you. Must be a Chinese thing.

  • “In the past few days, several senior executives of the organization behind the semiconductor industry in Mainland china have been taken away by the CCP Central Commission for Discipline, Inspection and Investigation.” Given my knowledge of communist nomenclature, I strongly suspect that this is not the sort of organization you want to enfold you in their tender mercies.
  • “In 2014, the General Office of China’s Ministry of Industry and Information Technology announced the official establishment of the National Integrated Circuit industry investment Fund Company Limited [ICF], also known as the National Big Fund or big fund.” Probably best to think of them like USA’s SMEATECH, but with a whole lot more opportunities for graft.
  • Together two rounds of government funding added up to 320RMB, or about $47.4 billion, which should have driven additional public/private capital investment of some $240 billion divided up between China’s Ministry of Finance and large central Chinese enterprises, most of which are also owned by the state. Even for the semiconductor industry, that’s a lot of cheddar.
  • By some estimates, $100 billion of that had already been spent by 2021.
  • “The two phases of investment cover all aspects of integrated circuits (ICs), including IC manufacturing IC design, packaging and testing semiconductor materials and equipment, and industry ecological construction.”
  • ICF provides overall direction and management, while Huaxin Investment provides management of the second phase of fund investment.
  • “Eight years have passed, but high-end Chinese chips haven’t yet been produced, and the management of the state level chip industry has collapsed.” Reading between the lines, this means TSMC is still kicking their ass. If that’s the standard, then it’s a bit unfair because every other semiconductor manufacturer in the world is in the same boat.
  • On July 28, Xiao Yaqing, head of MIIT, fell from power. “Xiao was the spearhead of the Chinese communist party’s attempt to build a world-class chip industry, and eliminate its dependence on the US.” He supposedly tried to slit his wrists.
  • “The very next day, Xi Jinping immediately appointed a replacement a longtime aerospace official to take over MIIT.” Yeah, that’s really going to help your semiconductor goals.
  • “On July 15, Lu Jun, former deputy director of the China Development Bank Development Fund Management Department, was investigated Lu Jun was involved in many investment operations of the Big Fund, of which he was the sole manager. He was also former president of Huaxin.
  • Yang Zhengfan, another Huaxin executive, was also taken away.
  • Also arrested: Wang Wenzhong of Hongtai Fund and Gao Songtao, both involved with Huaxin and the Big Fund. And that’s probably not all. Evidently a whole network of semiconductor executives are being rounded up.
  • Dia Shijing of Tsinghua Unigroup was among those reported arrested, but Tsinghua Unigroup is saying “Nah, everything’s good here! Go about your business, citizens!”
  • In July 2021, Tsinghua Unigroup announced that it was overwhelmed by 200 billion RMB of debt and filed for bankruptcy because it couldn’t pay its bonds at maturity. Keep in mind that Tsinghua Unigroup, partially owned by Tsinghua University, is itself owner of YMTC, which is (I think) China’s biggest domestic memory chip manufacturer. Tsinghua/YMTC was previously one of China’s biggest semiconductor manufacturing success stories, second only to SMIC, and supposedly “the largest integrated circuit company in China.” They have actual working fabs up and running. And they’re still evidently a money-losing failure.
  • Tsinghua Unigroup has grown through mergers and acquisitions, buying up over 20 companies. This strategy is not unknown among western companies, as GlobalFoundries and NXP are both the results of a similar strategy. But neither of those companies is on the cutting edge.
  • “Tsinghua Unigroup has been using short-term loans rolling over to create long-term loans. These made the group’s cumulative liabilities too large and its financing structure unbalanced.” Yeah, I bet. “Get big quick” worked for a few doctcom era mega-success stories, but I don’t think it works in semiconductors.
  • Zhao Weiguo once boasted he was going to buy TSMC. Also, I’m going to kick Shaq’s butt in the slam dunk contest just as soon as I take time off from dating all these supermodels.
  • China Development Bank extended Tsinghua Unigroup 100 RMB credit between 2016 and 2020. Still a lot of cheddar.
  • I’m skipping over a whole lot of blow-by-blow “who owns what” in the corporate structure. Imagine if Spectre, the Gotti Family, and the Bank of England all had shares in Amway.
  • “Due to debt, Tsinghua Unigroup abandoned its plan to build DRAM memory chip manufacturing plants in Chongqing and Chengdu in southwest China earlier this year.” I bet that left a lot of pissed-off local commissars holding the bag.
  • “When the chip industry becomes a national strategy, but with no real oversight, it becomes a disaster zone of corruption, and a big cake for those in the circle to get rich for themselves.” True of any industry anywhere, but especially true of China, and especially true of semiconductors, where “fake it until you make it” isn’t an option if you’re actually building fabs.
  • “China cannot make high-end chips to this day.” True.
  • “American chip technology is far ahead of the world.” Also true, though with caveats. For semiconductor manufacturing, TSMC is on the cutting edge, with Intel and Samsung within striking distance. For semiconductor leaders, two American companies (Applied Materials and Lam Research) dominate a fair number of technologies, but Tokyo Electron is competitive in many of them, and ASML dominates the stepper market.
  • Skipping over the bits where China stole US (and other) tech, which should be familiar by now.
  • Enter the Trump Administration, “blacklisting and embargoing more than 600 Chinese high-tech companies and high-end manufacturing companies, as well as universities and research institutions.” Pissing off your biggest trade partner is generally not a great plan.

  • Result: Bottlenecks in China’s supply chains.
  • EDA makes software to design chips, and China has no real substitute.
  • SMIC’s supposed 7nm chip breakthrough (which I’m still skeptical of) reportedly copied TSMC technology.
  • Skipping over the coverage of America’s own ill-advised semiconductor subsidies.
  • Semiconductors are still a big item in China most recent Five-Year Plan (and yes, the Chicoms still use Five Year Plans, just like Mama Stalin used to make).
  • “The outside world has not seen the investment of the Big Fund break any bottleneck. However, the earthquake happening in the industry has directly shown people that there is a deep corruption in the Chinese chip industry.” Why should it be different than any other Chinese industry?
  • And just who is going to step up to those jobs running China’s increasingly-unlikely-to-succeed semiconductor moonshot, given that the last batch got rounded up by the Chinese Inquisition?
  • Interesting bit of history: Previous CCP head Jiang Zemin put his own son Jiang Mianheng in charge of developing China’s semiconductor industry, and also managed to make the country even more corrupt than it already was. And here we are.
  • It’s ironic that just as Washington was passing a giant graft bucket of semiconductor subsidies because China was supposedly kicking our ass, China itself was sacking the very people presiding over China’s own bucket of graft for not catching up to the west. The truth is somewhere between.

    China was never going to catch up to western semiconductors because the gap was too large and you need a crazy swarm of free market capitalist entrepreneurs risking private money to eek out important incremental process tweeks to keep Moore’s Law going. China was never going to have that as long as they suffered under Communist rule. And a huge percentage the government money that was sloshed into semiconductors was indeed swallowed up by graft and diversion of funds. But all that money does appear to have helped China close the gap some. Granted, a lot of that was via systematic IP property theft, but it got them into the game.

    Ultimately it wasn’t nearly enough, just as the prophecy foretold.

    Is China’s semiconductor industry a giant pit of graft, disappointment and failure? Yeah, but probably less than most of the rest of the economy.

    Is Russia’s Economy Collapsing?

    Tuesday, August 2nd, 2022

    Given the cutoff from SWIFT, the widespread economic sanctions, and the huge pullout of Western firms from Russia in the wake of their invasion of Ukraine, I would have expected more signs of the widely predicted economic decline on the part of Russia than we’ve been seeing.

    However, this report from the Yale Chief Executive Leadership Institute (CELI) says that the sanctions are indeed crippling Russia’s economy.

    Some skepticism is probably in order, as CELI’s head, Jeffrey A. Sonnenfeld, for all his talk of advising both Trump and Biden, is a Biden donor, and we all know the great lengths our political elites to lie in order to cover up the Biden Administration’s many manifest failures. But reading through the report there seems to be a substantial amount of evidence to support the thesis.

    The summary:

    As the Russian invasion of Ukraine enters into its fifth month, a common narrative has emerged that the unity of the world in standing up to Russia has somehow devolved into a “war of economic attrition which is taking its toll on the west”, given the supposed “resilience” and even “prosperity” of the Russian economy. This is simply untrue – and a reflection of widely held but factually incorrect misunderstandings over how the Russian economy is actually holding up amidst the exodus of over 1,000 global companies and international sanctions.

    That these misunderstandings persist is not surprising. Since the invasion, the Kremlin’s economic releases have become increasingly cherry-picked, selectively tossing out unfavorable metrics while releasing only those that are more favorable. These Putin-selected statistics are then carelessly trumpeted across media and used by reams of well-meaning but careless experts in building out forecasts which are excessively, unrealistically favorable to the Kremlin…

    Our team of experts, using Russian language and unconventional data sources including high frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, have released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion, and assessing Russia’s economic outlook.

