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Long Term Market-Based Inflation Expectations

Still averaging around 1.7%, for the next five years. As of today, the five year inflation breakeven was 2.61%, down from 2.72% in mid-May. The estimated…

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Still averaging around 1.7%, for the next five years.

As of today, the five year inflation breakeven was 2.61%, down from 2.72% in mid-May. The estimated inflation risk and liquidity premia adjusted 5 year breakeven was 1.72% as of 9/30 (when the corresponding actual breakeven was 2.51%).

Figure 1: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red), all in %. NBER defined recession dates shaded gray (from beginning of peak month to end of trough month). Source: FRB via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 10/7, NBER and author’s calculations.

For the ten year horizon:

Figure 2: Ten year inflation breakeven calculated as ten year Treasury yield minus ten year TIPS yield (blue), ten year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red), all in %. NBER defined recession dates shaded gray (from beginning of peak month to end of trough month). Source: FRB via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 10/7, NBER and author’s calculations.

On a side note, the yield curve continues to steepen (10yr-3mo):

Figure 3: 10 year-3 month Treasury spread (blue), constant maturity yields, in %. NBER defined recession dates shaded gray (from beginning of peak month to end of trough month). Source: FRB via FRED,

Author: Menzie Chinn

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Economics

Stocks Surge As Earnings Roll-In, But Is Risk Gone?

Stocks Surge As Earnings Roll-In, But Is Risk Gone?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Surges Toward Previous…

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Stocks Surge As Earnings Roll-In, But Is Risk Gone?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Surges Toward Previous Highs

Last week, we discussed the “correction being over” for the time being.

“While the market started the week a bit sloppily, the bulls charged back on Thursday as earnings season officially got underway. With the market crossing above significant resistance at the 50-dma and turning both seasonal “buy signals” confirmed, it appears a push for previous highs is possible.

Two factors are driving the rebound. Earnings, so far, are coming in above estimates. Such isn’t surprising as analysts suppressed estimates going into reporting season. Secondly, bond yields declined.

Chart updated through Friday.

However, to expand on a point from last week, breadth remains dismal, with only 60% of stocks above their respective 50-dma even though the index is at all-time highs.

Moreover, our “money flow buy signal” has reversed to previous highs, but volume has dissipated sharply during the advance.

Our concern is that while the expected rally from support occurred, there has been very little “conviction” to that advance. Therefore, we tend to agree with David Tepper of Appaloosa Management when he stated:

Sometimes there are times to make money… sometimes there are times not to lose money.

While the market is within the seasonally strong year, the risk of a correction remains. Such is particularly the case as we head into 2022.

Its Been A Very Long Time Without A Deeper Correction

While investors are quickly returning to a more “bullish” excitement about the market, it is worth remembering the recent 5% correction did little to resolve the longer-term overbought conditions and valuations.

In mid-August, we discussed the market’s 6-straight months of positive returns,a historical rarity. To wit:

“There are several important takeaways from the chart above.”

  1. All periods of consecutive performance eventually end. (While such seems obvious, it is something investors tend to forget about during long bullish stretches.)

  2. Given the extremely long-period of market history, such long-stretches of bullish performance are somewhat rare.

  3. Such periods of performance often, but not always, precede fairly decent market corrections or bear markets.

Unfortunately, as we now know, that streak ended in September with a 5% correction that sent investors scurrying for cover.

There is another streak that is also just as problematic. Currently, the S&P 500 index has gone 344-days without violating the 200-dma. Such is the sixth-longest streak going back to 1960.

While investors are currently starting to believe that a test of the 200-dma won’t happen, there are several points to be mindful of.

  1. Corrections to the 200-dma, or more, happen on a regular basis.

  2. Long-stretches above the 200-dma are not uncommon, but all eventually resolve in a mean-reversion.

  3. Extremely long periods above the 200-dma have often preceded larger drawdowns.

The most crucial point to note is that in ALL CASES, the market eventually tested or violated the 200-dma. Such is just a function of math. For an “average” to exist, the market must trade both above and below that “average price” at some point.

