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June 7, 2023

THE WORLD IS SMOLDERING. How many more have to die before we force a negotiated settlement?  Where is leadership?

McCarthy Opposes Extra Ukraine Spending After Debt Deal
House Speaker Kevin McCarthy (R., Calif.) declined to commit to providing additional financial support for Ukraine, showing the continued influence of his party’s right flank and moving him into direct conflict with Senate Republicans who want more military spending beyond what Congress passed last week.

His stance also clouds the broader outlook for spending on Ukraine. Congress has authorized $113 billion in military, economic and humanitarian assistance since Russia invaded the country last year, and Republican and Democratic backers of the effort have expected that they would have to approve more funding later this year.

The disagreement over new funding follows the debt-ceiling deal that President Biden signed into law last weekend. Discretionary military spending will rise 3% in 2024, but with a possible penalty of a 1% cut from fiscal 2023 levels if Congress doesn’t pass all 12 annual appropriations bills by the end of the calendar year. Many Senate Republicans, including Sen. Lindsey Graham (R., S.C.), were infuriated by the terms, and demanded a commitment from Senate leaders to pass another bill to supplement those outlays. 

 Southern Ukrainian Towns Inundated as Floodwaters From Burst Dam Rise
On Wednesday, authorities in the Russian-occupied Kherson region declared a state of emergency due to flooding at the Kakhovka hydroelectric power station, which supplies electricity to three million people. Vladimir Leontyev, the head of the city’s administration, told reporters Wednesday that 900 people were evacuated on Tuesday due to the destruction of the power station.
Local officials in the Ukrainian-controlled part of the Kherson region said flooding was expected to peak later on Wednesday. Nearly 2,000 homes on the western bank of the river have already been flooded, said the head of the Kherson region’s military administration, Oleksandr Prokudin.

U.S. Nears Deal to Produce GE Jet-Fighter Engine in India
The U.S. and India are expected to reach a deal during Prime Minister Narendra Modi’s visit to Washington this month to manufacture jet-fighter engines in India, U.S. and Indian officials and defense executives said.

The planned assembly at plants in India of General Electric engines for India’s Tejas jet fighter is a key part of India’s effort to bolster its domestic defense industry and wean itself from a longstanding reliance on Russia for equipment to deter an emboldened China, defense analysts said.

“India’s the only country that’s actually fighting with China,” said Richard Rossow at the Center for Strategic and International Studies, an independent U.S. think tank. “They can’t hold down the fort alone.”

 Treasury’s $1 Trillion Debt Deluge Threatens Market Calm
Investors are bracing for a flood of more than $1 trillion of Treasury bills in the wake of the debt-ceiling fight, potentially sparking a new bout of volatility in financial markets. 

Some on Wall Street fear that roughly $850 billion in bond issuance that was shelved until a debt-ceiling deal was passed—sales expected between now and the end of September, according to JPMorgan analysts—will overwhelm buyers, jolting markets and raising short-term borrowing costs.

Few expect major upheaval, but many worry about the potential for unforeseen problems in the financial plumbing—where trillions of dollars worth of transactions occur daily—that could send tremors throughout markets. Many remember how money-market rates skyrocketed in 2019 during a period of low liquidity, necessitating intervention by the Federal Reserve.  

“When you dump a tremendous amount of debt into the market, it causes dislocation,” said Jon Maier, chief investment officer of Global X, an exchange-traded fund provider. “Investors are underestimating that.”

Who Is Brian Armstrong? Coinbase CEO Is Taking On the SEC
Brian Armstrong is on a collision course with regulators. Depending on whom you ask, his approach represents either a bold stance that will change history or reckless posturing by a Silicon Valley crypto bro who is overdue for a legal smackdown.

The Securities and Exchange Commission’s lawsuit this week against Armstrong’s company, Coinbase COIN -12.09%decrease; red down pointing triangle Global, the biggest U.S. cryptocurrency exchange, follows years of warnings by the agency that crypto exchanges were breaking the rules by listing tokens subject to securities laws.

Armstrong pushed back, arguing that securities laws were an outdated and inappropriate framework for regulating digital assets. As Coinbase added new tokens to its marketplace, the CEO effectively went over the heads of the SEC’s leaders to appeal to Congress and the American people to depict the agency’s approach as flawed.

Jim Grant Warns of a ‘Generation-Length’ Rise in Interest Rates
Jim Grant, the founder of Grant’s Interest Rate Observer, says he sees a “long cycle of rising rates” ahead that will test the mettle of investors who’ve become accustomed to years of loose monetary policy.

The long-time financial journalist and commentator says he sees the possibility of a “generation-length bear market in bonds” as rates gradually move higher. It’s up to investors to adapt to this new reality, he says, and expunge the “muscle memory” of the lower-rate world that’s predominated in recent decades.

“I speculate that we are embarked on a long cycle of rising rates,” Grant says in the latest episode of the Odd Lots podcast. “And I say that, first of all, for reasons of pattern recognition, there’s no theory behind it, but I observe that in 2020 and ‘21, some unimaginably large number of debt securities were priced to yield less than nothing.”

Bloomberg’s index of negative-yielding debt peaked at the end of 2020 at almost $18 trillion, and then dwindled to almost zero last year as central banks around the world ramped up rates to try to tamp down inflation. Still there’s some $1.85 trillion worth of bonds yielding less than nothing today.

That’s the “most extraordinary expression of unqualified bullishness on an asset class because it had the name of ‘bonds’ which had been falling in yield, rising in price,” Grant says. “It would not surprise me at all if we were embarked on something resembling a generation-length bear market in bonds, meaning rising yields and falling prices. That would fit the form.”

China’s exports plunge by 7.5% in May, far more than expected

The decline was so sharp that export volumes came in below their levels at the start of the year, after accounting for seasonality and changes in export prices, Julian Evans-Pritchard, head of China Economics at Capital Economics, said in a note.

“This points to subdued global demand for Chinese goods,” he said.

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