December 10, 2021: Two Developments and the Q3 2021 Z.1

December 10, 2021: Two Developments and the Q3 2021 Z.1
Doug Noland Posted on December 11, 2021

In such an extraordinary environment, I’ll take note of two of this week’s developments.

China – in an about-face – implemented policy easing measures, cutting reserve requirements and announcing a loosening of property finance. This was to get ahead of an unfolding Evergrande default along with rapidly deteriorating developer financing conditions. Developer bonds rallied modestly, with an index of Chinese high-yield dollar bonds ending the week down 170 bps to 20.1% (back to where they began the month).

There were additional reports of generally mild Omicron symptoms, both from South Africa and the CDC (after studying the initial 43 documented U.S. cases).

Both developments were consequential, though I would caution against over-optimism. Recall the Federal Reserve slashed rates from 5.25% in September 2007 to 2.0% by April 2008. Yet aggressive easing measures likely only worsened the subsequent financial and economic crashes. As for Omicron, there was confirmation this week of the variant’s extraordinary transmissibility – multiples of even the fast-spreading Delta variant.

December 8 – Bloomberg (Kanoko Matsuyama): “The omicron variant of Covid-19 is 4.2 times more transmissible in its early stage than Delta, according to a study by a Japanese scientist who advises the country’s health ministry, a finding likely to confirm fears about the new strain’s contagiousness. Hiroshi Nishiura, a professor of health and environmental sciences at Kyoto University who specializes in mathematical modeling of infectious diseases, analyzed genome data available through November 26 in South Africans in Gauteng province. ‘The omicron variant transmits more, and escapes immunity built naturally and through vaccines more,’ Nishiura said in his findings…”

Reports have Omicron cases doubling every 2.2 days in the UK, with an estimate of 64,000 daily cases by Christmas. And Friday from Bloomberg: “Denmark is seeing the number of people infected with the Omicron variant of Covid-19 double every second day, offering a glimpse of a development that is probably unfolding throughout Europe… Denmark has now recorded more than 1,000 cases of the Omicron variant after a 60% jump in one day.”

Meanwhile in the U.S., average daily Covid cases are back up to 121,000, having surged 38% over two weeks. Cases and hospitalizations are surging in many states, especially in the colder Midwest and Northeast regions. Unfortunately, all indications point to another challenging Covid winter.

While one can debate the longer-term ramifications of this week’s two key developments, they were undoubtedly decisive for speculative Bubble markets. With next Friday the quarterly “quadruple witch” expiration of options and other derivatives, negative developments this week (i.e. severe Omicron symptoms or an Evergrande default spurring market dislocation) could have unleashed a self-feeding downside dislocation exacerbated by derivatives hedging-related sell programs (selling by those on the wrong side of derivatives market protection written).

Instead, mild Omicron symptoms and Beijing intervention spurred a short squeeze, a reversal of hedges, and yet another round of derivatives-related market melt-up dynamics. Even if the Omicron variant spreads crazy fast, the number of cases won’t be much of an issue by next Friday.

After almost reaching 35 the previous Friday, the VIX Index collapsed to end this week at 18.7. The S&P500 surged 3.8% to a new record high. And it’s not only equities markets that are highly unstable. Crude prices surged 8.2% this week, with Gasoline jumping 9.4%. Bitcoin sank another 9%. Italian bank stocks surged 6.6%, recovering after the drubbing from two weeks back. Italian 10-year yields rose five bps this week to 0.96%. Italian bonds traded at 0.85% on November 22, 1.12% on November 24th, 0.92% on November 30th, 1.05% on December 1st, 0.87% on December 6th, and 1.03% on December 8th. Greek yields surged 16 bps this week to the high since June 2020. After sinking 13 bps the previous week, 10-year Treasury yields jumped 14 bps this week to 1.49%. U.S. long-bond yields surged a notable 21 bps this week.

While they rose somewhat this week, U.S. market yields remain absurdly low in the context of highly elevated inflation (November CPI up 6.8% y-o-y!). In a world of fragile Bubbles, I understand the safe haven aspect of Treasury market pricing. But, mainly, the introduction of QE – and inevitably entrapped central bankers – fundamentally distorted U.S. and global bond markets. Liquidity over-abundance, ultra-low yields and central bank backstops unleashed the greatest period of Credit and speculative excess the world has ever experienced.

New Fed Z.1 data this week provide our quarterly snapshot of The Great U.S. Credit Bubble. System Debt (Non-Financial and Financial) ended the quarter at a record $86.218 TN, having expanded $11.3 TN, or 15.1%, over the past seven quarters. At $63.681 TN, Non-Financial Debt (NFD) has surged $9.183 TN, or 16.8%, over the 21 pandemic months. NFD is now up 81% in the less than 13 years since the mortgage finance Bubble collapse.

NFD expanded during Q3 at a seasonally-adjusted and annualized (SAAR) rate of $1.491 TN, the weakest expansion since 2016. The slowdown, however, was the upshot of an anomalous SAAR $327 billion contraction in Federal borrowing (after expanding at a blistering $2.2 TN pace during the first-half), explained by a $637 billion drawdown of the Treasury’s account at the Fed. Meanwhile, Household borrowing remained exceptionally strong, and Corporate debt growth bounced back from a weak Q2.

Treasury Securities contracted nominal $52 billion during the quarter to $24.250 TN, reducing y-o-y growth to $1.350 TN. Over two years, Treasury Securities surged $5.678 TN, or 30.6%. Since 2007, Treasuries have inflated $18.199 TN, or 301%. Treasury Securities ended September at 105% of GDP, up from 41% to conclude 2007.

Agency Securities expanded another $128 billion during the quarter to a record $10.536 TN. This pushed one-year growth to $670 billion (2-yr $1.193 TN), the strongest GSE expansion since 2008. At a record $34.786 TN, combined Treasury and Agency Securities ended the quarter at 150% of GDP (up from 2007’s 92%).

Total Household Borrowings surpassed SAAR $1.0 TN for the fourth straight quarter ($1.068 TN). For perspective, Household Borrowings averaged $290 billion annually for the decade 2010 to 2019, with the annual record $1.290 TN posted at the height of mortgage finance Bubble excess in 2006.

For Q3, Total Mortgage Debt expanded nominal $328 billion, or 7.6% annualized, the strongest growth since Q3 2006. This boosted the one-year expansion to $1.047 TN (6.3%), the largest gain since 2007. Home Mortgages expanded $246 billion, or 8.2% annualized – also the strongest since 2006. One-year growth increased to $767 billion (6.7%), the strongest since 2007. Commercial Mortgages gained $53 billion (6.8% annualized), the biggest increase since Q4 2007.

Corporate Bonds expanded $223 billion during Q3, the largest expansion since Q4 2020’s $217 billion. One-year growth increased to $700 billion. For perspective, annual growth in Corporate Bonds averaged $341 billion during the decade 2010-2019.

The expansion of Federal Reserve Assets slowed from Q2’s nominal $489 billion to $343 billion – ending the quarter at a record $8.600 TN. The Fed’s balance sheet inflated $1.198 TN (16.2%) over one year and $4.591 TN (115%) over nine quarters. Since mid-2008, Fed Assets have inflated $7.650 TN, or 804%.

It’s worth noting that the Fed’s “repo” Liability jumped another $644 billion ($1.553 TN in 2 quarters) to a record $1.905 TN. Meanwhile, the Fed’s “Due to federal government” Liability fell another $637 billion during the quarter to $215 billion, with a nine-month drop of $1.513 TN. The Treasury’s drawdown of balances at the Fed explains the recent transitory decline in Treasury borrowings. Treasury issuance will be ramping back up.