    From our analysis, it becomes clear: business retreats and sanctions are crippling the Russian economy, in the short-term, and the long-term. We tackle a wide range of common misperceptions – and shed light on what is actually going on inside Russia.

    Here are their main points (generic paper reference verbiage elided):

  • Russia’s strategic positioning as a commodities exporter has irrevocably deteriorated, as it now deals from a position of weakness with the loss of its erstwhile main markets, and faces steep challenges executing a “pivot to Asia” with non-fungible exports such as piped gas…
  • Despite some lingering supply chain leakiness, Russian imports have largely collapsed, and the country faces stark challenges securing crucial inputs, parts, and technology from hesitant trade partners, leading to widespread supply shortages within its domestic economy…
  • Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst…
  • As a result of the business retreat, Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base…
  • Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood…
  • Russian domestic financial markets, as an indicator of both present conditions and future outlook, are the worst performing markets in the entire world this year despite strict capital controls, and have priced in sustained, persistent weakness within the economy with liquidity and credit contracting – in addition to Russia being substantively cut off from international financial markets, limiting its ability to tap into pools of capital needed for the revitalization of its crippled economy…
  • Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia…
  • I believe the first part of the first point is too speculative (“Rising Prices Mask Irreversible Deterioration in Long-Term Strategic Positioning”) and forward-looking to be worth examining. Russia isn’t worried about long-term positioning if it can use its gas pipeline leverage to crack the sanctions regime against it this year. The second “pivot to Asia difficulties” part is something I’ve covered here.

    First they cover why you can’t trust Russian statistics (duh):

    The Kremlin’s economic releases are becoming increasingly cherry-picked; partial, and incomplete, selectively tossing out unfavorable statistics while keeping favorable statistics. The Russian government is no longer disclosing certain economic indicators which prior to the war were updated on a monthly basis, including all foreign trade data, including those relating to exports and imports, particularly with Europe; oil and gas monthly output data; commodity export quantities; capital inflows and outflows; financial statements of major companies, which used to be released on a mandatory basis by companies themselves; central bank monetary base data; foreign direct investment data; and lending and loan origination data, and other data related to the availability of credit.

    The fact the data is so bad they’re not even trying to alter or spin it suggests things are pretty bad.

    Even Rosaviatsiya, the federal air transport agency, abruptly ceased publishing data on airline and airport passenger volumes. As a measure of comparison, prior to the war, the only economic data which have historically been classified and quarantined by the Russian government are sensitive metrics related to the trade of military goods, aircraft, and nuclear materials.

    Although the Kremlin explains away its newfound desperate obfuscation of its revenue and spending data and other macroeconomic indicators of overall economic health under the guise of “minimizing the risk of the imposition of additional sanctions”, what little data has trickled out from the Kremlin suggests the real reason may lie in the fact these statistics are unlikely to be positive for the Kremlin, and getting worse by the day. For example, total oil and gas revenues dropped by more than half in May from the month before, by the Kremlin’s own numbers. As one economist wrote, “it’s likely that the Kremlin is afraid of publishing data that reveal the full scale of the economy’s collapse”.

    Second, even those favorable statistics which are released are questionable if not downright dubious when measured against cross-channel checks, verification against alternative benchmarks and given the political pressure the Kremlin has exerted to corrupt statistical integrity. Indeed, the Kremlin has a long history of fudging official economic statistics, even prior to the invasion. Putin has on several occasions shunted aside heads of Rosstat who produced economic statistics which were not to his liking, and he personally transferred control of the agency to political appointees at the Economic Ministry, depriving the agency of its prior status as an independent branch of government free from political influence. Outside observers ranging from international organizations to foreign investors regularly sound alarm bells over “concerns about the reliability and consistency” of the Kremlin’s economic releases, especially given the propensity of Kremlin economists for “switching to new methodologies” with alarming frequency – many instances of which are not even disclosed. Concerns over meddlesome political interference must be given even more weight now that Putin appointed Sergei Galkin, the former Deputy Economic Minister and the most blatantly political pick in recent history as head of Rosstat in May.

    Third, and as mentioned briefly previously, almost all rosy projections and forecasts are irrationally extrapolating economic releases from the early days of the post-invasion period, when sanctions and the business retreat had not taken full effect, rather than the most recent, up-to-date numbers from recent weeks and months – partially due to the fact the Kremlin stopped releasing updated numbers, constraining the availability of datasets for economic researchers to draw upon. For example, many alarming forecasts projecting strong revenue from energy exports were based on the last available official export data from March, even though many business withdrawals and sanctions on energy had not yet taken effect, with orders placed prior to the invasion still being delivered.

    Take, as one instance of many, one widely cited study by Bloomberg decrying Russia’s surge in revenue from energy exports. The authors wrote: “even with some countries halting or phasing out energy purchases, Russia’s oil-and-gas revenue will be about $285 billion this year, according to estimates from Bloomberg Economics based on Economy Ministry projections. That would exceed the 2021 figure by more than one-fifth”. No doubt, Russia has continued to draw significant revenue from energy exports – a complex topic which we analyze in-depth in the sections below.

    But this specific Bloomberg analysis projected Russia’s 2022 energy export revenues based on its revenue through March of 2022 as disclosed by the Kremlin, even though the Kremlin has belatedly acknowledged that energy export revenues in May and June have diminished significantly. In fact, only after a long and unexplained delay did the Kremlin finally disclose that total oil and gas revenues dropped by more than half in May from prior months, by the Kremlin’s own numbers – along with the declaration that the Kremlin would cease releasing any new oil and gas revenues from that point on. Nevertheless, the misleading Bloomberg forecast carelessly extrapolating out initial energy export volumes into the rest of the year was then repeated by leading voices including Fareed Zakaria and others in proving the supposed “resilience” and even “prosperity” of the Russian economy.

    On the collapse of Russian imports:

    Imports consist of ~20% of Russian GDP, and the domestic economy is largely reliant on imports across industries and across the value chain with few exceptions, despite Putin’s bellicose delusions of total self-sufficiency.

    Snip.

    By far and large, the flow of imports into Russia has drastically slowed in the months since the invasion. A review of trade data from Russia’s top trade partners – since, again, the Kremlin is no longer releasing its own import data – suggests that Russian imports fell by upwards of ~50% in the initial months following the invasion.

    And China isn’t replacing western countries as a source of imports.

    In the initial days of the Russian Business Retreat, when hundreds of western businesses rushed to exit Russia, the authors – who were deluged with media inquiries given the prominence of the Yale CELI List of Companies curtailing operations in Russia – were frequently asked whether Chinese companies would rush to fill the spots vacated by western businesses. Many naïve observers cynically remarked that the Business Retreat would be futile, as Chinese companies would relish the opportunity to do more business in Russia, and the Russian economy would barely miss a beat. This is not at all what has played out – and quite to the contrary.

    In fact, according to recent monthly releases from the Customs General Administration of China, which maintains detailed Chinese trade data with detailed breakdowns of exports to individual trade partners, Chinese exports to Russia plummeted by 50% from the start of the year to April, falling from over $8 billion monthly at the end of 2021 to under $4 billion in April. This aligns with our anecdotal observations of several Chinese banks withdrawing all credit and financing from Russia following the start of the invasion, including ICBC, the New Development Bank, and the Asian Infrastructure Investment Bank, in addition to energy giants such as Sinochem suspending all Russian investments and joint ventures.

    The explanation for China’s reticence, once again, lies in the asymmetric nature of Russia’s relationships with its trading partners. Even on imports, it is clear that Russia needs its trade partners far more than its trade partners need Russia – and the power dynamic is not even close to being balanced.

    This imbalance is put into stark relief when the proportion of imports Russia draws from China is compared to the proportion of exports China sends to Russia. Russia is not even in the top ten destinations for Chinese exports; in 2021 alone, China exported over $500 billion in goods and services to its largest trade partner, the United States, representing ten times the amount of goods it sent to Russia ($72 billion). On the other hand, China represents Russia’s largest source of imports by far; in fact, the $72 billion in imports Russia draws from China is nearly three times the amount of imports Russia draws from its second largest partner, Germany ($27 billion), and five times the amount of imports Russia draws from its third largest partner, the United States.

    Given the extremely minor proportion of Chinese exports going to Russia vis-à-vis China’s trading relationship with the United States and Europe, clearly most Chinese companies are much more wary of losing access to US and European markets by running afoul of US sanctions and crossing US companies than they are of losing whatever erstwhile market share they had in Russia. The dangers of losing access to US technology are already readily apparent from China’s point of view. When the US imposed export restrictions on Chinese telecom companies Huawei and ZTE in 2020, they were unable to source advanced microchips and saw a massive reduction in their chip-dependent smartphone businesses – a fate which no Chinese company wants to suffer by running afoul of US sanctions related to Russia.

