Oregon’s economy was at the time ravaged by our nation’s high inflation and Paul Volcker’s battle to rein it in. The state’s unemployment rate was over 10% when I graduated from the University of Oregon in 1984. I don’t recall having animus toward the Federal Reserve but was instead frustrated with Washington’s huge deficits.
Paul Volcker was a courageous public servant. From the New York Times: “He prevailed by delivering shock therapy, driving the economy into a deep recession to persuade Americans to abandon their entrenched expectation that prices would keep rising rapidly.”
Much has been written over the past week honoring an extraordinary life. My thoughts returned to heart-felt comments uttered a couple months back by Chairman Powell:
“I’ve known Paul Volcker since I was an Assistant Secretary in the Treasury in 1992 or 1991. Of course, at that time, he had just relatively recently left the Fed – and I was frightened of even meeting him. I was just so intimidated by this global figure. And he couldn’t have been nicer and more interested in helping me and supporting me and we kind of kept up. He was really a great person to know. I read numerous accounts of his life. This book, if you haven’t read it, really sums it up really well. I don’t think there has been a greater public servant in our broad area in our lifetimes. He really just did exactly what he thought was the right thing – all the time. And he lets the chips fall where they may. He was famously booed at a Washington Bullets basketball game when he had rates very high… He’s a great man. I’m still in touch with him. I actually thought that I should buy 500 copies of this book and just hand them out at the Fed. I didn’t do that. It’s a book I strongly recommend, and we can all hope to live up to some part of who he is.”
And from Ben Bernanke (quote from NYT): “He came to represent independence. He personified the idea of doing something politically unpopular but economically necessary.”
“Paul Volcker was the most effective chairman in the history of the Federal Reserve.” Alan Greenspan
The Financial Times’ Martin Wolf began Paul Volcker’s tribute article with the opening lines from his review of Mr. Volcker’s memoir, “Keeping At It: The Quest for Sound Money and Good Government.” “Paul Volcker is the greatest man I have known. He is endowed to the highest degree with what the Romans called virtus (virtue): moral courage, integrity, sagacity, prudence and devotion to the service of country.”
Somehow Wolf allowed his memorial to descend (pathetically) into inflationist propaganda: “When demand is weak and inflation low, however, central banks must ease monetary policy. But expansionary policy is technically difficult once short-term interest rates reach zero. Central banks have to consider various unconventional alternatives: expansion of balance sheets via ‘quantitative easing’; negative interest rates; and what the monetarist Milton Friedman called ‘helicopter drops’ of money to the public through direct payments or permanent monetary financing of fiscal deficits.”
Spare us (especially when honoring a noble sound money proponent).
The passing of Paul Volcker marks the end of “the greatest generation” of monetary policy stewards. To be sure, the periods from McChesney Martin to Volcker were far from perfect. But they were also a far cry from reckless.
It’s now a profoundly changed era. Chairman Volcker was resolutely determined to pop the consumer price inflation Bubble. He was intensely criticized and, of course, faced political backlash. Yet there was a strong constituency that recognized inflation’s deleterious effects. No one would dare contemplate popping today’s inflationary asset price Bubble. An incredibly powerful constituency is resolute in perpetuating one of history’s most threatening inflations.
I believe Chairman Powell had hoped “to live up to some part of” the Volcker legacy. Powell’s courage to stand up to the markets was rather decisively quashed in a few short weeks. The lesson here – that would be vehemently scorned if only the world wasn’t hopelessly oblivious – is that Bubbles not repressed grow progressively powerful. Dr. Bernanke may admire Volcker’s independence and determination to pursue a politically unpopular policy course. Just imagine the fortitude necessary to drive interest rates to 20%, as equities and bonds tanked and the economy gasped. It’s infinitely easier to slash rates and expand the Fed’s balance sheet (creating electronic “money” and captivating bull markets in the process).
Volcker is a true policy hero whose virtues and accomplishments have withstood the test of time. He was willing to inflict acute short-term pain for the prospect of long-term gains. Volcker accepted being a villain with no expectation of vindication. He steadfastly followed his moral and ethical guiding light. In a financial world colored with seductive variations of gray, Paul Volcker’s “sound money” framework readily distinguished right from wrong.
He would take a stand and withstand the wrath. Our world today is desperately lacking such leadership. Sounding hopelessly archaic, I foremost blame the current disheartening state of the world on decades of increasingly unsound finance, with inescapable financial and economic fragilities along with social and geopolitical strains (having taken root soon after Volcker departed the Fed). A world devoid of a sound money and Credit anchor is inevitably a world unhinged.
