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Bonds are sending a stark message about the economy – CNN

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

New York (CNN Business)Turmoil in stocks has been grabbing headlines. But warning signs are also flashing in global bond markets, revealing the extent to which investors are on edge about the economy, inflation and what central bankers will do next.

What’s happening: The yield on benchmark 10-year US Treasuries — which moves opposite prices — jumped to 3.36% on Monday, its highest level since 2011.
But the yield on the 2-year Treasury climbed even higher as investors dumped those notes, too. That created an unusual phenomenon known as a “yield curve inversion.”
Breaking it down: Usually, the yield on longer-dated bonds is higher than that on shorter-dated bonds. It’s harder to predict what will happen further into the future, and investors want to be compensated for that extra risk.
However, after the surprise jump in US inflation in May, when prices rose at the fastest rate in 40 years, traders are bracing for dramatic action from the Federal Reserve later this week. That could spell trouble for the economy near-term.
Former Fed Chair Ben Bernanke told CNN’s Fareed Zakaria on Sunday that he thinks Jerome Powell, the current Fed chief, can still bring down inflation without causing a recession.
“Economists are very bad at predicting recessions, but I think the Fed has a decent chance — a reasonable chance — of achieving what Powell calls a ‘soft-ish landing,’ either no recession or a very mild recession to bring inflation down,” Bernanke said.
Bond traders, for their part, seem more skeptical. A yield curve inversion has preceded every single recession since 1955, according to research by the Federal Reserve Bank of San Francisco.
Over in Europe, the bond market is also showing signs of anxiety.
The gap between yields on 10-year German and Italian government bonds was at its widest since March 2020 on Monday, according to Tradeweb. It was the same for 10-year German and Greek bonds before a market holiday in Greece on Monday.
That indicates concern that the European Central Bank — which announced last week that it will raise interest rates in July for the first time in 11 years — could strain EU countries with high debt loads as it hikes borrowing costs. The more they have to pay servicing debt, the less for other purposes.
“It’s definitely a worry,” Andrew Kenningham, chief Europe economist at Capital Economics, told me.
At the end of 2021, Greece had the highest debt-to-GDP ratio in Europe at 193%. Italy was next at 151%.
Europe is in better shape than it was the last time the ECB started raising rates in the run-up to the region’s debt crisis.
Greece’s economy, in particular, has been beating expectations for growth, and it has favorable conditions on its debt that make repayment less of a concern. But that’s not the case in Italy, which will need to refinance its liabilities sooner, and where growth has been dragging.
“Italy has not done enough serious reforms,” said Holger Schmieding, chief economist at Berenberg Bank.
The ECB has said it would step in and resume bond-buying if the situation deteriorates rapidly. Yet exactly when it would intervene isn’t clear, making investors increasingly nervous.
“The ECB can contain the problem if they want to,” Kenningham said. But they haven’t laid out their “pain threshold,” he added.

US stocks finish in a bear market

US stocks finished Monday’s trading session in a bear market, with the S&P 500 (SPX) closing more than 20% below the all-time high it notched in early January.
The latest: Inflation and recession fears had eased somewhat at the end of May, and stocks regained some ground. But Friday’s miserable report on consumer prices caused the mood to deteriorate again as investors fretted about the Fed’s next moves.
That brought an end to the eye-popping rally stocks had experienced since March 23, 2020.
Remember: Stocks had briefly fallen into bear market territory on May 20. Then a late-day rally rescued the market from closing below that level for the first time since the early days of the pandemic.
Now it’s official. The latest bull market lasted just over 21 months — the shortest on record, according to Howard Silverblatt, an analyst at S&P Dow Jones Indices. Over the past century, bull markets have lasted an average of about 60 months.
Still, the most recent iteration was powerful, lifting the S&P 500 to 70 record highs in 2021.
Cryptocurrencies also rode positive sentiment higher last year. Bitcoin touched a record high of almost $68,790 last November.
It’s now in free fall, hitting its lowest level since late 2020 on Monday, and sliding again Tuesday. Two of the world’s biggest crypto platforms restricted activity amid the meltdown, raising concerns about market stability.

Democrats call for a windfall tax on oil profits

Last week, I wrote about how Exxon’s surging profits have lifted its stock to its highest level in years. But it’s not just investors that are paying attention.
Progressive Democrats are also honing in on the good fortune of oil and gas companies as they hunt for ways to show they’re working to address the consequences of rampant inflation.
Calls are growing for Exxon and its peers to give some of their hefty profits back to Americans who are struggling under the weight of higher prices, especially after the Conservative government in the United Kingdom introduced just such a measure last month.
“The oil companies are raking in record profits and yet they are increasing their prices at the pump. To me that just makes no sense,” Robert Reich, who served as Labor Secretary under President Bill Clinton, recently told CNN.
The White House may agree.
“It’s outrageous that oil and gas companies are able to take advantage and make four times the profits that they made when there wasn’t a war,” Bharat Ramamurti, deputy director of the National Economic Council, said last week. He did not rule out support for a windfall profit tax.
Big Oil is pushing back hard. The American Petroleum Institute said in a statement that raising taxes on the industry will discourage investment in new production, which it said is “exactly the opposite of what needs to happen.”
“It’s unfortunate that some policymakers continue to be more focused on scoring political points with tried-and-failed policies rather than advancing solutions that could actually address the factors behind rising prices,” said the industry lobby’s senior vice president of policy, economics and regulatory affairs.