The great Financial Sector ballooning runs unabated. The Domestic Financial Sector expanded $1.409 TN during the quarter to a record $130.6 TN. The Financial Sector inflated $13.464 TN over the past year (11.5%) and $25.342 TN over eight quarters (24.1%). For comparison, annual Financial Sector expansion averaged $3.715 TN during the decade 2010 to 2019. The Financial Sector ended Q3 at 563% of GDP. This compares to previous cycle peaks 494% (Q3 ’07) and 397% (Q1 2000). The Financial Sector ended the eighties at 265% of GDP.

Bank (“Private Depository Institutions”) Assets expanded another $728 billion (11.9% annualized) during Q3 to a record $25.115 TN. This pushed one-year growth to $2.213 TN, or 9.7%. This is down from 2020’s unprecedented $3.392 TN – but compares to an annual average $653 billion expansion during the decade 2010-2019. The Asset “Reserves at Federal Reserve” expanded another $348 billion to a record $3.859 TN. This pushed seven quarter growth to $2.310 TN, or 149%.

Bank Loans expanded $114 billion (3.8% annualized) during Q3 to $12.184 TN, the strongest expansion in 18 months. Loans increased $24 billion, or 0.2%, y-o-y. Within Loans, Mortgages jumped $90 billion during Q3 (to a record $5.842 TN), the strongest expansion since Q2 2016. Consumer Credit rose $54 billion (9.7% annualized) to $2.267 TN.

While Banks struggle in such a highly competitive (thoroughly saturated) lending marketplace, the securities business is booming. Bank holdings of Debt Securities jumped $253 billion (15.7% annualized) during the quarter to a record $6.700 TN. This pushed one-year growth to $1.183 TN, or 21.5%. Treasury holdings rose $110 billon for the quarter to a record $1.456 TN, with one-year expansion of $269 billion (22.6%).

Bank Agency/MBS Securities holdings gained $109 billion (11.7% annualized) to a record $3.836 TN, with stunning one-year growth of $740 billion, or 23.9%. Over the past seven quarters, Total Debt Securities holdings surged $2.052 TN, or 44.2%. Treasury holdings have jumped $576 billion (65.6%); Agency/MBS holdings $1.202 TN (45.6%); and Corporate Bonds $205 billion (31.3%) during 21 pandemic months. For perspective, Bank Debt Securities holdings on average increased $167 billion annually during the 2010-2019 period.

When the Fed creates “money” to settle its QE securities purchases, these Federal Reserve electronic funds flow through the banking system (more recently some bypass the banking system and flow directly to the Fed’s “reverse repo” program). These flows into the banks create new Deposit Liabilities – and for the most part are used to purchase securities. Total (Checking and Savings) Deposits jumped another $474 billion during the quarter to a record $20.412 TN. As a key manifestation of one of history’s great monetary inflations, banking system Total Deposits surged $2.187 TN over the past year and $4.878 TN, or 31.4%, over the past seven quarters.

Securities Broker/Dealer Assets expanded $103 billion (9.6% annualized) during the quarter to a record $4.392 TN. This pushed one-year growth to $368 billion, or 9.1%. While the Asset “Loans (other loans and advances)” declined $23 billion during Q3, it nonetheless jumped $189 billion, or 42.8%, over the past year. Broker Loans were up an unprecedented $256 billion, or 69%, during the past seven quarters. Miscellaneous Assets jumped another $88 billion (23.4% annualized) during the quarter to a record $1.592 TN – mostly from the category “Receivables due from other brokers and dealers.” Over seven quarters, Miscellaneous Assets surged $462 billion, or 40.9%.

Lack of Treasury issuance held growth in Total Debt Securities to a seven-quarter low $294 billion. Over the past year, Total Debt Securities rose $2.913 TN, or 5.6%, to a record $54.816 TN. Total Debt Securities-to-GDP slipped to 236%. This compares to 201% to end 2007, 158% to end the nineties, and 124% to conclude the eighties. Total Equities were down somewhat ($300bn) during the quarter, though they surged $18.381 TN, or 32.5%, over the past year. At 323%, Total Equities-to-GDP compares to previous cycle peaks 188% (Q3 ‘07) and 210% (Q1 2000). Total (Debt and Equities) Securities were little changed during the quarter at $129.8 TN, or 560% of GDP. This compares to previous cycle peaks 387% (Q3 ’07) and 368% (Q1 2000).

As a centerpiece of the Great Bubble, the Household balance sheet has inflated right along with government Credit (Fed and Treasury) and the securities markets. Household Assets inflated $2.667 TN during Q3 to a record $162.678 TN. Household Assets expanded $22.926 TN, or 16.4%, over the past year, and an incredible $35.592 TN, or 27.9%, over 18 months.

Household Real Estate gained $1.440 TN (14.6% annualized) during Q3, with record one-year growth of $5.254 TN (14.7%). For perspective, Real Estate on average increased $1.246 TN annually over the decade 2010 to 2019. Household Real Estate as a percentage of GDP rose to 176%, the high since Q3 2007.

Household holdings of Financial Assets increased $928 billion during the quarter to a record $114.1 TN. Financial Asset holdings jumped $16.637 TN, or 17.1%, over the past year, with 18-month growth of $27.537 TN, or 30.4%. Household Financial Assets-to-GDP ended September at 492%. This compares to a Q1 2009 trough 325%, as well as previous cycle peaks 374% (Q3 ’07) and 354% (Q1 2000). Little changed for the quarter, Household Total (Equities and Mutual Funds) Equities holdings were up $10.412 TN over the past year (32.3%). Total Equities-to-GDP slipped from Q2’s record to 184% – but compares to previous peaks 104% (Q1 ’07) and 115% (Q1 2000).

Household Liabilities increased $305 billion during the quarter to a record $17.969 TN. One-year growth of $1.127 TN was the strongest since peak mortgage finance Bubble year 2006. Household Net Worth (Assets less Liabilities) – a key Bubble manifestation – jumped another $2.362 TN during the quarter to a record $144.709 TN. Net Worth inflated a staggering $21.799 TN (17.7%) over one year and $34.124 TN (30.9%) over 18 months. Net Worth ended September at 624% of GDP (slightly below Q2’s record 626%). This compares to previous cycle peaks 491% (Q1 ‘07) and 445% (Q1 2000).

Review the incredible growth in the Federal Reserve’s balance sheet, Treasury and Agency Debt, the Financial Sector, Bank Assets/Liabilities, Total Debt Securities, Total Securities and Household Net Worth – and surging spending and inflation are not difficult to comprehend. We have an interesting Fed meeting coming next week. If the market rally holds through Wednesday, it will be difficult for the Fed not to upsize taper and talk “hawkish pivot.” Meanwhile, the type of volatility experienced throughout global markets is stealthily at work impairing liquidity. Especially as the Fed and others begin winding down QE programs, the liquidity backdrop ensures acute vulnerability to “risk off” de-risking/deleveraging episodes.

For the Week:

The S&P500 jumped 3.8% (up 25.5% y-t-d), and the Dow surged 4.0% (up 17.5%). The Utilities rose 2.5% (up 10.3%). The Banks gained 2.2% (up 36.2%), and the Broker/Dealers added 1.9% (up 26.6%). The Transports advanced 2.7% (up 31.2%). The S&P 400 Midcaps jumped 2.9% (up 20.5%), and the small cap Russell 2000 rose 2.4% (up 12.0%). The Nasdaq100 surged 3.9% (up 26.7%). The Semiconductors rose 2.9% (up 40.0%). The Biotechs increased 0.6% (down 8.4%). With bullion little changed, the HUI gold index fell 1.6% (down 19.2%).

Three-month Treasury bill rates ended the week at 0.0475%. Two-year government yields gained seven bps to 0.66% (up 53bps y-t-d). Five-year T-note yields rose 12 bps to 1.25% (up 89bps). Ten-year Treasury yields jumped 14 bps to 1.49% (up 57bps). Long bond yields surged 21 bps to 1.88% (up 23bps). Benchmark Fannie Mae MBS yields gained eight bps to 2.07% (up 73bps).