I ponder Paul Volcker’s career path had he been born in 1957 instead of thirty years earlier. It’s difficult picturing him qualifying for a position as a top Fed official in our era. He would call BS on QE and zero/negative rates. It would be a decisive “hell no!” to propping up highly speculative financial markets. Volcker would be repulsed by the notion of the Fed accommodating Trillion dollar federal deficits in a non-crisis environment.
It’s more than a challenge envisaging how Volcker’s exemplary personal attributes would be showcased in this day and age. Some unfairly associated his contentious views over the past decade with senility. Such notions from a more junior Volcker would have been chalked up to the rantings of a nutball. He was a disciple of sound money principles from a bygone era. Operating in today’s world of rank inflationism, this great man would have been relegated to the unexemplary.
Mr. Volcker’s passing is a sad reminder of how severely the world has lapsed. It’s similar for individuals, corporations, governments and the markets: add a significant amount of debt and you lose flexibility – you sacrifice freedom, independence and more. Well-tested traditional values and principles are too easily abandoned. The corrosion starts subtly only to end outrageously. Pushing short-term rates these days to 20%? Ten-year Treasury yields above 15%? Inconceivable. But almost as farfetched today would be any imposition of tight monetary conditions. At this point, 3% Fed funds and 4% ten-year yields would surely spark financial crisis.
The irony of it all. A more youthful Paul Volcker would be a pariah – a wretched antagonist naysayer in today’s world of market-dominated loose finance and central bank kowtowing to the almighty markets. Yet those that would deride a young Volcker these days absolutely cherish his legacy. Because the Volcker Fed slayed the beastly inflation dragon, policymakers now enjoy the prerogative of doing whatever it takes to sustain bull markets and economic expansions.
With inflation eradicated, the sky’s the limit as to the optimal size of central bank balance sheets. No amount of deficit spending (bond issuance) risks a spike in market yields, not with the annihilation of inflation risk. Asset inflation is to be actively promoted rather than feared. Meager inflation ensures central bankers can aggressively reflate faltering market Bubbles without concern for unleashing inflationary pressures. Volcker’s accomplishment laid the groundwork for the abdication of business and market cycles: the wonder of Capitalism free from the hinderance of corrections and adjustment. It’s a narrative befitting of Volcker’s inflationist successors, while dishonoring the legacy of the Last of the Great Central Bankers.
Excerpt from a recent Paul Volcker writing published in the December 11th, 2019, Financial Times:
“By the late summer of 2018, it was already clear that the US and the world order it had helped establish during my lifetime were facing deep-seated political, economic, and cultural challenges. Nonetheless, I drew reassurance from my mother’s reminder that the US had endured a brutal civil war, two world wars, a great depression, and still emerged as the leader of the ‘free world’, a model for democracy, open markets, free trade, and economic growth. That was, for me, a source of both pride and hope.
Today, threats facing that model have grown more ominous, and our ability to withstand them feels less certain. Increasingly, by design or not, there appears to be a movement to undermine Americans’ faith in our government and its policies and institutions. We’ve moved well beyond former president Ronald Reagan’s credo that ‘government is the problem’, with its aim of reversing decades of federal expansion.
Today we see something very different and far more sinister. Nihilistic forces are dismantling policies to protect our air, water, and climate. And they seek to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.
Without them, the American example that my mother so cherished will revert to the kind of tyranny that once seemed to be on its way to extinction — though, sadly, it remains ensconced in some less fortunate parts of the world…
Monetary policy is important, but it cannot by itself sustain global leadership. We need open markets and strong allies to support economic growth and the prospects for peace. Those constructive American policies have been a large part of my life. Instead, confidence in the US is under siege.
Seventy-five years ago, Americans rose to the challenge of vanquishing tyranny overseas. We joined with our allies, keenly recognising the need to defend and sustain our hard-won democratic freedoms. Today’s generation faces a different, but equally existential, test. How we respond will determine the future of our own democracy and, ultimately, of the planet itself.”
Statesman to the end.
For the Week:
The S&P500 jumped 1.7% (up 28.5% y-t-d), and the Dow gained 1.1% (up 22.0%). The Utilities surged 2.7% (up 22.5%). The Banks added 0.5% (up 31.9%), and the Broker/Dealers rose 0.9% (up 23.5%). The Transports gained 1.2% (up 18.9%). The S&P 400 Midcaps jumped 2.0% (up 24.2%), and the small cap Russell 2000 rose 2.1% (up 24.0%). The Nasdaq100 advanced 2.2% (up 37.1%). The Semiconductors surged 3.2% (up 60.5%). The Biotechs gained 1.5% (up 22.5%). With bullion adding $5, the HUI gold index dropped 2.8% (up 36.7%).