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Rate Shock Slows Global Economy – S&P Global Rankings – Net Newsledger

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6 Ways to Protect Your Money

NEW YORK – BUSINESS – “Things have changed, and not for the better,” says S&P Global Chief Economist Paul Gruenwald. “The main twist has been the about-face in the inflation narrative. With the wisdom of hindsight, we now see that central banks waited too long to raise rates, putting too much weight on supply-side explanations, or putting too much weight on labor market outcomes, or both.”

S & P Global Rankings report, “We have cut our 2022 growth forecasts for most large economies, outlined in a report we published today, “Global Economic Outlook Q3 2022: Rates Shock Puts The Economy On A Slower Path.”

“China has had the biggest downward revision. The country’s economy will likely expand 3.3% this year, a 0.9 percentage point drop from our growth assumption in May. We attribute this low growth to the effects of COVID-lockdowns.

“Economic momentum should protect the U.S. economy from recession in 2022. But the weight of extremely high prices is damaging purchasing power and, as aggressive Federal Reserve policy increases borrowing costs, it’s hard to see the economy walking out of 2023 unscathed.

“We have lowered our GDP growth forecasts modestly for the eurozone economy, largely on heightened inflation expectations”.

This report does not constitute a rating action.

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Trump's Billionaire Neighbor Warns US Economy Is In An “Omnibubble” – Forbes

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Jeff Greene, who made his first fortune shorting subprime mortgages during the Great Recession, sees trouble ahead for real estate and no relief for crypto or tech stocks.

By Giacomo Tognini


During the last major recession from 2007 to 2009, a little-known entrepreneur named Jeff Greene made billions of dollars by buying credit default swaps on subprime mortgage-backed bonds as the housing bubble collapsed.

Now Greene, a Palm Beach-based real estate mogul with an estimated $5.1 billion fortune, thinks the economy is going through another bubble in assets ranging from crypto and SPACs to overvalued tech stocks and real estate. “We’ve been in an omnibubble, there’s no question about it,” Greene, 67, told Forbes in a phone call from his Hamptons estate, something he’s been saying for months now. “If you spend trillions and trillions of dollars in every advanced economy in the world and have coordinated fiscal and monetary stimulus, obviously you’re going to create bubbles and inflation.”

Asked when he thinks a recession will hit, Greene guessed it might come in the first or second quarter of 2023. “Next spring [we’ll] definitely be in a much slower economy,” he said. “If this recession really happens, you’ll have all kinds of people stopping their construction projects and laying people off and [you’ll] start to see unemployment creep up quickly.”

More than a decade ago, Greene made a fortune from the wreckage of the housing market and reinvested some of his profits into apartments and condominiums, eventually building a residential real estate empire concentrated in south Florida and Los Angeles. But despite skyrocketing prices for real estate across the country, Greene thinks the boom will soon turn to bust. “The real estate market is in a bubble,” he said. “We’re way overbuilt and you’re going to see a lot of people have problems with their real estate developments,” he posited, referring to residential real estate.

He also sees a parallel between the subprime mortgage crisis of 2007 and the booming stock market and crypto wave of 2021. “It’s like when I was doing the subprime short [betting that the value of subprime mortgages would fall] and I remember saying, ‘Who’s on the other side of this trade?’ These mortgage-backed securities had almost no possibility of being paid back,” he said.

“It’s the same thing with people saying, ‘Well I have to buy equities because I don’t want to make one percent [return with low interest rates] so I’m going to put my money in something that’s highly inflated,” Greene said. “And they bought crypto, SPAC shares, houses to flip, equities and private equity investments at unprecedented multiples of revenue with no prospect of earnings whatsoever.”

While he still invests in a range of stocks and private equity, he told Forbes he’s now more risk averse than he was a decade ago, with little debt on his real estate projects in Florida and New York, where he recently finished construction on a 30-story residential building in lower Manhattan. He’s also turned down several offers to sell his buildings for cash or invest in highly-valued private companies in early funding rounds. (He won’t say which particular companies have approached him.)

Unlike his successful bets against the housing market in the Great Recession, Greene isn’t shorting anything this time around. Asked what he would do if he was more open to taking risks, he outlined a potential strategy. “If I were more aggressive, because I saw this [bubble] happening, I would have sold more at the top. I would have built a war chest and been sitting here waiting for opportunities [to buy at lower values],” Greene said. “The kinds of deals that people were bringing to me to invest in some of these tech companies, I was getting calls [saying] ‘I can get you into this special round at a billion dollars, the company is doing $40 million in sales.’”