Greek 10-year yields surged 16 bps to 1.36% (up 74bps y-t-d). Ten-year Portuguese yields gained three bps to 0.31% (up 28bps). Italian 10-year yields rose five bps to 0.96% (up 42bps). Spain’s 10-year yields added a basis point to 0.36% (up 31bps). German bund yields gained four bps to negative 0.35% (up 22bps). French yields increased three bps to zero (up 34bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields slipped a basis point to 0.74% (up 54bps). U.K.’s FTSE equities index jumped 2.4% (up 12.9% y-t-d).

Japan’s Nikkei Equities Index gained 1.5% (up 3.6% y-t-d). Japanese 10-year “JGB” yields were little changed at 0.06% (up 4bps y-t-d). France’s CAC40 rallied 3.3% (up 25.9%). The German DAX equities index rose 3.0% (up 13.9%). Spain’s IBEX 35 equities index increased 1.4% (up 3.5%). Italy’s FTSE MIB index rallied 3.0% (up 20.2%). EM equities were mostly higher. Brazil’s Bovespa index advanced 2.6% (down 9.5%), and Mexico’s Bolsa gained 1.2% (up 16.2%). South Korea’s Kospi index increased 1.4% (up 4.8%). India’s Sensex equities index gained 1.9% (up 23.1%). China’s Shanghai Exchange rallied 1.6% (up 5.6%). Turkey’s Borsa Istanbul National 100 index surged 6.5% (up 37.8%). Russia’s MICEX equities index sank 3.9% (up 14.3%).

Investment-grade bond funds saw outflows of $1.355 billion, while junk bond funds posted inflows of $1.259 billion (from Lipper).

Federal Reserve Credit last week expanded $11.3bn to $8.622 TN. Over the past 117 weeks, Fed Credit expanded $4.895 TN, or 131%. Fed Credit inflated $5.811 Trillion, or 207%, over the past 474 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week fell $12.8bn to a one-year low $3.446 TN. “Custody holdings” were down $38bn, or 1.1%, y-o-y.

Total money market fund assets rose $14.7bn to $4.636 TN. Total money funds increased $293bn y-o-y, or 6.7%.

Total Commercial Paper declined $5.4bn to $1.089 TN. CP was up $99bn, or 10.0%, year-over-year.

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.10% (up 39bps y-o-y). Fifteen-year rates declined one basis point bps to 2.38% (up 12bps). Five-year hybrid ARM rates fell four bps to 2.45% (down 34bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up three bps to 3.25% (up 34bps).

Currency Watch:

December 9 – Bloomberg: “China’s central bank has signaled a limit to its tolerance for the yuan’s recent advance by setting its reference rate at a weaker-than-expected level. The gap between the daily fixing set by the People’s Bank of China and the forecast in a Bloomberg survey of analysts and traders was the largest since mid-October… Thursday’s move illustrates Beijing’s wariness of rapid gains in the exchange rate given traders can unwind their long positions just as quickly.”

December 9 – Bloomberg (Sofia Horta e Costa): “Already fighting economic fires on a number of fronts, China is rushing to clamp down on speculation in its strengthening currency before it gets out of control. In the midst of managing a property slowdown and two of the country’s largest-ever corporate debt restructurings, the last thing Beijing needs is a rapidly appreciating yuan. China’s central bank attempted to ward that off this week, first forcing banks to hold more foreign currencies in reserve, then setting the daily reference rate far weaker than estimates. It may need to do more.”

For the week, the U.S. Dollar Index was little changed at 96.05 (up 6.8% y-t-d). For the week on the upside, the Norwegian krone increased 2.6%, the Australian dollar 2.4%, the Mexican peso 1.9%, the Swedish krona 1.0%, the Canadian dollar 1.0%, the Brazilian real 0.8%, the New Zealand dollar 0.7%, the South African rand 0.7%, the Singapore dollar 0.7% and the British pound 0.3%. For the week on the downside, the Japanese yen declined 0.6%, the Swiss franc 0.5%, and the South Korean won 0.1%. The Chinese renminbi increased 0.1% versus the dollar (up 2.47% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index recovered 1.2% (up 24.1% y-t-d). Spot Gold was unchanged at $1,783 (down 6.1%). Silver fell 1.5% to $22.20 (down 15.9%). WTI crude rallied $5.41 to $71.67 (up 48%). Gasoline surged 9.4% (up 52%), while Natural Gas fell another 5.0% (up 55%). Copper increased 0.5% (up 22%). Wheat dropped 2.3% (up 23%), while Corn gained 1.0% (up 22%). Bitcoin sank $4,908, or 9.4%, this week to $47,497 (up 63%).

Coronavirus Watch:

December 8 – Reuters (Ludwig Burger and Michael Erman): “BioNTech and Pfizer said… a three-shot course of their COVID-19 vaccine was able to neutralise the new Omicron variant in a laboratory test and they could deliver an upgraded vaccine in March 2022 if needed. The German and U.S. companies said two doses of their vaccine resulted in significantly lower neutralising antibodies but a third dose boosted those antibodies by a factor of 25. ‘The first line of defence, with two doses of vaccination, might be compromised and three doses of vaccination are required to restore protection,’ BioNTech Chief Medical Officer Ozlem Tuereci said… The companies suggested that two doses may still protect against severe disease.”

December 8 – Bloomberg (Antony Sguazzin): “South African excess deaths, a measure of mortality above a historical average, almost doubled in the week ending Nov. 28 from the preceding seven-day period as a new coronavirus variant spread across the country. During the period 2,076 more people died than would normally be expected, the South African Medical Research Council said… That compares with 1,091 the week earlier. The rise, while only reflecting a week of data, contrasts with hospitalization numbers that show that most admissions have mild forms of the coronavirus…”

December 6 – Associated Press (Laura Ungar and Andrew Meldrum): “As the omicron coronavirus variant spreads in southern Africa and pops up in countries all around the world, scientists are anxiously watching a battle play out that could determine the future of the pandemic. Can the latest competitor to the world-dominating delta overthrow it? Some scientists, poring over data from South Africa and the United Kingdom, suggest omicron could emerge the victor. ‘It’s still early days, but increasingly, data is starting to trickle in, suggesting that omicron is likely to outcompete delta in many, if not all, places,’ said Dr. Jacob Lemieux, who monitors variants for a research collaboration led by Harvard Medical School. But others said Monday it’s too soon to know how likely it is that omicron will spread more efficiently than delta, or, if it does, how fast it might take over.”

December 8 – Bloomberg: “South African excess deaths, a measure of mortality above a historical average, almost doubled in the week ending Nov. 28 from the preceding seven-day period as a new coronavirus variant spread across the country. During the period 2,076 more people died than would normally be expected, the South African Medical Research Council said. That compares with 1,091 the week earlier. The rise, while reflecting only a week of data, contrasts with hospitalization data…”

December 7 – CNBC (Spencer Kimball): “South African scientists say the Covid omicron variant significantly reduces antibody protection generated by Pfizer and BioNTech’s vaccine, although people who have recovered from the virus and received a booster shot will likely have more protection from severe disease, according to a small preliminary study… Prof. Alex Sigal with the Africa Health Research Institute and a team of scientists tested blood samples of 12 people who had previously been vaccinated with the Pfizer/BioNTech vaccine. They were looking specifically at how well antibodies generated by the vaccine can neutralize the new variant — meaning block its ability to infect cells. They found a 41-fold drop in the ability of the antibodies to neutralize the omicron variant compared with the original virus, a dramatic reduction from its performance against the original ancestral strain as well as other variants…”

December 7 – Financial Times (Donato Paolo Mancini and Oliver Barnes): “An offshoot of the Omicron coronavirus variant could be more difficult to distinguish from other strains with routine PCR tests, making it harder to track the global spread of the heavily mutated virus. On account of a genetic quirk, Omicron, first identified in southern Africa, can be identified by a certain type of PCR test because it does not possess one of the three coronavirus gene targets — the S gene… But an offshoot of Omicron identified in at least seven sequenced cases across South Africa, Australia and Canada no longer possesses this characteristic, meaning full genome sequencing is required to detect it. Researchers have classified the earliest identified form of Omicron as BA.1, while the offshoot has been labelled BA.2.”