    China is the most prominent example, but other trade partners have been just as reticent to export to Russia. In fact, it appears that exports to Russia from sanctioning and non-sanctioning countries have collapsed at a roughly comparable rate in the months following the invasion. One analysis found that non-sanctioning countries saw exports to Russia fall by an average of 40%, while sanctioning countries saw exports fall an average of 60%, reflecting the disadvantaged economic position Russia finds itself vis-à-vis practically all its trade partners regardless of political rhetoric

    Snip.

    One survey done by the Central Bank of Russia found that well over two-thirds of surveyed companies experienced import problems, and manufacturers, in particular, reported a shortage of raw materials, parts, and components. Unsurprisingly, the focus has shifted towards import substitution – a topic analyzed in closer detail in Section IV. But in short, this has not been fruitful. Despite Russian companies’ desperate efforts to find alternative production and re-orient supply chains towards domestic substitutes, according to a survey by Russia’s Gaidar Institute for Economic Policy, a whopping 81% of manufacturers said they could not find any Russian versions of imported products they need, and more than half were “highly dissatisfied” with the quality of homegrown production even when domestic substitutes could be sourced.

    On to the failure to find adequate domestic substitutes. I’m going to skip over a lot of the stuff I don’t really give a rat’s ass about (radical declines in new car sales) as it’s not particularly important except as evidence of aggregate demand destruction. Others are much more surprising: Fruits and vegetables and fish production are down as well, despite Russia supposedly being the country that can supply all its own fertilizer needs. (And pesticides and fertilizers are also down.)

    When domestic industrial production is measured by volume rather than value added, cross- filtered against a more granular breakdown by sub-industry, the picture becomes even bleaker suggesting large-scale shutdowns of the Russian industrial base, which is evidently operating at a fraction of its usual capacity. Industrial production volume in crucial industries such as appliances, railways, steel, textiles, batteries, apparel, and rubber fell by well over 20%, while other sub-industries such as electronics, sports, furniture, jewelry, fertilizers, and fishing fell in excess of 10%.

    And despite Putin’s rallying cries of self-sufficiency, all of these industries share a crucial similarity: they simply cannot replace imported parts and components that Russia lacks the technological prowess to make, and illicit, shadowy parallel imports can only go so far. For example, the Russian tank producer Uralvagonzavod has furloughed workers based on input shortages.

    So much for the Russian trolls that claim Uralvagonzavod’s is still cranking out tanks unimpeded!

    Russian production of tanks, missiles and other equipment relies on imported microchips and precision components that simply cannot be sourced right now. Likewise, Russia’s Caspian pipeline has had challenges finding spare parts related to the US and EU’s ban on exports related to gas liquefaction. Each of these supply disruptions – which cannot be replaced by import substitution or parallel imports – leads to production shutdowns which then ripple across the entire supply chain, bringing various ancillary products and services into a simultaneous standstill.

    The breadth of this industrial production slowdown across the Russian economy is further worsened by a rapidly deteriorating outlook for new purchases and orders. A reading of the Russian Purchasing Managers’ Index (PMI) – which captures how purchasing managers are viewing the economy – shows that new orders have plunged across the board, both in terms of domestic Russian orders as well as Russian orders for foreign products and foreign orders of Russian products. Clearly, purchasing managers want nothing to do with placing new orders until the geopolitical environment stabilizes. Likewise, PMIs highlight that inventories have dropped and delivery times have increased in the context of widespread supply-chain problems, so even if new orders were to be placed, the fulfillment of those orders would continue to pose steep challenges to Russian domestic production.

    Also hurting Russia is the fact that over 1,000 global companies have curtailed operations there. (Though some still remain; why the hell is Cloudflare, Carl’s Jr. and Sbarro still doing business there?)

    When the list was first published the week of February 28, only several dozen companies had announced their departure from Russia. In the two months since, this list of companies staying/leaving Russia has already garnered significant attention for its role in helping catalyze the mass corporate exodus from Russia, with widespread media coverage and circulation across company boardrooms, policymaker circles, and other communities of concerned citizens across the world.

    Based on the authors’ proprietary database tracking the retreats of over 1,000 companies, our researchers found that across all these 1,000 companies aggregated together, the value of the Russian revenue represented by these companies and the value of these companies’ investments in Russia together exceed $600 billion – a startling figure representing approximately 40% of Russia’s GDP. We further found that these companies, in total, employ Russian local staff of well over 1 million individuals. The value of these companies’ investment in Russia represents the lion’s share of all accumulated, active foreign investment in Russia since the fall of the Soviet Union – meaning the retreat of well over 1,000 companies in the span of three months has almost single-handedly reversed three decades’ worth of Russian economic integration with the rest of the world, while undoing years of progress made by Russian business and political leaders in attracting greater foreign investment into Russia.

    To be sure, this is not to say that the GDP of Russia will contract 40% overnight. Many of the 1,000+ businesses who have curtailed operations in Russia are still in the process of winding down their operation, meaning it will take months if not even years to feel the full impact of their withdrawal. Other companies from this list of 1,000+ have already divested or sold their Russian businesses to local Russian operators, which means that even though these businesses will lack western technical and financial support and know-how and deteriorate in the long-run, in the short-term, they will still continue to operate to some extent and thus cannot be written off from Russian GDP immediately. There are also some companies which continue some operations in Russia while pulling out of other operations, so any hit to Russian GDP from these companies would be partial rather than total. It is impossible to capture the full economic impact of the Russian business retreat as many of the most devastating consequences will be felt years from now -with long-term structural losses to the Russian economy beyond any single dollar figure of lost revenue or lost investment. Nevertheless, the fact that the 1,000+ companies that have curtailed operations represent such a high proportion of Russia’s GDP – 40% – signifies the importance of these economies to the Russian economy prior to the war, and how the Russian economy must now undergo dramatic, forced transformations with these companies pulling out, as amplified throughout this paper.

    Some might argue that the companies that curtailed operations in Russia were forced to incur a short-term loss in Russian revenue and investment – despite the fact the impact on Russia is more painful in both the short-term and the long-term – but it is not even true to say that the companies leaving Russia incurred any losses. In fact, rather than penalizing companies for leaving Russia, in a separate study, we found that foreign investors by far and large rewarded companies for removing the risk overhang associated with exposure to Russia – that the value of aggregate stock market gained since the start of the invasion for companies that have left Russia far outweigh the value of Russian asset divestitures and lost Russian revenue, which for most multinational corporations, represented a small fraction of total revenue to start with – no more than 1-2% in most cases. Thus, clearly the loss of 1,000+ companies has been borne solely by Russia – in both the short-term and the long-term – while leaving Russia actually benefited companies.

    Not to mention the brain drain and capital flight:

    Unsurprisingly, the Russian business retreat has coincided with rapid “brain-drain” as talented, educated Russians flee the country in droves. It is impossible to assess the exact number of Russians who have left Russia permanently since the outset of the invasion, but most estimates peg the number as no less than five hundred thousand – with the vast majority being highly-educated and highly-skilled workers in competitive industries such as technology. The mass exodus of skilled Russian natives is further amplified by the forcible expulsion of a not-insignificant population of western expatriates working in Russia. These workers – who understand the structural challenges facing the Russian economy and technical hurdles obstructing Putin’s vows of self-sufficiency and import substitution – are joined by many of Russia’s few remaining high-net-worth and ultra-high-net-worth individuals, who understand that capital controls, taxes, the business and investment climate, and government restrictions are only likely to become worse in the years ahead, particularly for those holding financial capital. By one measure, 15,000 ultra-high-net-worth individuals have fled Russia since the invasion began, which would represent 20% of the population of Russia’s ultra-high-net-worth individuals at the outset of the war. These Russians, as the holders of significant capital, seek the safety, security, and stability of western financial markets, especially as Russia’s access to those markets shrinks.

    These high net worth individuals are bringing their wealth with them when they flee, contributing to soaring private capital outflows, even by the Central Bank of Russia’s own admission. The official level of capital outflows indicated by the Bank of Russia in Q1, nearly $70 billion USD, is likely to be a gross underestimate of the actual level of capital outflows, given strict capital controls implemented by the Kremlin restricting the amount of wealth Russian citizens can transfer out of the country, particularly foreign-currency denominated wealth. Any additional capital outflows which have skirted these capital controls are unlikely to have been captured by the Central Bank of Russia’s gauge, and indeed, by all anecdotal reports, wealthy Russians are flocking for safe havens in droves.

    Next up, just why we haven’t yet seen an actual collapse: unsustainable fiscal stimulus and capital controls.