Three-month Treasury bill rates ended the week at 1.53%. Two-year government yields added two bps to 1.63% (down 86bps y-t-d). Five-year T-note yields rose eight bps to 1.73% (down 78bps). Ten-year Treasury yields jumped 10 bps to 1.92% (down 77bps). Long bond yields gained nine bps to 2.34% (down 67bps). Benchmark Fannie Mae MBS yields rose six bps to 2.75% (down 75bps).
Greek 10-year yields rose eight bps to 1.42% (down 298bps y-t-d). Ten-year Portuguese yields gained four bps 0.42% (down 131bps). Italian 10-year yields surged 15 bps to 1.41% (down 134bps). Spain’s 10-year yields increased three bps to 0.44% (down 97bps). German bund yields gained four bps to negative 0.25% (down 49bps). French yields rose five bps to 0.05% (down 66bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields slipped a basis point to 0.78% (down 50bps). U.K.’s FTSE equities index surged 3.1% (up 12.7% y-t-d).
Japan’s Nikkei Equities Index declined 0.9% (up 19.0% y-t-d). Japanese 10-year “JGB” yields rose two bps to negative 0.02% (down bps y-t-d). France’s CAC40 rose 1.7% (up 27.3%). The German DAX equities index added 0.3% (up 26.1%). Spain’s IBEX 35 equities index rose 1.2% (up 13.3%). Italy’s FTSE MIB index jumped 2.9% (up 31.0%). EM equities were higher. Brazil’s Bovespa index rose 2.3% (up 26.5%), and Mexico’s Bolsa increased 0.6% (up 6.9%). South Korea’s Kospi index gained 1.6% (up 8.0%). India’s Sensex equities index rose 1.6% (up 15.6%). China’s Shanghai Exchange advanced 1.3% (up 20.5%). Turkey’s Borsa Istanbul National 100 index added 0.6% (up 21.8%). Russia’s MICEX equities index increased 0.6% (up 27.3%).
Investment-grade bond funds saw outflows of $180 million, while junk bond funds posted inflows of $695 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.73% (down 89bps y-o-y). Fifteen-year rates were unchanged at 3.19% (down 88bps). Five-year hybrid ARM rates added a basis point to 3.37% (down 61bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.93% (down 55bps).
Federal Reserve Credit last week surged $40.4bn to $4.088 TN, with a 14-week gain of $361 billion. Over the past year, Fed Credit expanded $39.5bn, or 1.0%. Fed Credit inflated $1.277 Trillion, or 45%, over the past 371 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.3 billion last week to $3.405 TN. “Custody holdings” gained $2.3 billion, or 0.1% y-o-y.
M2 (narrow) “money” supply declined $19.2bn last week to $15.346 TN. “Narrow money” surged $1.015 TN, or 7.1%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits jumped $29.9bn, while Savings Deposits sank $48.1bn. Small Time Deposits dipped $3.1bn. Retail Money Funds added $1.4bn.
Total money market fund assets fell $19.5bn to $3.600 TN. Money Funds gained $591bn y-o-y, or 19.6%.
Total Commercial Paper declined $10.6bn to $1.129 TN. CP was up $55bn, or 5.1% year-over-year.
The U.S. dollar index gained 0.5% to 97.69 (up 1.6% y-t-d). For the week on the upside, the South African rand increased 2.0%, the South Korean won 1.0%, the Norwegian krone 0.7%, the Mexican peso 0.6%, the Australian dollar 0.4%, the Brazilian real 0.2%, and the Swiss franc 0.1%. On the downside, the British pound declined 2.5%, the euro 0.4%, the Singapore dollar 0.1%, the Swedish krona 0.1% and the Japanese yen 0.1%. The Chinese renminbi declined 0.43% versus the dollar this week (down 1.83% y-t-d).
The Bloomberg Commodities Index rose 1.2% this week (up 4.4% y-t-d). Spot Gold added 0.4% to $1,482 (up 15.5%). Silver gained 1.2% to $17.224 (up 10.8%). WTI crude added 37 cents to $60.44 (up 33%). Gasoline jumped 2.6% (up 29%), and Natural Gas recovered 1.4% (down 21%). Copper gained 0.9% (up 7%). Wheat rose 1.8% (up 8%). Corn jumped 1.8% (up 3%).