However, a “correction” requires a “catalyst” that changes the investor psychology from “bullish” to “bearish.”

Extremely Depressed Volatility

At the moment, there are plenty of concerns, but investor psychology remains extremely bullish. Most concerns are well known, and, as such, the market discounts them concerning forward expectations, valuations, and earnings projections. However, what causes a sudden “mean reverting event” is an exogenous, unexpected event that surprises investors. In 2020, that was the pandemic-related “shutdown” of the economy.

However, as with an empty “gas can,” a catalyst is ineffective if there is no “fuel” to ignite. Currently, that “fuel” is found in the high levels of market complacency, as shown by the collapse in the volatility index over the last couple of weeks.

“The Volatility Index (VIX) closed at a new 18-month low as the S&P 500 closed at a new multi-year high on Thursday, 10/21/21. If you were wondering, the 18-month low in the VIX Index represents the first occurrence since November 2017.” – Sentiment Trader

It is worth remembering the market had three 10-20% corrections in 2018 as low volatility begets high volatility.

Another measure is the P/E to VIX ratio which recently also peaked at 2.0. Previous peaks have been coincident with short-term corrections and bear markets.

While anything is possible in the near term, complacency has returned to the market very quickly. As noted, while investors are very bullish, there are numerous reasons to remain mindful of the risks.

  • Earnings and profit growth estimates are too high

  • Stagflation is becoming more prevalent

  • Inflation indexes are continuing to rise

  • Economic data is surprising to the downside

  • Supply chain issues are more presistent than originally believed.

  • Inventory problems continue unabated

  • Valuations are high by all measures

  • Interest rates are rising

You get the idea.

But a more significant problem will set in next year – a contraction of liquidity.

A Sea Of Liquidity

As noted, the unexpected “pandemic-driven economic shutdown” sent the Federal Reserve and Government into fiscal and monetary policy overdrive. Such led to an unimaginable influx of $5 trillion into the economy, sending the “money supply” surging well above the long-term exponential growth trend.

The importance of that “sea of liquidity” is both positive and negative. In the short term, that liquidity supports economic growth, the surge in retail sales into this year, and the explosive recovery in corporate earnings. That liquidity is also flowing into record corporate stock buybacks, retail investing, and a surge in private equity. With all that liquidity sloshing around, it is of no surprise we have seen a near-record surge in the annualized rate of change of the S&P 500 index.

However, as stated, there is a dark side to that liquidity. With the Democrats struggling to pass an infrastructure bill, a looming debt ceiling, and the Fed beginning to “taper” their bond purchases, that liquidity will start to reverse later this year. As shown below, if we look at the annual rate of change in the S&P 500 compared to our “measure of liquidity” (which is M2 less GDP), it suggests stocks could be in trouble heading into next year.

While not a perfect correlation, it is high enough to pay attention to at least. With global central banks cutting back on liquidity, the Government providing less, and inflationary pressures taking care of the rest, it is worth considering increasing risk-management practices.

A Note On Bond Positioning

I got asked last week to discuss our bond positioning. So we posted the following to RIAPRO subscribers on Friday morning.

“5-year implied inflation expectations are up over 40 basis points (bps) since October 1st. They now stand at a 15+ year high of 2.94%. While inflation expectations rise, the yield curve is flattening. In this case, short maturity bonds are rising in yield much more than longer maturity bonds. The graphs below show what has happened to bond yields since the inflation expectations last peaked on May 18th. As we show the 30-year bond is 26 bps lower since then, while the 2-year note is 26 bps higher. As a result, the 2/30 yield curve has flattened 52 bps over the period.

Our portfolios are set up for the yield curve flattening. The portfolio’s largest bond holding is TLT with a duration of 20 years. The benchmark, AGG, has a duration of 8 years. The models are also not fully vested in the fixed income sleeves to further protect against higher yields.’ – Michael Lebowitz

Conclusion

As noted throughout this week’s message, there are many reasons to suspect the recent rally will fail as the impact of weaker economic growth begins to temper expectations. However, that is not the case today, and the current momentum can undoubtedly carry the markets higher next week.