    As global businesses swarmed for the exits and after the implementation of devastating sanctions by the US and EU in the early weeks following the invasion, many western economists and policymakers had unrealistic expectations that the Russian economy may collapse or that a financial crisis might take hold. Sanction regimes very rarely cause instantaneous financial crises or economic collapses; rather, they tend to be longer-duration tools designed to structurally weaken a nation’s economy while isolating it from global markets. Indeed, as this paper has shown, the impact of business retreats and sanctions on the Russian economy has been nothing short of catastrophic, eroding the Russian economy’s competitiveness while exacerbating internal structural weaknesses.

    But for those who expected a more rapid collapse in the Russian economy, and who were shocked this did not occur – much of the reason the Russian economy proved marginally more resilient than initially expected has to do with the unprecedented and unsustainable fiscal and monetary response initiated by the Kremlin. A little-understood but critically important component of Russia’s economic journey since the outset of the invasion, the Kremlin’s fiscal and monetary response has largely averted a credit/liquidity squeeze, which could have induced a financial panic, while propping up the economic livelihoods of many core constituencies of the Putin regime, ranging from state owned enterprises to pensioners and retirees – rescuing them from sudden economic catastrophe.

    One of the best case studies for how, through massive and unsustainable government intervention, the Kremlin has been able to temporarily prop up the Russian economy also happens to be one of Putin’s favorite propaganda talking points: the appreciation of the ruble, which is now the strongest-performing currency this year by some measures. Overnight, as soon as the invasion commenced, the exchange rate for the ruble relative to the dollar jumped from ~75 to ~110 – but the Kremlin immediately announced a rigorous set of capital controls on the ruble including a blanket ban on citizens sending money to bank accounts abroad and foreign money transfers; a suspension on cash withdrawals from dollar banking accounts beyond $10,000 per person; a mandate for all exporters to exchange 80% of foreign currency earnings for rubles; a suspension of direct dollar conversions for individuals with ruble-denominated banking accounts; a suspension of domestic lending in foreign currencies; a suspension of dollar sales across domestic banks; a mandate that companies pay foreign-denominated debt in rubles; and encouragement of individuals to redeem dollars for rubles out of patriotic duty. These restrictive capital controls – which rank amongst the most restrictive of any government in the world – immediately made it effectively impossible for domestic Russians to purchase dollars legally or even access a majority of their dollar deposits, while artificially inflating demand for rubles through forced purchases by major exporters. These capital controls, which have only weakened slightly in the four months since the outset of the invasion, continue to prop up the ruble’s official exchange rate with artificial strength across onshore and offshore markets.

    However, the official exchange rate given the presence of such draconian capital controls can be misleading – as the ruble is, unsurprisingly, trading at dramatically diminished volumes compared to pre-invasion on low liquidity. By many reports, much of this erstwhile trading has migrated to unofficial ruble black markets, where the spread between the official exchange rate and the actual exchange rate is equally dramatic – upwards of 20% to 100% higher than the official exchange rate, in some cases, given a shortage of obtainable, liquid dollars within Russia. Even the Bank of Russia has admitted that the exchange rate is a reflection more of government policies and a blunt expression of the country’s trade balance rather than freely tradeable liquid FX markets.

    The Kremlin’s implementation of capital controls pales in comparison to the unsustainable full-scale fiscal and monetary stimulus launched over the last few months, stretching to every corner of the Russian economy. That the Kremlin would flood the Russian economy with such a deluge of Kremlin-initiated spending was far from certain in the initial days of the war. Initial attempts by the Kremlin to intervene in the economy when the invasion started were marked by relative restraint, defined by measures such as shutting down trading on the Moscow Stock Exchange and suspending measures intended to be largely transitory in nature. But when it became apparent that western sanctions were not being lifted and that the Russian economy would not go back to “normal” anytime soon, Putin announced escalating waves of fiscal and monetary stimulus targeted at easing the economic pain faced by individuals and companies. These measures included subsidized loans and loan payment assistance to companies; transfer payments to affected industries; subsidized mortgages and mortgage payment assistance; increases in direct payments to individuals including families, pregnant women, government employees, pensioners, military, low-income; recapitalization of companies by the National Wealth Fund, the sovereign wealth fund of Russia; nationalization and recapitalization of certain companies and assets; subsidized credit forgiveness approaching a debt jubilee; subsidized protection from bankruptcy and foreclosure; drawdowns from the National Wealth Fund for state expenditures; and subsidized infrastructure development – to name only a few.

    The ultimate scale of these relief expenditures is still unclear as they are currently ongoing, but initial signs point towards a massive, unprecedented magnitude of spending. By the Central Bank of Russia’s own data releases, the Russian money supply – M2, which includes cash, checking deposits, and cash-convertible proxies of store-holders of value – ballooned by nearly two times from the start of the year through June.

    A good thing that doubling your money supply almost overnight can’t possibly have any negative repercussions!

    Putin’s remaining FX reserves are decreasing at an alarming pace, as Russian FX reserves have declined by $75 billion since the start of the war – a rate which, if annualized, suggests these reserves may be spent down within a few years’ time. Critics point out that official FX reserves of the central bank technically can only decrease, not increase, due to international sanctions placed on the central bank, and suggest that non-sanctioned financial institutions such as Gazprombank can still accumulate FX reserves in place of the central bank. While this may be true technically, there is simultaneously no evidence to suggest that Gazprombank is actually accumulating any sizable reserves, considering the distress facing its own loan book, pressure to fund increasing amounts of infrastructure loans and the fact that Gazprombank has been accused of being the conduit through which the Kremlin indirectly transfers the regular military pay and combat bonuses of Russian soldiers fighting in Ukraine. These signs point toward Gazprombank simply channeling massive government expenditures outward with the government spending down immediately rather than stashing away government revenues for later.

    Snip.

    The challenges facing Russia’s sovereign financing are exacerbated by Russia’s newfound lack of access to international capital markets. With Russia’s first default since 1917 on its sovereign debt, Russia is now frozen out of international debt issuances for years to come and unable to tap into traditional sovereign financing across international capital pools. Russia can continue to issue its version of domestic bonds, known as OFZs, but the total capital pool available within Russia domestically is a fraction of the financing needed to sustain these levels of spending by the Russian government over an entire economic cycle. And indeed, the Finance Minister has confirmed that Russia is not raising debt to pay for its fiscal program and has no plans to do so in the near-term.

    “Financial Markets Pricing In Sustained Weakness In Real Economy with Liquidity and Credit Contracting.” Yeah, I’m just going to skip over all that. Just note that not even Russians want to buy Russian real estate or stock.

    Let’s jump to the conclusion. After reiterating the main points:

    Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia.

    Is Russia’s economy collapsing? Not quite yet. Actual economic collapse is what we’re seeing in Sri Lanka: You can’t buy food, you can’t buy fuel, and you can’t keep the lights on. Russia isn’t there yet. However, the authors do present compelling evidence that Russia’s economy is contracting quite dramatically, and will continue to get worse as long as the war and sanctions continue.

    Scenes From China’s Slow-Motion Collapse

    Tuesday, July 26th, 2022

    Remember the bank runs in China story after all those bank accounts in Hunan were frozen? I’ve been looking for signs of wider contagion amidst the Chinese banking sector, and mostly haven’t seen it. But I have seen a lot of other cracks appear in China’s overall economic system, so here’s a roundup.

  • One reaction to the frozen accounts: “Chinese Bank Run Turns Violent After Angry Crowd Storms Bank of China Branch Over Frozen Deposits.”

    A large crowd of angry Chinese bank depositors faced off with police Sunday in the city of Zhengzhou, and many were injured as they were taken away, amid the freezing of their deposits by some rural-based banks.

    The banks froze millions of dollars worth of deposits in April, telling customers they were upgrading their internal systems. The banks have not issued any communication on the matter since, depositors said.

    According to Chinese media the frozen deposits across the various local banks could be worth up to $1.5 billion and authorities are investigating the three banks.

    On Sunday, about 1,000 people gathered outside the Zhengzhou branch of China’s central bank on Sunday to demand action; they held up banners and chanted slogans on the wide steps of the entrance to a branch of China’s central bank in the city of Zhengzhou in Henan province, about 620 kilometers (380 miles) southwest of Beijing.

  • China’s communist government reacted to the protests with their usual tact and understanding:

  • Also, it looks like the province suddenly had an outbreak of Flu Manchu, forcing protestors to stay at home. What are the odds?
  • But it looks like some of them will finally get some money back:

    (Plus more on the property slump.)

  • The official line on the Hunan account freeze: “Henan police said in a statement on July 10 that further investigations showed that, since 2011, a criminal group led by a suspect named Lu Yi had gradually taken control of several rural banks, through companies including the Henan New Wealth Group, to illegally transfer out funds. The police said they had arrested more suspects and seized more assets involved in the case.” I have no doubt the aforementioned were probably guilty, but I bet a whole lot more bank officials, regulators, and CCP officials (to the extent that those are separate groups and not mostly-overlapping Venn circles) were in on the scheme, plus a whole bunch more in dozens of other schemes that siphoned off depositor money into various pockets and a host of entirely different schemes. As I’ve said before, it’s smoke and mirrors all the way down.
  • Another thing driving unrest: “Rotten tail buildings,” that is residential buildings on which all construction is stopped, but for which those with mortgages for individual units are still expected to pay for:
    

  • The Result? Disgruntled homebuyers are refusing to pay their mortgages.