Market Instability Watch:
December 16 – Financial Times (Colby Smith): “The Federal Reserve on Monday cleared the first big hurdle in its attempts to keep a lid on short-term borrowing costs in what traders have been concerned could be a turbulent end to the year. Despite a similar cash squeeze to the one that sent overnight rates unexpectedly soaring to 10% in September, actions by the New York arm of the US central bank helped hold the overnight repo rate to 1.7%, just 8 bps higher than on Friday and in line with normal fluctuations. The Fed has been flooding the system with cash in the form of short-term loans since the September alarm, for fears banks were unwilling or unable to lend enough.”
December 17 – Wall Street Journal (Sam Goldfarb): “A spirited rally is pushing some types of corporate bonds toward their best year in a decade… Including price changes and interest payments, U.S. investment-grade corporate bonds have returned 14.2% year-to-date through Monday—on track for their first double-digit tally since 2009, according to Bloomberg Barclays data. Speculative-grade bonds have returned 13.5%. December is shaping up to be a particularly good month for corporate debt investors. Not only have higher-quality bonds rallied, as they have for most of the year, but prices have climbed on… bonds with near-rock bottom, or triple-C, ratings that investors have largely shunned since May.”
December 19 – Financial Times (Jennifer Alban): “Investors have been scrambling to buy the bonds of the riskiest US corporate borrowers as the year draws to a close, underscoring a desperate hunt for yield as interest rates remain rooted near historic lows. In December alone, companies across the US rated triple C — the bottom tier of the ‘junk’ bond market — have returned 4.4%, according to Oleg Melentyev, head of US high-yield strategy at Bank of America Global Research.”
December 16 – Financial Times (Anna Gross): “US stocks have hit all-time highs this year, but not everyone in the market will be celebrating. Investors have pulled more money out of US-focused equity funds than in any year on record. Investors have taken a total of more than $156bn out of mutual and exchange traded funds this year, according to… Refinitiv Lipper — the highest annual figure since the company started collecting data in 1992. Equity mutual funds had outflows of $248bn, while $92bn was drawn into equity ETFs. Investors have been funnelling money into bonds and money-market funds, which are seen as havens in periods of uncertainty.”
December 17 – Bloomberg (Gregory Calderone): “An outsize CBOE Volatility Index options trade could signal the return of ‘50 Cent,’ an investor who earned the moniker for a proclivity to buy cheap options in large amounts. Someone snapped up roughly 130,000 January $22 calls on the index for about 50 cents each Tuesday, contracts that would pay off if the volatility gauge almost doubles from its current level. The trade came as the S&P 500 Index climbed toward a record for the fourth session in a row and the VIX, which tracks the 30-day implied volatility for stocks in the benchmark gauge, hovered near its lowest level of the year.”
Trump Administration Watch:
December 15 – Financial Times (James Politi): “Even in the euphoria of finally reaching a trade deal with China following months of tempestuous talks, US trade representative Robert Lighthizer struck a wary tone on whether Beijing would follow through on the pledges it had just agreed. ‘We think it was a good negotiation and will make a real difference. A sceptic would say we’ll see, that’s probably a wise position to take,’ Mr Lighthizer told reporters… ‘But our expectation is they will keep their obligations.’”
December 16 – Reuters (Makini Brice and Susan Heavey): “The so-called Phase One trade deal between Washington and Beijing has been ‘absolutely completed,’ a top White House adviser said on Monday, adding that U.S. exports to China will double under the agreement. ‘They’re … going to double our exports to China,’ National Economic Council Director Larry Kudlow told Fox News…”
December 18 – Reuters (Stella Qiu and Martin Pollard): “China and the United States are in touch over the signing of their Phase 1 trade deal, China’s commerce ministry said, which will see lower U.S. tariffs on Chinese goods and higher Chinese purchases of U.S. farm, energy and manufactured goods. The Phase 1 deal was announced last week after more than two years of on-and-off trade talks, although neither side has released many specific details of the agreement.”