We will continue to maintain our more bullish stance from that position until the market begins to falter. After that, numerous support levels and warning triggers will tell us it is time to become more “risk-averse” in our allocations.

While that time is not now, don’t become overly complacent, thinking this market can only go higher. Markets have a nasty habit of doing the unexpected just when you feel you have everything figured out.

Have a great weekend.

Tyler Durden
Sun, 10/24/2021 – 10:30











Author: Tyler Durden

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Luongo: Is The Bitcoin ETF “A Trap”?

Luongo: Is The Bitcoin ETF "A Trap"?

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

So Tuesday October 19th, 2021 was supposed to…

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Luongo: Is The Bitcoin ETF “A Trap”?

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

So Tuesday October 19th, 2021 was supposed to be the day that changed everything for bitcoin.

And it may, just not in ways anyone bullish on crypto should be comfortable with.

Finally the SEC approved a Bitcoin ETF, the ProShares Bitcoin Futures ETF (BITO) began trading this week to great fanfare in the cryptocurrency community. There was much rejoicing as Bitcoin hit a new all-time high which it has since given back.

On the heels of that announcement Valkyrie changed the proposed ticker symbol for its Bitcoin Strategies ETF, another futures-based product, to BTFD. Gotta love the cheek, there.

And while that’s all well and good, I have to tell you that I have sincere reservations about popping the virtual champagne here.

Because I’ve seen this story before… in gold and silver.

I remember those heady days when all the gold bugs thought an ETF would be just the thing to solve the ‘liquidity’ problem gold had. At the time they didn’t want to hear that this lack of liquidity was one of those good problems gold and silver had.

Once people dug into the prospectus of the proposed SPDR Gold ETF, which has since then changed its name to SPDR Gold Shares ETF, they found that GLD didn’t have to hold physical gold of any particular quality. They could hold the dreaded ‘paper gold.’

That was the key to these funds being just another layer of the Matrix.

They opened up those markets to another sink to drain demand into a black hole of infinite ‘liquidity’ which in the end did nothing to help the price of gold. In fact, just the opposite occurred. It took pressure off the physical spot market and the forex trading of gold and dumped billions of unsuspecting retail investors into the Midgewater Marshes of Wall St.’s hyper-financialization engine.

Or does no one remember the definition of ‘Getting Corzined?”

So, will that happen with bitcoin since these ETFs are even less tied to the underlying commodity than GLD and SLV?

Before I answer that, let’s back up and set up some boundary conditions.

This ETF will trade and settle only in front-month Bitcoin futures contracts traded on the CME.  These are cash-settled contracts that bear no relation to actual commodities futures contracts where the buyer is pledging to take delivery of a defined-amount of say, soybeans, and the the seller is pledging to deliver that amount of soybeans by a certain date.

In these contracts there is no delivery of bitcoin, the underlying commodity, here.  The only thing delivered is cash.

This is just like there is very little gold actually delivered based on the outstanding volume of gold futures open interest on the COMEX during the delivery period during the first week of every other month. Most gold futures are settled in cash, because that’s what many want, a way to hedge dollar or euro exposure with gold without the hassle of actually owning the stuff.

And there is nothing inherently wrong with that. But it shouldn’t be the entire market and nor should the ETFs be marketed as having exposure to actual gold.

Even when people stand to take delivery in gold there have been multiple instances where cash-settlement was forced on the buyer, presumably because the gold wasn’t there.

FYI, it’s in the contract. The COMEX reserves the right to NOT DELIVER gold. Force majeure is a thing, even in the United States.

Futures of this type create nothing more than synthetic supply for speculators to make side-bets on the price of an asset without ever having to trade the asset itself. This sucks away demand for that asset and bearing the risk associated with holding it.

It creates absolutely zero actual physical demand for the commodity. So, these ETFs will generate absolutely zero demand on the Bitcoin blockchain, only send a secondary signal to actual bitcoin traders that there is something happening they should be aware of.

The question everyone should be asking which market is the more important? The actual bitcoin market or the bitcoin futures market?

What it does create is a very different set of parameters and games theory optimization strategies for those that play it.