    A rapidly increasing number of “disgruntled Chinese homebuyers” are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s real estate woes and stoking fears that the crisis will spread to the wider financial system as countless mortgages default.

    According to researcher China Real Estate Information, homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen.

    And that was over a week ago.

    According to Citi analysts, average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years. Meanwhile, it’s only getting worse as China’s home prices fell for a ninth month in May, with June figures set for release Friday.

    The crisis engulfing Chinese developers is reaching a new phase, with a debt selloff expanding to firms once deemed safe from the cash crunch, including investment-grade names such as Country Garden Holdings, the largest builder by sales.

    The payment refusals, which come at a time when China’s economy is set to post what may be a negative GDP print due to the latest economic shutdown over Xi’s catastrophic zero covid policies, underscore how the storm engulfing China’s property sector is now affecting hundreds of thousands of average citizens, posing a threat to social stability ahead of a Communist Party Congress later this year. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.

    As a result of the unprecedented push for a debt jubilee, shares of China’s banks extended their recent decline Thursday, with the CSI 300 Banks Index falling as much as 3.3% before closing down 2.2%. A Bloomberg Intelligence index of Chinese developer stocks slid as much as 2.7%, even though Chinese lenders were quick to try and dispel fears that the movement could crash the economy: according to Bank of Communications, its outstanding balance of overdue mortgage loans linked to housing projects with risks of delayed delivery is 99.8 million yuan, accounting for 0.0067% of its domestic housing mortgage balance. The bank added that its housing mortgage loan quality is stable and risks are controllable, the Shanghai-based lender says in an exchange filing. At the same time, Postal Savings Bank of China says its overdue mortgage loans linked to halted housing projects is 127m yuan, and risks are controllable. Of course, it’s not like Chinese banks would ever lie, now is it?

  • There are some signs that the cracks are spreading.

    The Great Debt Jubilee is picking up speed: China’s homebuyer mortgage boycott, which prompted Beijing to scramble to avoid a potentially devastating crash in what is the world’s biggest asset is spreading, and according to Bloomberg, some suppliers to Chinese real estate developers are now also refusing to repay bank loans because of unpaid bills owed to them, a sign that the loan boycott that started with homebuyers is starting to spread.

    In a jarring case study of what happens when a ponzi scheme goes into reverse, hundreds of contractors to the property industry complained that they can no longer afford to pay their own bills because developers including China Evergrande Group still owe them money, Caixin reported, citing a statement it received from a supplier Tuesday.

    Similar to homebuyers who have taken a stand and refuse to pay for properties that remain uncompleted, one group of small businesses and suppliers circulated a letter online saying they will stop repaying debts after Evergrande’s cash crisis left them out of pocket.

    “We decided to stop paying all loans and arrears, and advise our peers to decline any requests to be paid on credit or commercial bill,” the group said in the letter dated July 15, which was sent to the developer’s Hubei office. “Evergrande should be held responsible for any consequence that follows because of the chain reaction of the supply-chain crisis.”

    As Bloomberg oh so perceptively puts it, “the payments protest is the latest sign of how a movement by homebuyers to boycott mortgages on unfinished homes in China is spreading to affect other sectors in the economy.”

    Yes it is, and it’s also why Beijing should be freaking out (if it isn’t), because what is taking place in China is far worse than what took place in March 2020 when the global credit machinery ground to a halt, only back then it’s because there was no other option, now it’s a voluntary development and not even fears of reprisals from China’s ruthless, authoritarian, Lebron-beloved dictatorship is stopping millions of people from calling for a systemic boycott, one which can topple China’s entire $60 trillion financial system in moments.

    Probably an overstatement, just because it takes a whole lot to overcome the inertia of the average Chinese citizen just wanting to keep their head down and not be the nail that sticks up.

  • Speaking of Evergrande, the rats there continue to flee the sinking ship.

    Embattled Chinese real estate giant Evergrande is expected to deliver a preliminary restructuring plan this week, following the exit of two bosses.

    The firm says its chief executive and finance head have resigned, after an internal probe found that they misused around $2bn (£1.7bn) in loans.

    Chinese businessmen misusing funds? Try to contain your shock.

    Evergrande has more than $300bn in liabilities and defaulted on its debts late last year.

    The crisis has spooked traders who fear contagion in China’s property sector.

    On Friday, Evergrande said it found that chief executive Xia Haijun and chief financial officer Pan Darong were involved in diverting 13.4bn yuan ($2bn; £1.7bn) in loans secured by its property services unit to the wider group.

    The firm said in a filing to the Hong Kong Stock Exchange that Mr Xia and Mr Pan had resigned because of their “involvement in the arrangement of the pledges”.

    Getting caught trying to cook the books even after it’s hit the fan. Classic Chinese management.

  • “Some big-name Chinese stocks including Alibaba Group Holding Ltd. and Baidu Inc. face the prospect of getting kicked off the New York Stock Exchange and Nasdaq if they refuse to let U.S. regulators see their financial audits.”

    The U.S. Securities and Exchange Commission has started the process, compelled by a 2020 law, and investors have started to pay attention. So has China, which moved to potentially clear a big hurdle that stymied U.S. regulators for years.

    1. Why does the U.S. want access to audits?

    The 2002 Sarbanes-Oxley Act, enacted in the wake of the Enron Corp. accounting scandal, required that all public companies have their audits inspected by the U.S. Public Company Accounting Oversight Board. According to the SEC, more than 50 jurisdictions work with the board to allow the required inspections, while two historically have not: China and Hong Kong. The long-simmering issue morphed into a political one as tensions between Washington and Beijing ratcheted up during the administration of President Donald Trump. The Chinese chain Luckin Coffee Inc., which was listed on Nasdaq, was found to have intentionally fabricated a chunk of its 2019 revenue. The following year, in a rare bipartisan move, Congress moved to force action.

    2. Where does it stand?

    As required by the law, known as the Holding Foreign Companies Accountable Act or HFCAA, the SEC in March started publishing its “provisional list” of companies identified as running afoul of the requirements. While the move had long been telegraphed, the first batch of names fueled a sharp decline in U.S. shares of companies based in China and Hong Kong as it dashed hopes for some kind of compromise. In all, the PCAOB has said it’s blocked from reviewing the audits of more than 200 of those businesses. The companies say Chinese national security law prohibits them from turning over audit papers to U.S. regulators. SEC Chair Gary Gensler said in late March that the Chinese authorities faced “a hard set of choices.” Days later, China announced it would modify a 2009 rule that restricted the sharing of financial data by offshore-listed firms, potentially clearing one obstacle.

    3. What is China changing?

    The China Securities Regulatory Commission said the requirement that on-site inspections should be mainly conducted by Chinese regulatory agencies or rely on their inspection results would be removed. It said it would provide assistance for cooperation with foreign regulators. The CSRC said it’s rare in practice that companies need to provide documents containing confidential and sensitive information. However, if required during the auditing process, they must obtain approvals in accordance with related laws and regulations.

    4. What’s the broader issue?

    Critics say Chinese companies enjoy the trading privileges of a market economy — including access to U.S. stock exchanges — while receiving government support and operating in an opaque system. In addition to inspecting audits, the HFCAA requires foreign companies to disclose if they’re controlled by a government. The SEC is also demanding that investors receive more information about the structure and risks associated with shell companies — known as variable interest entities, or VIEs — that Chinese companies use to list shares in New York. Since July 2021, the SEC has refused to greenlight new listings. Gensler has said more than 250 companies already trading will face similar requirements.

    5. How soon could Chinese companies be delisted?

    Nothing is going to happen this year or even in 2023, which explains why markets initially took the possibility in their stride. Under the HFCAA, a company would be delisted only after three consecutive years of non-compliance with audit inspections. It could return by certifying that it had retained a registered public accounting firm approved by the SEC.

    6. How many companies will be affected?

    There’s not much discretion. If a company from China or Hong Kong trades in the U.S. and files an annual report, it will soon find itself on the SEC’s list simply because those have been identified as non-compliant jurisdictions. In the March interview, Gensler pointed out that the law focuses on non-compliant countries, rather than specific companies.

  • Up to 10,000+ rich Chinese are looking for a way to flee the country.
  • For that and other reasons, Beijing is looking to impose more controls to prevent capital flight.
  • What would a “China is screwed” roundup be like without a Peter Zeihan video?

    “Demographically they’re in collapse…China’s not even going to survive this decade. They don’t even have the numbers to try…China doesn’t have the naval capacity to secure markets and resources….Xi Jinping has enacted a cult of personality that is tighter than anything that has existed through Chinese history. It’s gotten so tight that no one wants to bring him information about anything…This is how countries die.” Plus: China doesn’t know how to store grain.