December 17 – Reuters (Susan Heavey and David Lawder): “U.S. Trade Representative Robert Lighthizer… said details of Chinese purchases across U.S. agriculture, manufacturing, energy and service sectors in the ‘phase one’ China trade deal would be detailed in writing. Lighthizer, outlining the purchases in the agreement, told Fox Business Network in an interview: ‘This will all be written out,’ but gave no further details…”
December 18 – CNBC (Yun Li): “The ‘phase one’ trade deal between the U.S. and China, supposedly a game changer for the global economy going by the stock market’s rise to a record after the announcement, has left many analysts and investors puzzled about what was specifically agreed to… Skepticism is brewing in the markets as much of the details have not been confirmed by both sides. China, in particular, has been reluctant to commit to the amount of agriculture products it’s willing to buy, while big numbers are floating from Washington. Beijing has also been quiet about tariffs on U.S. goods as well as an enforcement mechanism. ‘There remains more questions than answers,’ Chris Krueger, Washington strategist at Cowen, said… ‘It’s ‘more trade truce than deal … It is unclear if any China tariffs on U.S. goods have been reduced … Vague promises on IP protections.’”
December 18 – Wall Street Journal (Josh Zumbrun and Kirk Maltais): “The limited trade pact reached by the U.S. and China last week could be a boon to American farmers hard hit by the trade war, but the agricultural sector’s relief over a deal is being tempered by skepticism over the ambitious targets set by U.S. negotiators. U.S. officials said China has committed to boosting agricultural purchases to at least $40 billion—and perhaps as high as $50 billion—annually over the next two years. The latter figure would nearly double peak sales before the trade war. ‘They need U.S. pork, they need U.S. soybeans. Do they need $50 billion of agricultural goods? Absolutely not,’ said Dave Marshall, a farm-marketing adviser with First Choice Commodities Inc.”
December 17 – Reuters (Alexandra Alper): “The Trump administration is finalizing a set of narrow rules to limit exports of sophisticated technology to adversaries like China, a document seen by Reuters shows, in a boon to U.S. industry that feared a much tougher crackdown on sales abroad. The Commerce Department is putting the finishing touches on five rules covering products like quantum computing and 3-D printing technologies that were mandated by a 2018 law to keep sensitive technologies out of the hands of rival powers.”
December 14 – New York Times (Keith Bradsher): “President Trump’s initial retreat from his trade-war threats has handed hard-liners in China a victory. A longer, pricklier trade war and stiff Chinese resistance to economic reforms could result. Mr. Trump on Friday outlined a partial trade deal that deferred new tariffs on $160 billion a year in Chinese-made goods, a move that would have had him taxing virtually everything China sells to the United States. He also agreed for the first time to broadly reduce tariffs he had already imposed on Chinese goods, halving tariffs on more than $100 billion a year worth of products like clothing and lawn mowers — a striking about-face for a protectionist president who last year described himself as a ‘tariff man.’”
Federal Reserve Watch:
December 17 – Bloomberg (Rich Miller): “The Federal Reserve is running the risk of fomenting an eventual financial crisis by easing banking regulations at the same time that it’s cut interest rates. So say some former Fed officials, including ex-Vice Chairman Alan Blinder and financial stability experts Daniel Tarullo and Nellie Liang. They worry that the combination of looser credit and laxer rules will prompt financial institutions and investors to pile on leverage and take excessive risks. While that may spur economic growth in the short run, it could end up triggering a recession once the speculative bets are unwound. ‘When you lower rates and put incentives in place to increase borrowing, it should not be surprising that risks will increase,’ said Liang, former director of the Fed’s financial stability division. ‘That means this is not the right time to be also significantly loosening financial regulations.’”
December 17 – Wall Street Journal (Michael S. Derby): “Two Federal Reserve officials said they expect to hold interest rates steady for the time being, even as President Trump once again lobbied for lower borrowing costs. The presidents of the Dallas and Boston Fed banks… sounded upbeat on the U.S. economy’s likely prospects in 2020 and comfortable with the Fed’s current policy stance. ‘I’ve got penciled in no change’ in rates for 2020 said the Dallas Fed’s Robert Kaplan… Boston Fed leader Eric Rosengren… concurred with the case for holding steady. It is time for the Fed to be ‘patient for a fairly material period of time until we actually see a significant change in the outlook,’ Mr. Rosengren said… In between their appearances, Mr. Trump tweeted that it ‘would be sooo great if the Fed would further lower interest rates and quantitative ease. The Dollar is very strong against other currencies and there is almost no inflation. This is the time to do it. Exports would zoom!’”
U.S. Bubble Watch:
December 17 – Associated Press (Andrew Taylor): “House leaders on Monday unveiled a $1.4 trillion government-wide spending package that’s carrying an unusually large load of unrelated provisions catching a ride on the last train out of Congress this year. A House vote is slated for Tuesday on the sprawling package, some 2,313 pages long, as lawmakers wrap up reams of unfinished work — and vote on impeaching President Donald Trump. The legislation would forestall a government shutdown this weekend and give Trump steady funding for his U.S.-Mexico border fence. The year-end package is anchored by a $1.4 trillion spending measure that caps a difficult, months-long battle over spending priorities.”