They aren’t playing bitcoin, they are playing with “speculating on bitcoin.”

And this type of speculation has been going on since December 2017, when the CME’s original bitcoin futures contract began trading. No shock, then, to anyone with any sense of market history that bitcoin peaked in January 2018 and entered a two-plus year bear market.

Moreover, they aren’t risking their holdings of bitcoin as the seller of the contract or taking on the volatility risk of the future delivery of bitcoin as the buyer of the contract.

These aren’t futures contracts, they are more appropriately called ‘contracts for difference,’ or CFDs, that shady Greece-based Forex companies offer. In effect, I bet the price goes up, you bet it’ll drop and after a certain amount of time we settle our bet.

Futures are supposed to help producers of commodities and consumers thereof coordinate production and consumption through time.  They are a vital part of how a free market optimizes capital flow and risk assessment.

They help send signals to all players in the supply chain up and downstream of those base commodities what the supply and demand structure of those markets looks like. These are vital and essential pricing signals that when screwed with upset the flow of capital around the world. 

So, this should clue you in as to why all these ‘supply chain’ issues and rising ‘inflation’ concerns are suddenly popping up all over the world. There’s been a whole lotta shenanigans going on in various commodities futures markets now since the beginning of the COVID-9/11 psy-op pandemic.

From last year’s catastrophic contango in crude oil and the insane pump and dump of lumber futures to this fall’s rise in energy and industrial metals prices, commodities futures markets have become the plaything of speculators who are all downstream of the central banks money printing machines.

And since I subscribe heavily to the theory that there are no coincidences in geopolitics, I have to ask the basic question I always ask in times like these… cui bono?

Who benefits from this volatility?

For years the rent-seekers close to the central banks have turned futures from an essential market function into a tool of market manipulation by giving some actors access to free money to speculate on the asset and utilize the leverage they gain to push and pull the price for trading desk profits.

But, honestly, that analysis is as generous as I can be about this situation.

By corrupting the gold market nearly to its terminal state over the past fifteen years they have extended the life of the central banks’ power for close to two decades now. The game, in my opinion, is far more sinister than just profit motive, if only it were that banal.

No, this manipulation of global commodity prices has massive political and societal effects, corrupting everything these markets touch. Remember, a corrupt money begets a corrupt society.

So with corrupted futures markets we have corrupted the very essence of the structure of production and consumption, the very essence of voluntary exchange as the basis for civilization.

I wonder who benefits from that…. could it be Communists who hate Capitalism? Askin’ for a friend.

Back to gold and silver. GLD and SLV provide massive amounts of liquidity to retail investors which bleeds off physical demand.  I can’t tell you how many hours I’ve spent trying to convince people to STOP BUYING GLD AS A PROXY FOR GOLD over the past fifteen years.

If you want gold buy gold. Hold it in your hand, stop pussyfooting around and remember that not every decision you make with your money should be immediately reversible. That’s not investing, that speculating.

The only people who worship at the altar of the Gods of Liquidity are the market-makers skimming both sides of the trade.

GLD and SLV both act as a psychological crutch to never commit to taking the other side against the central banks and the powers that continually siphon off your best energy into rabbit holes of irrelevant distractions, like what some dumb chick said on Twitter the other day.

You think you’re buying portfolio protection or are hedging against the dollar but all you’re doing is creating the very synthetic short against your portfolio that dulls its returns over time.

By buying either of these funds you are just feeding the beast who is working against your well being.

Because while they may track the gold price they don’t give you any actual say in the price of it, because all you’re doing is signaling SPDR to print more shares to buy more contracts on the COMEX which were printed out of thin air by some investment bank borrowing money from the Fed at 0%!

The same will go for any bitcoin ETFs that don’t hold physical BTC.

This is why SEC Chair and Davos troll par excellence Gary Gensler fast-tracked this ETF now after 5 years of the SEC farting around saying no to real Bitcoin ETFs. Everyone serious about crypto wants a physical bitcoin-settled ETF, which the SEC doesn’t want to grant because that would be something that would 1) increase the actual demand for Bitcoin and 2) would expose those involved in the trade to actual time-risk.

The biggest clue that these ETFs are not for our benefit but theirs is the following. Settling bitcoin accounts for the ETF daily would be the easiest ETF of this type to implement ever. At the end of trading on any given day the fund simply sends one measly transaction to the blockchain to buy or sell the net of all the trades of the bitcoin ETF’s shares for the day.

Hell, they could settle it up every hour if need be during times of volatility. With Lightning Network live, that settlement could even happen there and bleed the blockchain traffic off over time if there’s congestion and the fees too high. It would lead to less bitcoin volatility in the long run, rather than more.

And before you begin criticizing me, it’s irrelevant whether I have the settlement mechanisms right here or not, the finer details could be worked out easily if anyone at the SEC cared to want to do that job.

What’s important is that the blockchain creates a far more stable environment for issuing a commodity ETF than any other physical commodity actually does. It’s not like we need warehouses to store digital commodities, after all.

Moreover, I can even see some upside for the government here. With a daily on-chain settled ETF government stooges like Gensler would then bleed investor demand away from non-KYC/AML compliant crypto exchanges (of which there are dozens) and put them under the purview of Wall St. brokerages, SEC compliance rules etc. where more crypto investors would pay their capital gains taxes, which I thought is what Treasury Secretary Janet Yellen wants to crack down on so badly?

So, again, why didn’t they do this and why are we instead going to get a critical mass of these corrupt futures-based ones?

I think you know my answer to that.

They need to get as many hooks into bitcoin that they can now to control the price and siphon off retail investor demand while also collecting massive trading fees and trading against their clients’ books.

The same way they do in gold.

Because they have all but admitted at multiple layers of the technocracy that bitcoin has already beaten them.

I’m with Raoul Pal in saying if Gensler was pro-Bitcoin he wouldn’t approve a futures ETF, he’d approve a real one.  As I said already, if there is one commodity on the planet that can handle a day-to-day settled ETF with physical accounting of the float it would be Bitcoin.

And yet they won’t do it.  It is expressly against their goals to encourage investors into Bitcoin in ways that would improve it as a market. Instead they want to add bitcoin to their schemes of suppressing the price and sucking up the supply over time, the same way they have destroyed the oil markets, the gold market and every other damn market these vultures have ever touched.

So, my advice is stay in actual on-chain bitcoin.  You want bitcoin. Buy some frickin’ bitcoin.

Buy the Grayscale closed-end fund, GBTC, if you need to.

Or, do what millions have already done, just learn to take full control over your investments and your portfolio hedges and tell the Genslers of the world to go stuff his shit back up his ass where it belongs.

They are going to tempt you with lower trading fees on their exchanges as opposed to the much higher ones on Coinbase.  It’s being designed this way on purpose.  Here, you can trade bitcoin for free on RobinHood, why pay Coinbase their fee?

Or do yourself a real favor and stop trying to trade bitcoin and listen to the laser-eyes set on Twitter. Just buy the stuff, pull it off the exchanges onto a hardware wallet and ignore all their fancy, financial schemes to separate you from real value.

These things are ultimately just marketing. Bitcoin didn’t need an ETF to scare the living daylights out of Wall St., Davos, the CCP and every other would be Bond Villain out there.

Thanks to Zerohedge for the above chart. This is what you are staring at over time if you buy this over buying bitcoin directly. No different than what happened to a lot of gold holders who tried to outperform the market through the price manipulation on the COMEX over the 2005-11 bull market.

Davos wants private cryptocurrencies banned but failing that they want it as much of it under their control as possible. It’s why the World Economic Forum has ‘approved of’ and is ‘working with’ a list of preferred cryptocurrencies while Gensler and Yellen muck up the market and insert dangerous language into unpassable legislation, e.g. the Build Back Better plan.

The problem for them is that Wall St. wants private crypto because it is one of the ways for them to survive the collapse of the current monetary system, since the traditional banking model is as dead as MySpace. The CFTC settlement with Tether last weekend tells you all you need to know about who’s actually in charge on Capitol Hill… and it ain’t Davos.  