  • Some more Zeihanian deglobalization thoughts from Stephen S. Roach.

    The widely acclaimed globalization of the post-Cold War era is now running in reverse. A protracted slowdown in global trade has been reinforced by persistent pandemic-related supply-chain disruptions, ongoing pressures of the US-China trade war, and efforts to align cross-border economic ties with geostrategic alliances (“friend-shoring”). These developments tighten the noose on China, arguably the country that has been the greatest beneficiary of modern globalization.

    Of the many metrics of globalization, including financial, information, and labor flows, the cross-border exchange of goods and services is most closely tied to economic growth. Largely for that reason, the slowdown in global trade, which commenced in the aftermath of the 2008-09 global financial crisis and intensified in the COVID-19 era, points to a sea change in globalization. While global exports went from 19% of world GDP in 1990 to a peak of 31% in 2008, in the thirteen years that followed (2009-21), global exports have averaged just 28.7% of world GDP. Had world exports expanded on a 6.4% trajectory – halfway between the blistering 9.4% pace of 1990-2008 and the subdued post-2008 rate of 3.3% – the export share of global GDP would have soared to 46% by 2021, far above the actual share of 29%.

    China’s gains from the globalization of trade have been extraordinary. In the decade prior to China’s 2001 accession to the World Trade Organization, Chinese exports averaged just 2% of total world exports. By 2008, that share had risen nearly fourfold, to 7.5%. China had timed its WTO membership bid perfectly, just when the global trade cycle was on a major upswing. While the financial crisis took a brief toll on Chinese export momentum, the interruption was short-lived. By 2021, Chinese exports had surged to 12.7% of world exports, well above the pre-2008 peak.

    China is unlikely to maintain this performance. Overall growth of global trade is slowing, and China’s slice of the trade pie is under mounting pressure.

    The ongoing trade war with the United States is especially problematic. During the first phase of China’s export-led growth surge in the aftermath of WTO accession, the US was consistently China’s largest source of external demand. Largely due to former US President Donald Trump’s tariffs, that is no longer the case. By 2020, US imports of Chinese goods and services had fallen 19% below the peak levels of 2018. Despite rebounding sharply on the heels of the US economy’s post-pandemic snapback, in 2021, US imports from China remained 5% below the 2018 peak. Partial tariff rollbacks for selected consumer products, which President Joe Biden’s administration is apparently considering as an anti-inflation gambit, are unlikely to jump-start bilateral trade.

    At the same time, enduring pandemic-related supply-chain disruptions are likely to take a sharp toll on China and the rest of the world.Over the six months ending in April, a “global supply chain pressures index” constructed by researchers at the Federal Reserve Bank of New York averaged 3.6, well above the 2.3 reading in the first 21 months following the February 2020 onset of pandemic-related lockdowns, and sharply higher than the “zero” reading associated with the absence of supply-chain disruptions.

    This is a big deal for a world connected by supply chains. Global value chains accounted for more than 70% of the cumulative growth in overall global trade from 1993 to 2013, and China has enjoyed an outsize share of this GVC-enabled expansion. As supply-chain disruptions persist, exacerbated by China’s zero-COVID policies, pressures on Chinese and global economic activity are likely to remain intense.

    Mounting geostrategic tensions are the wild card in deglobalization, especially their implications for China. “Friend-shoring” in effect turns Ricardo’s efficiency calculus of cross-border trade into an assessment of the security benefits that come from strategic alliances with like-minded countries. China’s new unlimited partnership with Russia looms especially relevant in this regard. With China edging closer to crossing the line by providing support to Russian military efforts in Ukraine, the US has recently moved to impose sanctions on five more Chinese companies through its so-called Entity List.

  • You’ve heard about the ghost cities. Did you hear about the failed ghost developments that were built as weird, cheap imitations of western structures?

  • Is Xi Jinping in danger from a coup?

  • No doubt I’ve missed many other examples of cracks in China’s economic edifice. Feel free to share them in the comments below.

    Semiconductor Update for July 18, 2022

    Monday, July 18th, 2022

    Enough links have filtered into the semiconductor bucket to be worth doing a roundup. This one touches on China and the corruption of our political elites.

  • The congressional Democrats’ attempt to throw money at the problem is going nowhere fast.

    The Biden administration is laser-focused on sending Ukraine billions of dollars in weapons, including the latest round of anti-ship systems, artillery rockets, and rounds of 105 mm ammo for howitzer cannons that it has entirely lost focus on reshoring efforts to boost semiconductor production Stateside.

    Multiple manufacturers of semiconductor wafers have announced plans for new multi-billion dollar factories across the U.S. but are contingent on Congress allocating funds to aid in building facilities under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act.

    Congress passed the CHIPS Act in January 2021 as part of last year’s National Defense Authorization Act, which proposed $52 billion in funding for increasing the domestic capacity of chip production, though the House and Senate have come to a standstill over disagreements on certain parts of the bill that have sparked so much uncertainty among companies set to build new factories.

    In a letter on June 15, dozens of technology executives from IBM, Intel, Microsoft, Analog Devices, Micron, Amazon, and Alphabet called on Congress to move quickly on the CHIPS Act. They wrote, “the rest of the world is not waiting for the U.S. to act,” and funding for new chip factories must be achieved immediately.

    Taiwan’s GlobalWafers announced a new $5 billion factory in the U.S. on Monday, but contingent on subsidies from the federal government.

    “This investment that they’re making is contingent upon Congress passing the CHIPS Act. The [GlobalWafers] CEO told me that herself, and they reiterated that today,” U.S. Commerce Secretary Gina Raimondo told CNBC, the same day GlobalWafers announced its development plan.

    Notes:

    • IBM doesn’t own any fabs any more, having sold them all to GlobalFoundries.
    • Intel runs a huge number of very profitable fabs (troubles with their sub-10nm process yields notwithstanding) and doesn’t need federal subsidies.
    • Microsoft doesn’t own any fabs and is deeply unlikely to build any; their flagship Xbox Series X uses a custom AMD Zen 2 fabbed by TSMC as its CPU.
    • Analog Devices is an Integrated Device Manufacturer that owns several fabs with pretty old technology; they don’t have any 300mm fabs. They closed a small fab in Milpitas they got from their acquisition of Linear Technology last year. Designing analog chips is its own black art, and not everything that applies to shrinking digital circuits applies to the analog realm.
    • Amazon has no fabs and probably won’t be building any, but they do have a chip design division to support Amazon Web Services, and recently designed a cloud computing chip. They work closely with AMD (fabbed at TSMC), Intel (own their own fabs) and Nvidia (another fabless design house that also gets their chips fabbed at TSMC).
    • Alphabet AKA Google has no fabs and probably won’t be building any, though they do have a lot of AI chip design work going on.
    • GlobalWafers isn’t a semiconductor manufacturer, it’s a silicon wafer manufacturer. Making such wafers (the substrates upon which semiconductor fabrication depends) has its own challenges, but they are several orders less difficult than cutting edge chip fabrication. Maybe I’m quite far out of the loop, but I’m deeply suspicious that GlobalWafers planned wafer plant in Sherman, Texas will cost $5 billion. That’s a relatively piddling sum for a new semiconductor fab, but extremely expensive for a wafer factory. This makes me suspect a subsidy grab is afoot.

    So of the companies mentioned, Intel could suck up government funding to build a fab they were going to build anyway, I’m sure Analog Devices would build a fab with government money, but chances of them running an under 10nm process in said theoretical fab is extremely slim, none of the other mentioned copies are going to build a fab, and none of that government money is going to alleviate the main problem that the overwhelming majority of cutting edge chip designs have to flow through TSMC fabs in Taiwan. What will solve that problem is TSMC opening a state-of-the art fab in Arizona in 2024. No amount of U.S. taxpayer money will make that already-under-construction fab start producing chips any quicker.

    As I’ve mentioned previously, semiconductor subsidies are the wrong solution to the wrong problem.

    $250 billion in taxpayer subsidies wouldn’t get you a single additional wafer start this year, and probably would accomplish little more than channeling money to politically connected firms and sticky pockets in a state (New York) that no one wants to build fabs in any more because of high costs, high taxes and union rule requirements.

  • So who expects to earn immediate gains from the taxpayers subsidizing semiconductors? Would you believe Nancy Pelosi?

    I bet you would.

    This past week it hit the terminal that House Speaker Pelosi was doing a little portfolio re-jiggering, including exercising $8 million of call options in Nvidia and selling Apple and Visa calls. The data was per CongressTrading.com and was reported on by Bloomberg.

    The Nvidia LEAPS were bought June 3, 2021 with $100 strikes, set to expire June 17, 2022 and the position appeared to be disclosed on Thursday morning for the first time. $8 million trades seem a little odd for members of Congress to begin with, but who are we to judge?