He found those offers to be overpriced: Greene thinks many of those tech companies are bound to run into difficulties as the stock market continues to drop and the economy enters a recession next year. “[I’m] thinking, ‘Who’s doing this?’” he said, referring to investing in startups at sky-high valuations.

“I have friends who are very smart people that were doing this and everybody thought they were going to be the next Zoom. A lot of these companies lose money and now they’re cutting expenses and trying to make it through this period,” he said. “You can be sure that there are companies that are going to be up against the wall. You’ll be able to get into some of these—what I call ‘science projects’ [because] they’re just sort of ideas that are unlikely to become huge—at very favorable terms. And people will make a lot of money, one of them will be the next Google or Amazon. In those spaces, there’ll be opportunities.”

Still there is no doubt that Greene is a beneficiary of the bubble. Greene, who’s lived in Palm Beach since 2009, pointed out the increasing exodus of billionaires and wealthy investors leaving northern states to relocate to south Florida, where property prices have soared since 2020. And it’s not just billionaires who are moving to the Sunshine State: rents in Miami rose nearly 26% on a year-on-year basis in the second quarter of 2022—higher than all major U.S. metro areas—and demand for apartments is near record levels, according to Marcus & Millichap.

“There’s just extraordinary migration to our area, which has put tremendous pressure on [real estate] values,” said Greene, who cited the recent announcement that billionaire Ken Griffin plans to move his hedge fund Citadel from Chicago to Miami as providing yet another boost to the local economy.

The influx of the superrich to Palm Beach has also increased enrollment at the Greene School, a nonprofit pre-K-through-high school in Palm Beach that Greene founded with his wife, Mei Sze, in 2016. There are now 150 students enrolled at the school, up from 123 in the 2019-2020 school year.

“The kinds of families who are moving into our town and putting their kids in our school, it’s like the all-star team,” he said, citing a pre-K class with parents including several Ivy League-educated hedge fund founders. “These are people that will create all kinds of jobs and businesses that are going to juice the Palm Beach county economy. I’m very bullish long-term on the economic growth and the value of my holdings there.”

Greene estimates that he owns “virtually all of the remaining high-rise development sites on the water” in Palm Beach, much of which he acquired after the housing market crash in 2009 when land values were cheap. But even if the property market in south Florida is still booming, Greene sees dark clouds ahead if, as he expects, the economy tips into a recession in early 2023—particularly for real estate investors who are highly leveraged.

Even among fellow billionaires, Greene has seen the impact of recession fears on their high-spending lifestyles. “I was at Hotel du Cap with a bunch of superrich people [two weeks ago], one of the most expensive hotels in the world in Antibes, France, and everybody’s saying ‘Oh my god, I’ve lost 30% of my net worth.’ But they’d already booked the hotel,” he said. “Those days are going to be over this winter. You’re going to start seeing people spending less money and the recession will kick in.”

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Canada's economy grew in April, but May contraction expected – CBC News

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Statistics Canada says real gross domestic product grew 0.3 per cent in April.

The agency says the growth was led by the mining, quarrying and oil and gas extraction sector and client-facing industries.

However, its early estimate for May indicates the economy contracted by 0.2 per cent for the month. The official reading for May is expected on July 29.

“If the May drop holds, it would represent only the second monthly GDP decline in a year (January also fell on Omicron restrictions),” BMO chief economist Doug Porter said in a commentary.

For April, Statistics Canada said the mining, quarrying, and oil and gas extraction sector grew by 3.3 per cent, as oil and gas extraction gained 3.9 per cent.

Oilsands extraction rose 5.6 per cent, the largest monthly increase since September 2020, while oil and gas extraction excluding the oilsands grew 1.6 per cent.

The accommodation and food services sector added 4.6 per cent, as food services and drinking places grew 3.5 per cent to top pre-pandemic levels. Accommodation services rose 7.2 per cent.

The arts, entertainment and recreation sector rose 7.0 per cent, but was still 12 per cent below its February 2020 level.

Real estate slowdown

Porter said the drop in May looks to be due to broad weakness in the goods-producing sectors, even as many beaten-down service sectors likely recovered further.

“Resources, construction and manufacturing all are expected to slip,” he said.

“Another big weight in coming months will be the deepening dive in home sales. Real estate agent activity fell 15 per cent [month over month] in April alone and is now down 25 per cent [year over year] from the blistering levels of a year ago.”

CIBC’s Andrew Grantham said that second-quarter GDP appears to be tracking just below an annualized pace of four per cent, lower than the six per cent rate the Bank of Canada forecast back in April.

“However, other than perhaps a quicker retreat in housing activity, the slower than projected growth appears to be due to supply rather than demand-side factors,” Grantham said. “As a result, it will do little to ease the Bank of Canada’s concerns regarding current inflationary pressures.”

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