December 14 – Wall Street Journal (James Mackintosh): “Are U.S. companies making more money than ever before, or are they mired in one of their longest profit slumps since World War II? Widely used measures have diverged in recent years, leaving many investors worrying that something is amiss. Look at pretax domestic profits as measured by the Bureau of Economic Analysis, and it is easy to be bearish. Profits are down 13% in five years, the biggest drop outside a recession since World War II. President Trump’s tax cut has cushioned the blow to earnings, with after-tax corporate profits falling only a little. Profit margins also are down sharply, with the pretax margin for domestic business lower than the postwar average and below where it stood from World War II until 1970. Falling domestic profits suggest companies are in deep trouble, avoiding an even deeper slump only thanks to tax cuts. Earnings by S&P 500 companies tell the opposite story. Reported earnings per share were at a record in the 12 months to June, up 31% in five years and forecast to keep rising. The after-tax profit margin is slightly down from a record last year, but still higher than any time before that.”
December 18 – CNBC (Diana Olick): “Strong reads on the economy have researchers at mortgage giant Fannie Mae revising their 2020 housing forecast much higher. Fannie Mae’s Economic and Strategic Research Group predicts builders will expand production more than previously expected… After increasing just over 1% annually this year, growth in single-family housing starts will accelerate to 10% during 2020 and top 1 million new homes in 2021… That would mark a post-recession high but is still far below the annual peak of about 1.7 million single-family starts in 2005 and the 1.2 million annual pace experienced in the late ’90s… ‘It will likely take several years, even at a more robust pace, for new construction to address the existing pent-up demand for additional housing, as suggested by a still-increasing share of 25- to 34 year-olds living at home with their parents,’ according to the report… ‘We now expect single-family housing starts and sales of new homes to increase substantially, aided by a large uptick in new construction as builders work to replenish inventories drawn down by the recent surge in new home sales activity,’ said Fannie Mae chief economist Doug Duncan.”
December 16 – CNBC (Diana Olick): “A stronger economy and a severe housing shortage have the nation’s homebuilders feeling better than they have in two decades. Builder confidence in the newly built, single-family home market jumped 5 points in December to 76, the highest reading since June 1999, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Anything above 50 is considered positive… The index stood at 56 last December. At the worst of the housing crash, in 2009, builder sentiment hit a low of just 8.”
December 17 – Reuters (Lucia Mutikani): “U.S. homebuilding increased more than expected in November and permits for future home construction surged to a 12-1/2-year high as lower mortgage rates continue to boost the housing market and support the broader economy… Overall housing starts jumped 13.6% on a year-on-year basis in November. Building permits increased 1.4% to a rate of 1.482 million units in November, the highest level since May 2007.”
December 19 – CNBC (Diana Olick): “The number of homes for sale at the end of November was the lowest on record for the month, according to the National Association of Realtors, which began tracking this metric in 1999. There were just 1.66 million homes on the market, down 5.7% compared with November 2018. That represents a 3.7-month supply at the current sales pace, down from a 4-month supply a year ago. Supply is leanest on the low end, where demand is strongest. For homes priced below $100,000, inventory was down 15% annually. For those priced between $100,000 and $250,000, supplies were 7% lower annually… The housing shortage has reignited home prices, which had been cooling last year and into the first months of this year. The median price for an existing home sold in November was $271,300, the highest November price reading since the Realtors began tracking in 1999.”
December 19 – Reuters (Lindsay Dunsmuir): “U.S. home sales dropped more than expected in November due to an ongoing shortage of properties for sale, despite the sector receiving an overall boost from the Federal Reserve’s decision to cut interest rates this year. …Existing home sales fell 1.7% to a seasonally adjusted annual rate of 5.35 million units last month. October’s sales pace was downwardly revised to 5.44 million units… Existing home sales still rose 2.7% from one year ago, NAR said, the fifth straight month of year-on-year gains.”
December 17 – Bloomberg (Prashant Gopal and Katia Dmitrieva): “Permits to build new apartment buildings in the U.S. are surging as a bulging population of millennials fuels demand for rentals and low interest rates ease construction financing costs. Authorizations for larger multifamily dwellings… jumped to an average annualized pace of 501,000 in the three months through November… That’s the highest since July 2015. Prior to that year, which was a hot one for condos and apartments, it’s the strongest since 1987. The rental market is booming as young people leave dorm rooms and their parents’ basements to strike out on their own.”
December 15 – CNBC (Michael Ivanovitch): “Looking at the latest U.S.-China trade numbers, one wonders how the agreement announced last week could lead to an acceptable balance of bilateral trade accounts. China’s surplus on its U.S. goods trade in the first 10 months of this year was $294.5 billion, and amounted to 40% of America’s total trade gap. During the same period, Beijing slashed U.S. exports to China by 14.5% to $87.6 billion. By contrast, Chinese goods sales to the U.S. were more than four times larger at $382.1 billion.”
December 16 – MarketWatch (Joy Wiltermuth): “U.S. consumers might have their pick of employment in today’s robust job market, but that doesn’t mean everyone is getting financed for a car. A Federal Reserve Bank of New York survey of consumer credit… showed a spike in the rate of auto-loan rejections, to 8.1% in October from 4.5% in the same month last year. And for the full year, the average rate of car-loan rejections was 7.1%, up from 6.1% for 2018, even through applicants reported fewer denials in other parts of the record $14 trillion consumer debt market for the same 12-month period.”
December 16 – Reuters (Jonnelle Marte): “U.S. consumers showed greater appetite for loans this year – driven by stronger demand for mortgages amid lower rates – and they had an easier time accessing credit when compared to a year earlier, a survey from the New York Federal Reserve showed… The greater demand for credit was driven by consumers seeking to take advantage of lower borrowing rates to buy homes.”
December 15 – Wall Street Journal (Rebecca Elliott): “America’s hottest oil-drilling regions—such as this one at the heart of the Permian Basin—are seeing their economies soften as shale producers slash spending, leading to emptier hotels, choosier employers and less overtime for workers. Early this year, demand for the tubing, bolts and valves used in fracking was so high that Homer Daniels’s oil-field equipment company, RK Supply, in the Midland area was on track to easily beat its annual revenue forecast. But by August, Mr. Daniels had to impose a hiring freeze as customers delayed projects. ‘It affects everybody’s bottom lines,’ Mr. Daniels said… ‘The boom time is done at this point, unless oil prices go up significantly,’ said Michael Plante, senior economist at the Federal Reserve Bank of Dallas.”
December 16 – Reuters (Eric M. Johnson, David Shepardson): “Boeing Co said… it would suspend production of its best-selling 737 MAX jetliner in January, its biggest assembly-line halt in more than 20 years, as fallout from two fatal crashes of the now-grounded aircraft drags into 2020. Boeing… said it would not lay off any of the roughly 12,000 employees there during the production freeze, though the move could have repercussions across its global supply chain and the U.S. economy.”
December 17 – CNBC (Thomas Franck): “Boeing will still burn more than $1 billion a month even after halting 737 Max production, according to J.P. Morgan. Boeing’s decision to stop suspend production of the troubled aircraft was made in light of months of cash-draining groundings worldwide, but the company’s internal overhead and labor expenses will remain and will increase cash burn, analyst Seth Seifman wrote to clients.”
December 19 – Reuters (Bharath Manjesh): “Moody’s… lowered its rating on Boeing Co’s debt and said it sees long-term risk to the company’s reputation in the wake of the planemaker’s plan to halt production of its best-selling 737 MAX jetliner. A further downgrade of the ratings could occur if the grounding runs into the second half of 2020, especially if aviation authorities identify some other component of the MAX’s flight management system that requires updating…”
December 17 – Bloomberg (Romy Varghese): “San Francisco is projecting a $420 million budget gap over the next two fiscal years as expenses such as pension contributions are rising faster than the growth in revenue for the technology hub.”
December 14 – Wall Street Journal (Maureen Farrell and Eliot Brown): “In early October, WeWork’s board of directors trickled into a brick building in lower Manhattan… After they took their seats around the conference room table, Mark Schwartz started to vent. ‘I’ve stayed silent too long,’ the… former Goldman Sachs… partner told the six other men on the board, including WeWork’s co-founder and chairman, Adam Neumann. Mr. Schwartz aired his frustrations about the state of the company, which was perilously low on cash after years of freewheeling spending and had become the butt of jokes on Wall Street… No more fantasies, he said, as advisers and others looked on. Now, he said, they needed to make decisions that would save the company. Even more remarkable than the content of Mr. Schwartz’s blistering rebuke was the fact that it came so late. The banker had stayed silent so long that the story was almost over.”