    But then, what did Speaker Pelosi do just hours after disclosing the trade, on Friday?

    She threw her weight behind a stalled $50 billion CHIPS PLUS bill that “would provide $52 billion in funding for semiconductor manufacturing grants and investment tax credits for the chip industry.”

  • Speaking of TSMC, they’re tired of their customers using their old tech.

    We tend to discuss leading-edge nodes and the most advanced chips made using them, but there are thousands of chip designs developed years ago that are made using what are now mature process technologies that are still widely employed by the industry. On the execution side of matters, those chips still do their jobs as perfectly as the day the first chip was fabbed which is why product manufacturers keep building more and more using them. But on the manufacturing side of matters there’s a hard bottleneck to further growth: all of the capacity for old nodes that will ever be built has been built – and they won’t be building any more.

    Not strictly true. Remember, Bosch just finished building a 65nm fab.

    As a result, TSMC has recently begun strongly encouraging its customers on its oldest (and least dense) nodes to migrate some of their mature designs to its 28 nm-class process technologies.

    Nowadays TSMC earns around 25% of its revenue by making hundreds of millions of chips using 40 nm and larger nodes. For other foundries, the share of revenue earned on mature process technologies is higher: UMC gets 80% of its revenue on 40 nm higher nodes, whereas 81.4% of SMIC’s revenue come from outdated processes.

    That’s because UMC has fallen woefully far behind TSMC, and no one trusts them because they let Chinese spies walk out the door with other company’s IP. SMIC is on Mainland China, sucks even more, and is trusted even less.

    Mature nodes are cheap, have high yields, and offer sufficient performance for simplistic devices like power management ICs (PMICs). But the cheap wafer prices for these nodes comes from the fact that they were once, long ago, leading-edge nodes themselves, and that their construction costs were paid off by the high prices that a cutting-edge process can fetch. Which is to say that there isn’t the profitability (or even the equipment) to build new capacity for such old nodes.

    This is why TSMC’s plan to expand production capacity for mature and specialized nodes by 50% is focused on 28nm-capable fabs. As the final (viable) generation of TSMC’s classic, pre-FinFET manufacturing processes, 28nm is being positioned as the new sweet spot for producing simple, low-cost chips. And, in an effort to consolidate production of these chips around fewer and more widely available/expandable production lines, TSMC would like to get customers using old nodes on to the 28nm generation.

    “We are not currently [expanding capacity for] the 40 nm node” said Kevin Zhang, senior vice president of business development at TSMC. “You build a fab, fab will not come online [until] two year or three years from now. So, you really need to think about where the future product is going, not where the product is today.”

  • This video asks whether China can produce their own chips:

    Obviously, they already produce some of their own chips, but the video covers most of the issues China has with fabbing more complex chips that I’ve already discussed here and here. They’re still dependent on the same three leading fab companies (TSMC, Intel and Samsung) everyone else is for sub 10nm feature chips, and are overwhelmingly dependent on both foreign talent and foreign semiconductor equipment manufacturers like ASML and Applied Materials.

  • Speaking of TSMC and Intel, India would really like them to build fabs there. The problem is, despite a whole lot of technical talent there, it doesn’t have a terribly large domestic electronics manufacturing base.
  • Biden’s EPA Trying To Crush The Permian Basin?

    Sunday, July 3rd, 2022

    Evidently $8 a gallon gas simply isn’t high enough for the Biden Administration’s EPA. Hot on the heels of the Supreme Court telling the EPA it can’t regulate carbon dioxide absent congressional authority to do so, the EPA is attacking drilling in the Permian Basin over ozone.

    The Permian Basin, straddling Texas and New Mexico, is the world’s biggest oil field and accounts for over 40% of the nation’s petroleum production.

    It is now in the regulatory crosshairs of the Biden administration’s Environmental Protection Agency . . . not because of carbon dioxide, but due to ozone.

    The Environmental Protection Agency is weighing labeling parts of the Permian Basin as violating federal air quality standards for ozone — a designation that would force state regulators to develop plans for cracking down on that smog-forming pollution. The move, outlined in a regulatory notice, could spur new permitting requirements and scrutiny of drilling operations.

    Ozone levels in the basin have surpassed a federal standard “for the last several years — really since the fracking boom took off in the Permian,” said Jeremy Nichols, climate and energy program director for WildEarth Guardians.

    The conservation group formally petitioned EPA for the so-called non-attainment designation in March 2021 and, roughly six months later, warned the agency it intended to sue to force action. The designation “basically says you’ve got to clean up this mess or the consequences are going to get even more severe as far as restricting your ability to permit more pollution and more development,” he said.

    So expect an industry that’s already taken it on the chin thanks to Flu Manchu lockdowns and Biden Administration policy to be further slammed during an energy crunch.

    Oil prices sit consistently above $110 per barrel. Average gasoline prices in Texas have eclipsed $4.50. And natural gas prices in May were three times higher than in 2019.

    Fossil fuel producers do not see a break in these high costs any time soon, according to a survey done by the Federal Reserve Bank of Dallas.

    Uncertainty about their industry is as prolific as was their fossil fuel production before the pandemic.

    Nearly half of respondents blamed labor shortages, inflation, and supply chain bottlenecks as the primary causes for oil and gas production concerns — each of which is an indirect consequence of government policy.

    Responding to the coronavirus pandemic — a factor outside of their control — federal, state, and local governments shut down business operations across the nation: grounding air travel, closing everyday businesses, or putting strict constraints on ingress and egress of persons.

    This sent a ripple effect throughout the global supply chain, creating a self-fulfilling disruption for both demand and supply. Fewer people traveling meant less demand for fuel. Less demand for fuel at first drove down the cost of oil to historic lows, but then led to less fuel production when the market adjusted. As travel demand recovered, the production side struggled, and continues to struggle, to catch up — playing into the high prices currently seen.

    Another consequence of the shutdowns, unemployment skyrocketed both as a result of the closures themselves and the loss of business profits the lockdowns exacerbated. The oil and gas industry is still struggling to return to pre-pandemic levels of employment — employing 30,000 fewer workers than at the end of 2019.

    How important is the Permian Basin for American energy production?

    In July, the Permian Basin will produce roughly 60% of the oil barrels per day from of the seven most prolific U.S. basins, according to the Energy Information Administration (EIA); 5.316 million BPD out of a total of 8.901 million.

    In June, the Permian Basin is expected to generate 5.232 million BPD; the second most prolific area is expected to produce 1.152 million BPD.

    The idea to wield ozone regulations against Permian Basin operations evidently came from environmental activist and regulator Joe Goffman.

    Climate activists also want EPA to tighten ozone standards to indirectly regulate CO2 from fossil fuels. Joe Goffman, a champion of this idea, is leading EPA’s Office of Air and Radiation on an acting basis, and he’s in charge of ozone rules.

    Mr. Goffman midwifed the Obama Clean Power Plan that had sought to conscript states into a force-fed green energy grid transition until the courts killed it. A 2014 article from E&E News described Mr. Goffman as the “U.S. EPA’s law whisperer. His specialty is teaching an old law to do new tricks.” How many more tricks does he have up his sleeve to keep gas prices high?

    Just how high does the Biden Administration want to raise the price of gas?

    China Last Year: Labor Shortage. China This Year: “$1.35 An Hour. Take It Or Leave It.”

    Monday, June 27th, 2022

    Last year China was suffering from widespread labor shortages.

    This year? Not so much. In fact, the situation has flipped to such a degree that a factory owner told hundreds of students waiting to see if they can get a job that he’s only paying 9 yuan (about $1.35 an hour), and they can take it or leave it. Most stay.

    Never mind the “Fight for $15” an hour. That’s not $15 a day.

    Between the worldwide stagflation, the Russo-Ukrainian War, and the continuing Flu Manchu lockdowns, China’s house of cards economy is coming apart at the seems quicker than anticipated.

    Sri Lanka Is Screwed

    Thursday, June 23rd, 2022

    Remember how Sri Lanka managed to wreck agricultural yield by forcing the country to use organic fertilizer? “Not only had Sri Lanka’s ban on fertilizers, pesticides, weedicides, and fungicides resulted in massive food shortages, it also led to the doubling in price of rice, vegetables, and other market staples.”

    Turns out that was just the tip of the iceberg.

    Sri Lanka’s prime minister is increasing efforts to revive the country’s “completely collapsed” economy amid a lack of foreign exchange reserves and severe shortages of essential items.

    “We are now facing a far more serious situation beyond the mere shortages of fuel, gas, electricity, and food. Our economy has faced a complete collapse,” Prime Minister Ranil Wickremesinghe told parliament on June 22.

    “It is no easy task to revive a country with a completely collapsed economy, especially one that is dangerously low on foreign reserves,” he said.

    This video goes into more depth of just how badly Sri Lanka is screwed.