Market Mania Watch:

December 6 – Financial Times (Paul Singer): “Despite recent jitters over the Omicron variant, global stock market prices remain at or near their highest valuations in history. Bond prices reflect the lowest interest rates in history. And is it any surprise that inflation has broken out of the boundaries of the last 20 years, given the stated goal of policymakers to create more of it? Across the market landscape, risks are building, many of them hidden from view. Yet, in a surprising twist, a growing number of the largest investors in the world — including socially important institutions such as pension funds, university endowments, charitable foundations and the like — are currently lining up to take on more risk, which could have catastrophic implications for these investors, their clients’ capital and the stability of broader public markets. What is driving this behaviour? In the main, it is driven by the radically expansionary monetary and fiscal policies undertaken by developed-world governments since the end of the global financial crisis, which were accelerated after the Covid-19 pandemic rattled markets and depressed economic activity last year.”

December 8 – Bloomberg (Nikos Chrysoloras): “The real earnings yield on U.S. stocks hasn’t been so low since Harry Truman was president and the Cold War was just starting, according to Bank of America Corp. strategists. The S&P 500 Index currently has a real earnings yield of -2.9%, meaning that without continued growth in company results, investors would lose 2.9% when adjusted for inflation, the strategists led by Savita Subramanian wrote… ‘Last time the real earnings yield was this negative was 1947.’”

December 6 – Wall Street Journal (Alexander Osipovich): “Nasdaq Inc. is poised to beat the New York Stock Exchange in initial public offerings this year, far outpacing its crosstown rival during a record year for capital raised in U.S. public markets. IPOs at Nasdaq have raised $191 billion this year through Friday, compared with $109 billion for new listings at the NYSE, according to Dealogic. Nasdaq’s commanding lead with only a few weeks left in 2021 means it is likely to beat the Big Board for the third year in a row.”

December 6 – Reuters (Alun John, Tom Wilson and Gertrude Chavez-dreyfuss): “Bitcoin dropped by almost 5% on Monday as the start of the week offered little respite to the world’s largest cryptocurrency after a bruising weekend when, at one point, it lost over a fifth of its value. The rout sent bitcoin’s price and the amount invested in bitcoin futures back to where they were in early October, before a massive price surge that sent the token to an all-time high of $69,000 on Nov. 10. Since that record peak, bitcoin has plunged 32%.”

December 6 – Bloomberg (Vildana Hajric): “Interest and demand in Bitcoin rose a lot in 2021 despite the digital asset’s turbulence. More than half of current investors got in over the last 12 months, according to crypto-firm Grayscale Investments LLC. In a survey of 1,000 people, about a quarter said they already owned Bitcoin and of that 55% said they started investing this year. The results underscore the explosive growth cryptocurrencies have seen this year as investors plowed money toward the volatile asset class amid growing popularity of even ancillary products, like non-fungible tokens (NFTs).”

December 7 – Bloomberg (Lu Wang): “As U.S. stocks suffered one of this year’s worst declines last week, one big ally of this bull market stepped up its buying at a furious pace. Corporate America bought back $3.4 billion worth of its own stock, twice the level from the previous week and reaching the highest measure since March, according to… Bank of America… While wealthy individuals and institutional investors also bought the dip, buybacks from companies accounted for almost half the total purchases by the bank’s clients.”

Market Instability Watch:

December 6 – Bloomberg (Alice Gledhill): “Regulators should bolster lines of defense for open-ended bond funds to cut systemic risk in periods of market turmoil, according to a report by the Bank for International Settlements. As the coronavirus roiled markets last year, bond funds dumped assets in droves to keep up with investor redemptions, exacerbating already-poor liquidity and pricing pressure. Conditions were tense until authorities moved to backstop bond markets, raising questions over the efficacy of existing safeguards, said BIS… ‘This episode has sparked a discussion about bond OEFs’ resilience, the comprehensiveness of their liquidity management tools, especially in times of stress, and the tools’ adequacy for financial stability more broadly,’ economists Stijn Claessens and Ulf Lewrick wrote…”

Inflation Watch:

December 7 – Wall Street Journal (Paul Kiernan): “The flood of everyday Americans into options trading has drawn a skeptical eye from U.S. regulators, who are considering possible rule changes for the era of smartphone brokerage apps. Around 39 million options contracts have changed hands on an average day this year, up 35% from last year and the highest level ever… Retail traders recently made up around one-quarter of all options activity. Gaining approval to buy and sell options through some brokerages, such as Robinhood Markets Inc., is significantly easier than at others. Such discrepancies, combined with the recent trading surge, has left U.S. regulators questioning whether the rules governing individual investors’ access to the options market need to be revised.”

December 9 – Wall Street Journal (J.J. McCorvey and Julia Carpenter): “Rising inflation is hitting the wallets of many Americans. The cost of rent is where some are feeling it most. Over the past year, the median cost of rent has risen by nearly 20% in a handful of areas including Phoenix, Tampa, Fla., and Boise, Idaho, according to… the Urban Institute. The average rent for a one-bedroom apartment in Sarasota, Fla., for example, was recently at $2,004 a month—a 40% increase compared with the previous year, according to… Zumper. Many factors are driving the rent surge including a short supply of housing inventory.”

December 7 – Reuters (Matt Scuffham): “U.S. bank executives… raised concerns about the impact of a sustained period of higher inflation, adding to pressure on the Federal Reserve to accelerate plans to slow down the pace of its asset purchases. Wells Fargo Chief Executive Charlie Scharf said at a conference that the Fed may need to move more quickly to address inflation concerns. Goldman Sachs Chief Executive David Solomon said he anticipated a period of higher inflation. The International Monetary Fund last week warned of intensifying inflationary pressures, especially in the United States, and said U.S. central bankers should focus more on inflation risks. ‘There’s a case to be made that they (the Federal Reserve) should be moving faster than they’ve been moving,’ said Scharf…”

December 7 – CNBC (Jeff Cox): “Labor productivity fell at the fastest rate in more than 60 years in the third quarter… A measure of output versus energy, nonfarm business sector productivity declined 5.2% from the previous three-month period, worse than the Dow Jones estimate for a drop of 5%, and the worst since the second quarter of 1960. The slide happened as output increased 1.8% while hours worked rose 7.4%. On a year-over-year basis, productivity fell 0.6%, which itself was the biggest decline since the second quarter of 1993. Unit labor costs, or the measure of how much businesses pay their per unit of input, rose 9.6% from the second quarter, which reflected a 3.9% increase in compensation combined with the decline in productivity.”

Biden Administration Watch:

December 8 – Reuters (Andrea Shalal, Steve Holland and Andrew Osborn): “President Joe Biden warned Russian President Vladimir Putin… that the West would impose ‘strong economic and other measures’ on Russia if it invades Ukraine, while Putin demanded guarantees that NATO would not expand farther eastward. The two leaders held two hours of virtual talks on Ukraine and other disputes in a video call about U.S.-Russian relations, which have sunk to their lowest point since the end of the Cold War more than three decades ago, as Russia masses tens of thousands of troops on Ukraine’s border. Putin responded to the warning with a demand for reliable, legally binding guarantees against NATO expansion eastward and complained about NATO attempts to ‘develop’ Ukrainian territory, the Kremlin said.”

December 6 – Wall Street Journal (Gerald F. Seib): “In Washington, President Biden this week convenes a summit of the world’s democracies. But the real drama for the democratic world is unfolding elsewhere around the globe. Three potential crises are proceeding in tandem: a potential Russian invasion of Ukraine, continuing Chinese pressure on Taiwan and the potential collapse of Iran nuclear talks. Any one of these standoffs has the potential to shake the world order and produce wider conflict. Taken together, they signal that the U.S. and its allies are at a dangerous moment—perhaps more dangerous than many Americans realize. The challenge for President Biden and the democratic leaders he’ll be consulting with this week is to find a way to show firmness on each front without provoking a crisis.”

Federal Reserve Watch:

December 8 – Bloomberg (Bill Dudley): “The U.S. Federal Reserve has bitten the bullet: At their policy-making meeting next week, in recognition of persistent high inflation, officials will announce a speedier tapering of asset purchases that have been supporting economic growth. The aim is now to complete the program in time to be able to start raising short-term interest rates as soon as March should that prove necessary. But the taper isn’t all that will be on the agenda at next week’s meeting. Fed officials are also likely to signal a faster and larger tightening of monetary policy over the next three years — to an extent that markets haven’t yet anticipated.”

December 7 – Financial Times (Colby Smith, Christine Zhang and Caitlin Gilbert): “The Federal Reserve will end its bond-buying programme by the end of March and raise US interest rates soon after, according to a poll of leading academic economists for the Financial Times. The latest survey… marks an abrupt shift in the economists’ expectations at a time of surging inflation and tumbling unemployment. Their responses underscore how swiftly the economic situation in the US has evolved over just a handful of months, as well as the pivot under way at the US central bank as it quickly unwinds its pandemic-era support to focus on fighting soaring prices.”

December 7 – New York Times (Jeanna Smialek): “The Omicron variant of the coronavirus comes at a challenging moment for the Federal Reserve, as officials try to pivot from containing the pandemic’s economic fallout toward addressing worryingly persistent inflation. The central bank has spent the past two years trying to support a still-incomplete labor market recovery… But now that inflation has shot higher, and as price gains increasingly threaten to remain too quick for comfort, its policymakers are having to balance their efforts to support the economy with the need to keep price trends from leaping out of control. That newfound focus on inflation may limit the central bank’s ability to cushion any blow Omicron might deal to America’s growth and the labor market.”

U.S. Bubble Watch:

December 10 – CNBC (Jeff Cox): “Inflation accelerated at its fastest pace since 1982 in November…, putting pressure on the economic recovery and raising the stakes for the Federal Reserve. The consumer price index, which measures the cost of a wide-ranging basket of goods and services, rose 0.8% for the month, good for a 6.8% pace on a year over year basis and the fastest rate since June 1982. Excluding food and energy prices, so-called core CPI was up 0.5% for the month and 4.9% from a year ago, which itself was the sharpest pickup since mid-1991.”

December 9 – Associated Press (Paul Wiseman): “The number of Americans applying for unemployment benefits plunged last week to the lowest level in 52 years, more evidence that the U.S. job market is recovering from last year’s coronavirus recession. Unemployment claims dropped by 43,000 to 184,000 last week, the lowest since September 1969… The four-week moving average, which smooths out week-to-week ups and downs, fell below 219,000, lowest since the pandemic hit the United States hard in March 2020.”

December 8 – Reuters (Lucia Mutikani): “U.S. job openings surged in October while hiring decreased, suggesting a worsening worker shortage, which could hamper employment growth and the overall economy. The Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS report…, also showed a steady decline in layoffs, another sign that the jobs market was tightening. While the number of people voluntarily quitting their jobs fell, it remained quite high… Job openings, a measure of labor demand, increased by 431,000 to 11.0 million on the last day of October. This was the second-highest on record.”

December 7 – Associated Press: “The U.S. trade deficit narrowed to $67.1 billion in October, the lowest in six months, after hitting a record high in September. A big rebound in exports helped to offset a much smaller rise in imports… It was the smallest monthly deficit since a $66.2 billion imbalance in April. The strong rebound in exports is seen by economists as evidence of global supply chains beginning to untangle, and they believe smaller deficits this quarter could give a solid boost to overall U.S. economic growth.”

December 10 – Bloomberg (Jordan Yadoo): “U.S. consumer sentiment rose in early December by more than forecast on an improved economic outlook, though inflation concerns continue to weigh on households. The University of Michigan’s preliminary sentiment index increased to 70.4 from a decade-low 67.4 in November… Consumers expect inflation to rise 4.9% over the next year, matching last month’s reading, which was the highest since 2008…”

December 7 – Wall Street Journal (Thomas Gryta): “The supply-chain problems rippling across the U.S. economy are improving for some companies, but long-term fixes might take much longer, the heads of Intel Corp., Wayfair Inc. and Accenture said… ‘The bottom was this past summer, but it’s recovering slowly,’ said Niraj Shah, chief executive officer and co-founder of online retailer Wayfair. Chip giant Intel, which has been at the center of the global semiconductor shortage, expects supply-chain issues to last through 2023, partly because it takes three years to build a new factory, CEO Patrick Gelsinger said.”

December 8 – Bloomberg (Nancy Cook, Janet Lorin and Laura Davison): “For Americans worried about rising prices and shrinking household budgets, January could bring another blow to the bottom line. At the end of the month, the government’s temporary moratorium on federal student loan payments expires, meaning loans will once again accrue interest and borrowers will be expected to resume monthly payments. And barring congressional action, on Jan. 15 many American families will lose monthly payments from the government totaling hundreds of dollars, gained from a temporary expansion of the child tax credit under President Joe Biden’s pandemic relief law. The looming cutoff of two sources of significant federal pandemic aid to U.S. families threatens to add to Americans’ pessimism about the state of the economy…”

December 9 – Wall Street Journal (Tripp Mickle and Theo Francis): “Company founders and leaders are unloading their stock at historic levels, with some selling shares in their businesses for the first time in years, amid soaring market valuations and ahead of possible changes in U.S. and some state tax laws. So far this year, 48 top executives have collected more than $200 million each from stock sales, nearly four times the average number of insiders from 2016 through 2020…”

December 8 – CNBC (Annie Palmer): “Robotic vacuum cleaners couldn’t be summoned. Whole Foods orders were suddenly canceled. Parts of Amazon’s mammoth retail operation slowed to a standstill. Amazon Web Services, the leading provider of cloud infrastructure technology for businesses large and small, was hit with a historic, hourslong outage on Tuesday. Popular websites and heavily used services were knocked offline, angering users and underscoring the severity of problems that can arise from having so much economic activity reliant on technology from just a few vendors. AWS controlled 33% of the global cloud infrastructure market in the second quarter, according to Synergy Research Group, followed by Microsoft at 20% and Google at 10%.”

Fixed-Income Bubble Watch:

December 7 – Wall Street Journal (Matt Wirz): “Want to know how a jump in interest rates next year could hit markets in unexpected ways? Look at the recent selloff in junk bonds. The downturn began in early November when new inflation data stoked fears of interest-rate increases, then accelerated when the Omicron coronavirus variant shook stock markets. While prices of the below-investment-grade corporate bonds stabilized last week, investors continued to pull cash from funds that buy the debt. Investors pulled about $6 billion from high-yield mutual and exchange-traded funds in the two weeks ended Dec. 1, the biggest such outflow since the coronavirus surge of September 2020…”

December 7 – Yahoo Finance (Brian Cheung): “Corporations are rushing to issue more debt amid the Federal Reserve’s messaging that it may move quicker to tighten the spigot on its easy money policies. Despite the emergence of the Omicron variant, Fed Chairman Jerome Powell and a chorus of other Fed officials recently signaled they were likely to support a faster wind-down in the Fed’s asset purchase program. If the Fed can fully end the so-called quantitative easing program early next year, the central bank would have the flexibility to start raising interest rates earlier than the timeline previously set in early November.”

December 8 – Bloomberg (Olivia Raimonde): “It sounds scary: three leveraged loan deals just got yanked in the U.S., the biggest hiccup since things went haywire early in the pandemic. Yet it doesn’t appear to be a harbinger of major trouble and the withdrawals don’t seem to reflect broad market weakness. Taco Bell franchise operator Luihn VantEdge Partners LLC pulled a loan sale this week. Marketing company CM Group Inc. and American Physician Partners LLC… did the same last week. All of them were trying, in part, to fund acquisitions. No month has seen that many deals postponed since March 2020, when 10 transactions valued at $14.3 billion were canceled…”

China Watch:

December 8 – Wall Street Journal (Lingling Wei): “The People’s Bank of China has never been politically independent like a Western central bank, but it has nonetheless enjoyed a special status in the nation’s economic hierarchy. Now, President Xi Jinping’s shake-up of China’s financial sector is stripping that away. Earlier this week, pressured by senior leaders worried about plunging economic growth, the PBOC said it would ease banks’ reserve requirements… The move went against policy signals it had sent weeks earlier and came as the central bank and other financial institutions came under scrutiny by Beijing, part of Mr. Xi’s effort to curb capitalist forces in the economy… Though it needs approval from the top bodies of government before it makes big decisions such as those about interest rates, the PBOC has worked for years to establish credibility among investors, at home and abroad… In recent weeks, Communist Party discipline inspectors from China’s top anticorruption agency have visited the central bank’s headquarters… Officials briefed on the matter said the inspectors asked questions, reviewed documents and brought an unusually stern message: Beijing has little tolerance for any talk of central-bank independence; the monetary authority, just like any other part of the government, answers to the party.”

December 6 – Associated Press (Joe McDonald): “China’s central bank expanded the supply of money for lending Monday as Beijing tried to reassure its public and investors the economy can be protected if a troubled real estate developer’s $310 billion mountain of debt collapses. Evergrande Group’s struggle to turn assets into cash has prompted fear a default might chill Chinese lending markets and cause global shockwaves… The People’s Bank of China said it released 1.2 trillion yuan ($190bn) for lending by reducing the amount of money banks must hold in reserve. Beijing was expected to show support for lending after Evergrande warned Friday night it might run out of cash…”

December 7 – Reuters (Stella Qiu, Xiangming Hou and Kevin Yao): “China’s central bank on Tuesday cut the rates on its relending facility by 25 bps to support the rural sector and small firms. After the cut, the three-month relending rate stands at 1.7%, while the six-month rate is at 1.9% and the one-year at 2%, the People’s Bank of China said…”

December 6 – Bloomberg: “China’s policy makers moved to expand support for the nation’s economy as a property-market downturn threatens to hamper growth into next year. President Xi Jinping oversaw a meeting of the Communist Party’s Politburo on Monday that concluded with a signal of an easing in curbs on real estate. The leadership panel… pledged to stabilize the economy in 2022. That’s amid a liquidity crunch among developers that’s roiled the nation’s bond market. The People’s Bank of China also… said it will reduce most banks’ reserve requirement ratio by 0.5 percentage point next week…”

December 5 – Reuters (Stella Qiu and Ryan Woo): “A Chinese newspaper run by the State Council, or cabinet, warned the market against ‘simplistic’ interpretations of monetary policy moves as easing expectations gathered steam, suggesting China is not about to unleash a huge wave of credit in panic. Expectations the central bank will ease policy have sharply risen after Premier Li Keqiang said on Friday that the amount of cash that banks must keep as reserves will be reduced ‘in a timely way’, amid growing economic headwinds whipped up by an increasingly troubled property sector. ‘This is a rather simplistic interpretation of macro policy, which could easily lead to misunderstandings,’ the Economics Daily said…”

December 9 – Bloomberg (Rebecca Choong Wilkins): “China Evergrande Group has officially been labeled a defaulter for the first time, the latest milestone in months-long financial drama that’s likely to culminate in a massive restructuring of the world’s most indebted developer. Fitch Ratings cut Evergrande to ‘restricted default’ over its failure to make two coupon payments by the end of a grace period on Monday, a move that may trigger cross defaults on the developer’s $19.2 billion of dollar debt.”

December 8 – Bloomberg: “When China Evergrande Group finally acknowledged the need for a debt restructuring last week, the embattled property giant pledged to ‘actively engage’ with offshore creditors to create an overhaul plan. But the reality is that both Evergrande and its bondholders are likely to have little control over what happens next. That power lies with China’s Communist Party, including authorities from Evergrande’s home province of Guangdong. Officials from the province dominate a risk-management committee unveiled by the developer this week to guide its overhaul.”

December 6 – Bloomberg (Rebecca Choong Wilkins and Alice Huang): “China Evergrande Group is planning to include all its offshore public bonds and private debt obligations in a restructuring that may rank among the nation’s biggest ever, according to people familiar… The plan would cover public bonds sold by Evergrande and unit Scenery Journey Ltd… It would also include about $260 million of notes issued by joint venture Jumbo Fortune Enterprises that Evergrande has guaranteed, one of the people said.”

December 8 – Bloomberg: “Kaisa Group Holdings Ltd. has become the latest Chinese property developer to default, as Fitch Ratings downgraded its rating following a missed dollar bond payment. Fitch cut its long-term foreign-currency issuer default rating on Kaisa to restricted default, citing its failure to repay a $400 million dollar bond that matured Tuesday. The non-payment of that security also ‘triggered events of default for the company’s other U.S. dollar notes, which will become immediately due and payable if the bond trustee or holders of at least 25% in aggregate principal amount of the offshore notes declare so,’ Fitch said.”

December 7 – Bloomberg: “The list of Chinese developers warning they may be unable to meet upcoming financial obligations now includes China Aoyuan Group Ltd., another builder from the southern province of Guangdong to run into difficulties. The company said last week there’s no guarantee it will be able to meet certain commitments due to liquidity issues. Fellow Guangdong-based developer China Evergrande Group used nearly the exact language a day later when announcing plans to work on an offshore-debt restructuring plan.”

December 9 – Reuters (Liangping Gao and Gabriel Crossley): “China’s red-hot factory-gate inflation cooled slightly in November, driven by a government crackdown on runaway commodity prices and an easing power crunch… The producer price index rose 12.9% in November, the National Bureau of Statistics said…, slower than October’s 26-year high of 13.5% but faster than the 12.4% expected in a Reuters poll of analysts.”

December 8 – CNBC (Evelyn Cheng): “Fresh vegetable prices in China surged by 30.6% in November from a year ago, the National Bureau of Statistics said… The gains followed a 15.9% year-on-year rise in October, as floods and other extreme weather in recent months have hit farms. Although the bureau noted the supply of vegetables increased in November, prices were still up on a monthly basis by 6.8%.”

December 6 – Bloomberg: “China’s exports and imports grew faster than expected in November, with both hitting records as external demand surged ahead of the year-end holidays and domestic production rebounded on an easing power crunch. Exports rose 22% in dollar terms from a year earlier to almost $326 billion, while imports grew almost 32% to about $254 billion… Economists had forecast exports to grow by 20.3% and imports to increase by 21.5%.”

December 6 – Wall Street Journal (Liza Lin and Chun Han Wong): “China’s Communist Party has long maintained tight control over information, and the effort has intensified under leader Xi Jinping. The country has become increasingly opaque over the past year, even as its presence on the world stage grows. A new data-security law has made it harder for foreign companies and investors to get information… Several providers of ship locations in Chinese waters stopped sharing information outside the country… Chinese authorities have restricted information on coal use, purged documents related to political dissent cases from an official judicial database, and shut down academic exchanges with other countries. ‘China has always been a big black box,’ said Stephen Nagy, a politics and international studies professor at the International Christian University in Tokyo. The diminishing access to information is making it even harder for foreigners to understand what’s happening in the country, he said, ‘and that black box becomes even blacker.’”

December 6 – Financial Times (Edward White Michael Pooler and Gideon Long): “The Omicron variant of coronavirus forced governments across the world to tighten border controls, hasten vaccination drives and reinstate social distancing last week. But in Dalian, China, authorities reclassified the virus risk in parts of the north-eastern port city from ‘medium’ to ‘low’. The contrast, Chinese health officials and experts said, reflected how Beijing’s unwavering zero-Covid policy had proven a ‘magic bullet’, preventing at least 200m infections and 3m deaths. Western hubris, they argued, had led to negligence and now the potentially destabilising Omicron outbreak. ‘Western countries are likely to be gripped by Omicron if the variant proves highly infectious, with their unscientific easing of epidemic control measures and overconfidence in vaccines,’ reported the Global Times, a nationalist news service.”

Central Banker Watch:

December 5 – Bloomberg (David Goodman and Anchalee Worrachate): “The Bank of England is preparing to halt its almost 900 billion-pound ($1.2 trillion) quantitative easing program, leaving the future of what has become a controversial crisis-fighting tool shrouded in doubt. More than a decade after buying the first government security as part of an initial 75-billion pound, three-month plan during the global financial crisis, the BOE will next week complete what could conceivably be the last round of purchases as inflation hots up. The decision would make the BOE only the world’s second major central bank after Canada’s to halt its QE program during the pandemic.”

December 8 – Financial Times (Martin Arnold): “The negative side-effects of the European Central Bank’s bond-buying are increasing while its benefits are fading, one of its senior executives has said, warning that the policy is inflating asset prices and creating risks of financial instability. Isabel Schnabel, the ECB executive responsible for market operations, said asset purchases were ‘an important tool’ during times of market turmoil or recession, ‘but their cost-benefit ratio deteriorates as the economy gains ground’. Bond purchases increased ‘moral hazard’ by making investors reliant on them, Schnabel said, adding they may cause ‘excessive risk taking and overvaluations’, as well as creating a shortage of sovereign bonds in some countries such as Germany.”

December 8 – Bloomberg (Swati Pandey): “Australia’s economy can run hot while dodging the runaway inflation that’s plaguing much of the world, said Reserve Bank board member Ian Harper, signaling monetary policy will stay ultra-loose for some time yet. Harper cited Australia’s relatively resilient workforce participation during the pandemic… He said that was a key reason why Australian unemployment will take time to fall to levels needed to spark strong wages growth and subsequent price pressures.”

Global Bubble Watch:

December 7 – AFP (Ali Bekhtaoui): “The share of global wealth of the world’s richest people soared at a record pace during the Covid pandemic… Since 1995, the slice held by billionaires has risen from 1% to 3%, according to the World Inequality Report. ‘This increase was exacerbated during the Covid pandemic. In fact, 2020 marked the steepest increase in global billionaires’ share of wealth on record,’ the document said. The club of the richest 1% has taken more than a third of all additional wealth accumulated since 1995, while the bottom 50% captured just 2%. ‘After more than 18 months of Covid-19, the world is even more polarised,’ Lucas Chancel, co-director of the World Inequality Lab at the Paris School of Economics, told AFP.”

EM Watch:

December 9 – Bloomberg (Maria Eloisa Capurro): “Brazil’s central bank delivered its second straight interest-rate hike of 150 bps and pledged that the world’s most aggressive tightening cycle won’t end until rising inflation estimates return to target. The bank… lifted the Selic to 9.25% and anticipated another hike of the same size in February, leading economists to estimate the rate may reach as much as 12% early next year. Policy makers have now raised borrowing costs by 725 bps since March, the most among major global economies.”

December 9 – Bloomberg (Volodymyr Verbyany): “Ukraine raised borrowing costs as the threat of a war with Russia batters its currency and risks a renewed surge in inflation. The central bank lifted its benchmark interest rate to 9% from 8.5% on Thursday… Authorities are ready to raise rates more if needed, Deputy Governor Serhiy Nikolaychuk said… While double-digit gains in consumer prices have begun to ease — inflation in November slowed for s second consecutive month to 10.3% from a year earlier — reports from Ukraine’s allies that Russia may be preparing to invade have turned the hryvnia and the ruble into the region’s worst-performing currencies during the last month.”

December 8 – Financial Times (Kate Duguid and Jonathan Wheatley): “Foreign investment in emerging market stocks and bonds outside China has come to an abrupt halt over fears that many economies will not recover from the pandemic next year, their prospects worsened by the Omicron coronavirus variant and expectations of higher US interest rates. In late November, non-resident flows to EM assets excluding China turned negative for the first time since the coronavirus-induced market ructions of March 2020, according… the Institute of International Finance. ‘We’ve seen the willingness of investors to engage with emerging markets dry up,’ said Robin Brooks, chief economist at the IIF.”

Europe Watch:

December 7 – Associated Press (Geir Moulson): “Angela Merkel was assured of a place in the history books as soon as she became Germany’s first female chancellor on Nov. 22, 2005. Over the next 16 years, she was credited with raising Germany’s profile and influence, working to hold a fractious European Union together, managing a string of crises and being a role model for women. Now that near-record tenure is ending with her leaving office at age 67 to praise from abroad and enduring popularity at home. Her designated successor, Olaf Scholz, is expected to take office Wednesday.”

December 8 – Reuters (Balazs Koranyi): “Euro zone inflation will take longer to fall back to target than earlier thought but so far there is no evidence that high prices are becoming embedded in wages, ECB Vice President Luis de Guindos said… High inflation is challenging the ECB, which has little experience dealing with rapid price growth and complicates a crucial policy decision due on Dec. 16. While the ECB has maintained that inflation is temporary and will come back under target on its own, a growing number of policymakers are voicing their concern that a less benign outcome is also possible, so the bank should curb stimulus.”

Japan Watch:

December 8 – Associated Press: “Japan’s economy contracted at a 3.6% annual rate in July-September as a wave of coronivirus infections crimped travel and other activities… The estimate for the last quarter, downgraded from an earlier report of a 3.0% contraction, reflected weakness in consumer spending and trade, the government said. In quarterly terms, the measure used for most economies, the economy contracted 0.9%… The world’s third-largest economy was in a slump before the pandemic hit. Its recovery has been fitful thanks to precautions taken to curb COVID-19 infections. Troubles with supply chains, especially for computer chips used in autos, have also taken a toll.”

December 9 – Reuters (Leika Kihara): “Japan’s wholesale inflation hit a record 9.0% in November, pushing gains for a ninth straight month, a sign upward pressure on prices from supply bottlenecks and rising raw material costs were broadening. The rising cost pressures, coupled with a weak yen that inflates the price of imported goods, add to pain for the world’s third-largest economy as it emerges from a consumption slump caused by the coronavirus pandemic.”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 7 – Bloomberg (Elizabeth Elkin and Alvaro Ledgard): “California farmers who struggled to make it through record-breaking drought and heat in 2021 are bracing for another bad year, this time without any additional water from the state. The state said it won’t give any water from the State Water Project to farmers unless drought conditions improve. That could mean even higher food prices at a time when consumers are struggling with an ongoing pandemic and inflation across the board. ‘The carryover water that got a lot of farmers through this past year is gone,’ said Mike Wade, executive director at the California Farm Water Coalition. Farmers will either have to pump groundwater, if they can, ‘or they’re going to be fallowing a lot of farm land,’ he said.”

December 4 – The Hill (Caroline Vakil and Mychael Schnell): “An uptick in smash-and-grab robberies across the U.S. has jolted businesses, prompting owners and leaders to take precautions to protect brick-and-mortar shops amid a busy holiday shopping season. Stores and malls in San Francisco, Los Angeles, Chicago and other metropolitan areas have been the targets of flash mob robberies, break-ins and vandalism.”

Leveraged Speculation Watch:

December 5 – Bloomberg (Tracy Alloway): “Talk about bad timing. Speculators were caught offside in both bonds and stocks last week, increasing their bets against U.S. Treasuries and buying more equity exposure right before a bout of volatility caused the exact opposite moves. ‘Everyone was selling bonds and buying equities and both those trades went the other way,’ says Michael Purves at Tallbacken Capital Advisors LLC. ‘To me what’s interesting is how extreme these charts got. Hedge funds, which are often the big engines of market moves…, have been beaten up so much this year.’ The most recent positioning data from the Commodity Futures Trading Commission shows that leveraged funds increased their bets against Treasuries by the most since April 2020 as of Nov. 30 — just a couple days before the yield on the benchmark 10-year dropped to as low as 1.33%. Meanwhile, bets on U.S. equities also increased with E-mini S&P 500 futures seeing net buying of 56,000 contracts — the biggest long position since late 2018 — right before the index dropped sharply.”

December 6 – Wall Street Journal (Gregory Zuckerman and Juliet Chung): “Biotech stocks have fallen to earth with a thud in 2021 after soaring last year amid excitement over the development of Covid-19 vaccines, dealing big losses to some hedge funds… Perceptive Advisors, a prominent biotech hedge fund that manages about $9 billion, lost about 30% this year through November in its main fund, investors say. A hedge fund managed by OrbiMed Partners, which invests more than $18 billion in healthcare in public and private markets, has lost more than 40% this year through November…”

Geopolitical Watch:

December 6 – Financial Times (Gideon Rachman): “When Vladimir Putin talks about Ukraine, he sounds like a spurned, abusive husband. A 5,000-word essay that the Russian president published in July, entitled ‘On the historical unity of Russians and Ukrainians’, is full of protestations of undying love for Ukrainians — combined with threats of violence if the love is not reciprocated. Ukrainians are variously portrayed as the blood brothers of Russians and as neo-Nazis. Volodymyr Zelensky, the president of Ukraine, joked that Putin must have a lot of time on his hands… But the contents of Putin’s essay look increasingly alarming when read alongside obvious preparations in Moscow for an invasion of Ukraine. There are now close to 90,000 Russian troops, as well as tanks and artillery, deployed near the Ukrainian border. Last week, Putin made a threatening speech, warning the west not to cross Russia’s ‘red lines’.”

December 7 – Bloomberg (Nick Wadhams and Josh Wingrove): “The U.S. and European allies are weighing sanctions targeting Russia’s biggest banks and the country’s ability to convert rubles for dollars and other foreign currencies should President Vladimir Putin invade Ukraine, according to people familiar with the matter… The most drastic option would be to bar Russia’s access to the Swift financial payments system, but that would wreak havoc on ordinary citizens so officials are more inclined to go after Russia’s ability to convert rubles into dollars, euros or British pounds, the people said.”

December 4 – Associated Press (Ken Moritsugu): “China’s Communist Party took American democracy to task on Saturday, sharply criticizing a global democracy summit being hosted by President Joe Biden next week and extolling the virtues of its governing system. Party officials questioned how a polarized country that botched its response to COVID-19 could lecture others, and said that efforts to force others to copy the Western democratic model are ‘doomed to fail.’ The harsh rhetoric reflects a growing clash of values that has been thrust into the spotlight as China rises as a global power. The question is whether the United States and other leading democracies can peacefully co-exist with a powerful authoritarian state whose actions are at odds with the Western model that emerged victorious at the end of the Cold War.”

December 9 – Financial Times (Tom Mitchell): “The Chinese government has launched a bitter public relations campaign targeting Joe Biden’s Summit for Democracy, arguing that the Communist nation also deserves recognition as one of the world’s great democracies. In the run-up to the US president’s two-day summit…, Xi Jinping’s administration issued a flurry of white papers and seminars extolling the advantages of China’s political system and criticising America for trying to impose its democratic model on the rest of the world. Wang Wenbin, a Chinese foreign ministry spokesperson, accused the US of trying to ‘weaponise democracy, by openly convening this so-called Summit for Democracy to incite division and confrontation for geopolitical gains’.”

December 5 – Bloomberg (Tony Czuczka): “Defense Secretary Lloyd Austin said the U.S. will stand up to an ‘increasingly assertive and autocratic’ China in the Indo-Pacific region and beyond, calling its activity ‘disturbing.’ One way to counter China’s military modernization, growing nuclear capabilities and technological advances is to strengthen U.S. alliances in the region, Austin told a security conference in California… ‘The activity that we see in the region and other parts of the globe is disturbing,’ Austin said… China is ‘acting to develop military capability as fast as it can, but some of the coercive activity we see in the region has us and our partners in the region very concerned,’ he said.”

December 4 – Reuters (Alessandra Galloni, David Brunnstrom, Michael Martina, Humeyra Pamuk and Simon Lewis): “Any move by China to invade Taiwan would have ‘terrible consequences,’ U.S. Secretary of State Antony Blinken said…, adding that he hoped Chinese leaders would think very carefully about ‘not precipitating a crisis’ across the Taiwan Strait. Blinken… said China had been trying to change the status quo over self-ruled Taiwan, which Beijing claims as its territory, and that the United States is ‘resolutely committed’ to making sure the island has the means to defend itself.”

December 4 – Bloomberg (Demetri Sevastopulo): “Lloyd Austin, US defence secretary, warned that China’s air incursions by fighter jets, bombers and other warplanes near Taiwan appeared to be rehearsals for military operations against the country. ‘It looks a lot like them exploring their true capabilities and sure it looks a lot like rehearsals,’ Austin said in a speech…”

December 8 – Bloomberg (Peter Martin): “A top American defense official said strengthening Taiwan’s ability to defend itself is an ‘urgent task’ for the U.S. as China engages in destabilizing and ‘intentionally provocative’ actions toward the self-governing island. Taiwan should work to defend itself using ‘credible, resilient, mobile, distributed and cost-effective’ asymmetric capabilities, Assistant Secretary of Defense Ely Ratner told the Senate Foreign Relations Committee…”

December 5 – Wall Street Journal (Michael M. Phillips): “Classified American intelligence reports suggest China intends to establish its first permanent military presence on the Atlantic Ocean in the tiny Central African country of Equatorial Guinea, according to U.S. officials. The officials declined to describe details of the secret intelligence findings. But they said the reports raise the prospect that Chinese warships would be able to rearm and refit opposite the East Coast of the U.S.—a threat that is setting off alarm bells at the White House and Pentagon.”

December 8 – Reuters (Renju Jose and Yew Lun Tian): “Canada joined Australia and Britain in a United States-led diplomatic boycott of the Winter Olympic Games in Beijing…, saying it was important to send a clear message over China’s human rights record. The United States has said its government officials would boycott February’s Beijing Olympics because of China’s human rights ‘atrocities’, weeks after talks aimed at easing tense relations between the world’s two largest economies. China said the United States would ‘pay a price’ for its decision and warned of countermeasures but gave no details, while the International Olympic Committee (IOC) sought to play down the growing diplomatic boycott.”

December 9 – Financial Times (Katrina Manson, Andrew England and Najmeh Bozorgmehr): “The US military commander for the Middle East has told the Financial Times he has a ‘very robust range of military options’ to deter Iran, which has expanded its nuclear programme and ballistic missile arsenal. Amid growing warnings that time is running out to revive the 2015 nuclear accord that Tehran signed with world powers, the Biden administration is seeking to ratchet up pressure… ‘I think . . . Iran gravely underestimates us if they believe they’re going to be able to continue attacking and cause casualties in Iraq and Syria, and still be able to conduct nuclear negotiations with us without any effect,’ General Frank McKenzie, Centcom commander, said…”

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