That was a JPMorgan-style slap on the wrist similar to the SDNY’s settlement with Tether in December.  Tether may be a scam or a Ponzi scheme but it’s now another Wall St. approved scam and Ponzi scheme.

But it’s still not approved by Davos.

Gensler is fighting an uphill battle against an avalanche of capital that wants yield in a yield-free world. It’s a global market and everyday with Lightning online, the third world is getting access to first world payment technology. That’s the real battle they are losing.

Jay Powell came out today and reiterated his commitment to ending QE (hint: not a policy mistake) and allowing all that money printed and he’s sterilized over the past six months within the RRP facility to allow the economy to run without any further support.

He has finer control over dollar in/outflow than a Fed chairman ever has and right now, all the right people hate him. Meanwhile everyone on Capitol Hill has COVID-9/11 and January 6th fatigue except the ones holding desperately to the reins of power.

The arguments for sending the country on another spending spree seems dumb when there are help wanted signs everywhere and even that too dumb to be considered a dimbuld, Jen Psaki, is trying to play off their manufactured supply chain crisis with the excuse that people are buying so much stuff.

And we need $4.5 trillion in spending for what again exactly?

How’s that awesome power of the Speaker’s Gavel feel when jammed down your throat, Nance? Mmm… rosewood.

This will put upward pressure on UST yields for a time but worse it will begin a stampede out of European debt as the situation there as I’ve discussed ad nauseum ad infinitum is far worse than anything happening on Capitol Hill. All that has to happen now is for O’Biden to admit defeat and GFTO (which is another good candidate for a Bitcoin ETF ticker symbol, in my opinion) of the way.

We know they won’t, so brace yourselves for the mother of all battles for our monetary future.

And even if Gensler succeeds in taming bitcoin and major private cryptos all he’ll do is drive the economy underground. As Martin Armstrong has been warning us for decades, this is the main way empires collapse, by driving capital underground, deflating asset prices through collapsing money velocity and forcing monetary inflation to offset it.

Sound familiar?

Got Bitcoin? Got Gold? Got Depends?

*  *  *

Join my Patreon if you’ve, “Got this…”

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Tyler Durden
Sun, 10/24/2021 – 09:20











Author: Tyler Durden

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Economics

Edible Oil Prices Hit Record High As Food Inflation Treat Soars 

Edible Oil Prices Hit Record High As Food Inflation Treat Soars 

Prices of edible oils have been rising across the world. Palm oil, the world’s…

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Edible Oil Prices Hit Record High As Food Inflation Treat Soars 

Prices of edible oils have been rising across the world. Palm oil, the world’s most consumed vegetable oil, surged to a new record high, spreading concerns about persistent global food inflation

Malaysia’s palm oil futures soared more than 40% this year, while soybean oil is up more than 50%. Prices of canola oil are also at a record.  

Bloomberg notes the reason for the price surge is “because of the emergence of pent-up demand as economies reopen after COVID, the outlook for more use in renewable fuels as energy prices soar and production problems in major growers.” 

“Palm oil is not only riding on tight supply, which continues to sustain higher prices, but is also getting broader external support from energy markets,” said Sathia Varqa, owner of Palm Oil Analytics in Singapore. 

Production of palm oil in Malaysia has fallen this year because of a foreign worker freeze, exacerbating the country’s labor shortages. The Malaysian Palm Oil Board reported that production in the first nine months of the year was the weakest since 2017. 

“There are no stopping prices from going higher” until policies are implemented that are likely to cool the commodity market, such as higher interest rates,” Varqa said.

This means that the weight of vegetable oils in the UN’s Food and Agriculture Organization’s FAO Food Price Index will continue to pressure global food prices higher. Last month, the index hit a new decade high, which includes a basket of food commodities (such as cereals, vegetable oils, dairy, meat, and sugar). 

Global food prices surging to decades high is no laughing matter but an ominous sign for emerging market economies where households allocate more of their budgets to food. Rising food prices can cause discontent with governments and spark social unrest. SocGen’s Albert Edwards first warned about this right before the pandemic began. 

Tyler Durden
Sun, 10/24/2021 – 08:45




Author: Tyler Durden

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