    Some takeaways:

  • “The government’s gross mismanagement in agriculture is just a small symptom in a much larger problem. Sri Lanka has run out of money and is now facing down the barrel of complete economic collapse.”
  • “In a span of just two years, its reserves of foreign currency has gone from $9.2 billion to just $50 million, not enough to cover a single day’s worth of imports, and not nearly enough to cover the $6.6 billion it needs to make loan payments. On April 12th, the government announced it will no longer be making such payments as a result it’s been cut off from international loans.”
  • “Basic necessities are hard to come by and daily rolling blackouts are shutting down businesses.”
  • Sri Lanka may be the first poorly managed developing country to fall, but it won’t be the last.
  • On paper, it shouldn’t be a basket case. It had a thriving tourism industry before a 2019 terrorist attack and 2020’s Flu Manchu.
  • “Sri Lanka, being a small developing country, imports a huge amount of commodities. As such, it’s been running a large trade deficit.”
  • Enter the nepotism:

    Strongman Gotabaya Rajapaksa Gota built a name for himself viciously ending the civil war as head of the ministry of defense, with his brother Mahinda acting as president from 2005 to 2015. Gota ran on the promise of bringing forth vistas of prosperity and splendor in wake of an opposition party seen as too weak to handle domestic threats. Gota’s party won a landslide victory in parliament and he appointed his brother as prime minister. With a two-thirds majority, Gota quickly got to work rewriting the constitution, allowing him to appoint many top-level officials, including ministers and judges. He stuffed these positions with relatives, and has been slowly cementing greater unrestrained power.

  • How did he deal with the tourism downturn? He started printing money. “The budget deficit widened and its stockpile of foreign currency started to burn away.”
  • “Now more than ever, Sri Lanka was burning through its foreign reserves. This was further accelerated by the government’s desire to keep the rupees exchange rate at 200 rupees equal to one US dollar.” In the post-Bretton Woods world, fixed exchange rates are disasters waiting to happen.
  • The attempt to defend the rupee meant that foreign currency reserves went from $9.2 billion to just $1.6 billion in 2021.
  • “This caused the government to enact strange policies, like banning the importation of fertilizer in hopes of easing its trade deficit. Claiming the ban was to make Sri Lanka organic was simply a way to conceal its dire situation.” Yes, cutting back the ability of your own people to grow food in order to hide the manifest incompetence of your economic policies is quite the recipe for happiness.
  • Then Russia invaded Ukraine, and prices for food and energy skyrocketed.
  • “Basic necessities in Sri Lanka have become too expensive. The rupee is now just half of its original value. Schools have stopped testing for certain grades because they can’t buy ink.”
  • “The government has instituted daily 15 hour blackouts to save on energy imports but they have crippled industries. The nation has declared a state of emergency as massive mobs attack politicians and even set roadblocks to prevent them from escaping the country.”

    Sri Lanka may be the first, but it won’t be the last.

    With rapid global commodity inflation, supply shortages, and the likely coming global recession, many nations appear to be on the tipping point. There is growing unrest in Tunisia because of prices. Pakistan’s currency is plummeting and Argentina’s economy is straining under the weight of massive debt. The longer current conditions persist, the more likely we are to see what is happening in Sri Lanka to happen across the globe.

  • Banks Runs In China?

    Tuesday, June 14th, 2022

    Reader Kirk suggested Chinese bank runs might be the next story to cover. I think I covered bank runs at smaller rural Chinese banks in a previous “China is screwed” post. Is a wider run in progress? Maybe.

    Multiple sources contacted by Asia Markets, have confirmed deposits at the following six banks have been frozen since mid-April.

  • Yuzhou Xinminsheng Village Bank (located in Xuchang City, Henan Province)
  • Zhecheng Huanghuai Bank (City of Shangqui, Henan Province)
  • Shangcai Huimin Rural Bank (Zhumadian City, Henan Province)
  • New Oriental Village Bank (City of Kaifeng, Henan Province)
  • Huaihe River Village Bank (Bengbu City, Anhui Province)
  • Yixian County Village Bank (Huangshan City, Anhui Province)
  • It’s understood the banks with branches across the Henan and Anhui Provinces successively issued announcements in April, stating they would suspend online banking and mobile banking services due to a system upgrade.

    At the same time, clients reported their electronic deposits in online accounts, mobile apps and third-party platforms could not be withdrawn.

    This led to depositors rushing to local bank branches, only to be told they were unable to withdraw funds.

    By late May, images emerged on Chinese social media of demonstrations at the front of numerous bank branches. Asia Markets has verified these images with local contacts.

    Snip.

    Regardless of the cause, the developments raise serious questions about the health of China’s and its regulatory oversight. The more immediate concern, however, is the prospect of contagion, which could see the (so-far) rural-only bank run spread to bigger cities.

    There’s evidence this is already happening.

    In one of the only mainstream international media articles to report on the unfolding situation, local residents highlighted the seriousness of the situation and the likelihood of contagion.

    From the Financial Times on June 9:

    “Some depositors such as Xu have already lost trust in the system. The 39-year-old said he had withdrawn all of his deposits from 10 other small banks that had promised him an annualised yield of more than 4 per cent.

    “Another depositor, a 30-year-old father, said he had placed more than Rmb900,000 in his village’s banks since 2020 at a return of 4.1 per cent. “I felt like being slaughtered,” he said, declining to give his name. He drove overnight to negotiate with the banking regulator in Zhengzhou, capital of Henan, in mid-May. “This is the money my wife and I have saved together since we got married. I had to lie to her that I was away for work.”

    On Twitter, a video of a large line at an ICBC Bank in China (one of China’s largest state-owned banks) posted on Tuesday, June 9, suggest contagion is in progress.

    Translated to English, the tweet reads “The bank card system is locked, and these people are here to unlock it. Massive runs are coming.”

    Blogger, Jennifer Zeng, has reported major issues with withdrawing cash from banks in Shanghai in recent days. The uncertainty no doubt exacerbated by the prospect of more lockdowns as COVID cases again spike.

    “All banks in Shanghai have restricted depositors from withdrawing money… A bank run is about to sweep China,” she said.

    Maybe. This, from five days ago, suggests Shanghai banks are limiting total transactions to 300 a day.

    While I’m always willing to believe the worst about China’s smoke-and-mirrors economy, it’s possible that Shanghai’s problems are just temporary post-lockdown issues that will subside, assuming China doesn’t lock that city down again. (Don’t count on it.)

    All the reports of bank runs I’m seeing either link to that Asia Markets piece, or the Hal Turner radio show piece that largely reprints it.

    Right now I’m going to go with “Not Yet Proven” for current bank runs in China.

    Though Lord knows if I were stuck in China (and had somehow managed not to get imprisoned or executed), I’d be pretty intent on getting my money out of Yuan entirely and into something more stable like gold, silver, or even U.S. dollars…

    The Great Leveler Is Coming, Mimi

    Tuesday, June 7th, 2022

    In The Before-Time, The Long Long Ago, prior to The Great Dot Com Bubble Bust, newspapers (remember those?) were filled with reports of day-traders, ordinary people who quit their day jobs to trade stocks. And what do you know! A whole bunch of them made money doing that! They must have been geniuses!

    Few paused to test an alternative theory: They just happened to be riding the tail end of one of the greatest stock bubbles in history. It’s easy to pick stock market winners when there are lots of winners around.

    Then the bust hit, and a whole lot of geniuses turned out to not be so smart after all, especially those who had backed such companies as Flooz and WorldCom.

    Thanks in large measure to the SUPERgenius economic management of the Biden Administration, the world is now exiting an era of historically cheap money and entering a period of rising interest rates. A whole lot of business models that seemed to make sense during an era of cheap credit are going to look as retroactively foolish as Pets.com.

    Example the first: Vice Media is looking for a buyer.

    Vice will be mounting a new round of cost-cutting to try to stretch out its solvency while it searches for some sucker to buy it.

    Vice does not make money. It will never make money. It just wants a series of Sugar Daddies willing to pump money into it forever to keep its overpaid, underperforming staff paid.

    Snip.

    The article says that they can only estimate what Vice is worth. They guess it’s worth, maybe, “at least one billion.” (And they owe $1.1 billion in debt?)

    It was valued at $5.7 billion just a few years ago.

    Ace of Spades also posted this Ryan Long video that I’m absolutely stealing:

    As for the next media outlets to close, well, I’ve got to think any Bulwarkesque outlets whose entire raison d’être is subsidized Trump-hating is going to look like a luxury good during the Biden Recession.

    And Crunchbase keeps a running list of tech layoffs.

    Another sign of the serious straits people find themselves in: Consumers are maxing out their credit cards.

    High debt, high inflation and high interest rates are all recipes for disaster. And as those pools of liquidity dry up as cheap capital recedes, all the stranded starfish that so briefly thrived will find that they have no place to hide in the Biden Recession.

    Allusion in headline: