🏴󠁧󠁢󠁥󠁮󠁧󠁿 🇪🇸 🇸🇪 Toby on X:

🔶️ 3 kids murdered in England

🔶️ 3 people throat slit in Spain

🔶️ 14 year old girl stabbed to death is Sweden by two migrant girls.

🔶️ All this week.

📎 Toby

🇺🇸🇨🇳🏭 Geopolitical Risk and Decoupling: Evidence from U.S. Export Controls

"The U.S. has imposed export controls to deny China access to strategic technologies [but] we find no evidence of reshoring or friend-shoring. As a result of these disruptions, affected suppliers have negative abnormal stock returns, wiping out $130 billion in market capitalization, and experience a drop in bank lending, profitability, and employment. [U.S. firms'] total number of customers declines, potentially inflicting collateral damage upon the same U.S. firms whose technology export controls are trying to protect."

🔗 New York Federal Reserve

📎📝 Arnaud Betrand:

🔸 Wow, this is huge: the Federal Reserve is essentially saying that the U.S. shot itself in the foot with its export controls on China (which was illustrated by Intel's recent staff layoffs).

🔸 They also highlight that "the benefits of U.S. export controls, namely denying China access to advanced technology, may be limited as a result of Chinese strategic behavior. Indeed, there is evidence that, following U.S. export controls, China has boosted domestic innovation and self-reliance, and increased purchases from non-U.S. firms that produce similar technology to the U.S.-made ones subject to export controls.”

🔸 In other words, it's almost a pure loss for US firms who lose customers, revenue and market capitalization whereas the affected Chinese firms find alternative suppliers and China boosts its domestic innovation and self-reliance.

26-year-old clothing designer Tristan Sartor arrested on federal charges for being in Capitol for 1 minute and 15 seconds on Jan. 6. He committed no acts of violence or vandalism.

You can donate to his legal fund here: GiveSendGo.com/TRSartorLegal

🇮🇪 🇬🇧 Keith Woods on X:

🔶️ "These scenes from Liverpool tonight remind me of Dublin last year.

🔶️ In both cases, there's no central command or leadership figure, just working class natives who feel locked out of the system. Ireland, UK, who next? This may be the decade of White riots."

📎 Keith Woods

The World's Biggest Carry Trade

The BOJ can not afford to hike interest rates, because the government of Japan is engaged in a massive $20 trillion carry trade:

First, recall that the carry trade involves borrowing in one currency cheaply (Japanese yen) and converting that borrowed money into a foreign currency which offers a superior yield.

Excellent papers from the St Louis Fed, IMF, and Deutsche Bank consolidate the Japanese government’s balance sheet to include the central bank (BoJ), state-owned banks (namely, PostBank) and pension funds (namely, GPIF, the world's biggest pension fund).

On the liability side, Japan is primarily funded in low yielding Japanese Government Bonds (JGBs) and even lower-cost bank reserves. The asset side is mostly loans like the Fiscal and Investment Loan Fund (FILF), and foreign assets, primarily via Japan’s largest pension fund (the GPIF).

As the authors of the Fed paper argue, Japan is funding itself at very low real rates imposed by the BoJ on domestic depositors, while earning higher returns on foreign and domestic assets of much higher duration. As that return gap has been expanding, this has created extra spending flexibility for Japan's govt.

At a gross balance sheet value of around 505% GDP, or $20 trillion, the Japanese government's balance sheet is, simply put, one giant carry trade.

Crucially, one third of this funding is now effectively in overnight cash: if the central bank raises rates the government will have to start paying money to all the banks and the carry trade’s profitability will quickly start unwinding.

Consider what would happen if sustained inflation required the BOJ to hike rates: the liability side of the government balance sheet will take a huge hit via higher interest payments on bank reserves and a decline in the value of JGBs. The asset side will suffer via a rise in real rates and an appreciation of the yen that causes losses on net foreign assets and potentially domestic assets too.

This is key to understanding Japan in the coming years.