December 17 – Bloomberg (Sridhar Natarajan and Gillian Tan): “WeWork has obtained $1.75 billion in new financing in a fundraising push led by Goldman Sachs…, under terms that free up a mountain of cash for the struggling office-sharing company. The new line of credit is the first hurdle cleared by SoftBank in its pledge to put together $5 billion in debt financing for WeWork as part of a bailout package. The move should free up roughly $800 million in cash that WeWork had set aside to satisfy covenants on its previous credit line…”
December 17 – Bloomberg (Vildana Hajric and Olga Kharif): “Ether, the second-largest cryptocurrency, extended a three-day losing streak to turn lower for the year, bucking an uptrend set by most other major digital assets. Since the beginning of November, the coin has spent 64% of its days lower… It is down close to 1.3% for the year after more than doubling at one point.”
Fixed-Income Bubble Watch:
December 129 – Bloomberg (Liz Capo McCormick and Katherine Greifeld): “Normally, trillion-dollar deficits might be considered bad news for Uncle Sam. But these days, it seems there are fewer reasons to worry. With the Federal Reserve getting back into the business of buying Treasuries, the supply-demand picture for U.S. government debt is set to get a lot better in 2020. Not only will the central bank’s purchases reduce the amount the U.S. will need to borrow at auctions by almost a half-trillion dollars, but the Fed will also soak up nearly 60% of the Treasury’s net issuance to the public, according to JPMorgan…”
December 129 – Bloomberg (Sarah Husband and Ruth McGavin): “Threats to financial stability from recent growth in lending to risky companies are hard to assess because of shortfalls in understanding who holds the debt, an international banking supervisor has warned. The Financial Stability Board, which acts as a lookout for systemic risks in the banking system, encountered ‘important’ data gaps in a study of exposure to leveraged loans and collateralized-loan obligations… The global stock of leveraged loans to highly indebted companies may be as high as $3.2 trillion… Meanwhile, borrowers have become more indebted and investor protections included in documentation for loans have gotten weaker.”
December 16 – Financial Times (Richard Henderson, Colby Smith and Jennifer Ablan): “Investors have poured money into fixed income funds at a record pace this year, fuelling a blowout bond market rally that has taken veteran traders by surprise and sent borrowing costs back to their lowest levels on record. The latest data from EPFR Global… show that money has been added to fixed-income funds for 49 straight weeks. That stretch has added $468bn in new assets to bond funds, the largest uninterrupted haul in records going back to 2001 — eclipsing the $275bn over 54 weeks to December 2012, and the $250bn over 60 weeks ending in May 2010. Assets in bond funds now total $5.8tn, from $4.9tn at the start of the year, reflecting sharp rises in prices along with net inflows.”
December 18 – Financial Times (Joe Rennison and Tommy Stubbington): “Top-rated US companies flocked to sell bonds in Europe in 2019 in record amounts, taking advantage of borrowing costs pushed lower by a fresh wave of stimulus from the European Central Bank. The most creditworthy tier of American companies, known as investment-grade, has sold the equivalent of $129bn in euros so far this year, according to Dealogic… That is more than double last year’s tally of $56bn and much higher than the previous peak of $107bn in 2017.”
December 18 – Bloomberg (Tian Chen and Livia Yap): “China’s central bank injected the most liquidity via open-market operations since January, in a push to ensure ample cash supply ahead of seasonal tightness at year-end. The People’s Bank of China added 280 billion yuan ($40bn) into the financial system with 7 and 14-day reverse repurchase agreements… That came after the authorities restarted such operations after a 20-day hiatus on Wednesday. The overnight repo rate — an indicator of interbank liquidity — plunged the most in a month, while the benchmark seven-day tenor saw its biggest decline since July.”
December 17 – Bloomberg (Tian Chen and Heng Xie): “China’s government-bond investors will soon be looking for reassurance from the central bank that there’s plenty of cash in the financial system. The country will see a ‘liquidity hole’ of 2.8 trillion yuan ($400bn) in January, in large part because people across the nation will withdraw cash for the Lunar New Year holiday, according to Guotai Junan Securities Co. That means bond traders expect the central bank to unlock funds to avoid the liquidity-driven panic seen in October, when the benchmark 10-year yield spiked the most in six months.”
December 14 – Bloomberg: “China’s central bank warned property speculators that ‘homes are for living in’ as the regulator pledged to properly regulate the real estate market. The People’s Bank of China also said it will be ‘flexible’ and ‘appropriate’ in setting prudent monetary policy, and will boost financial support to manufacturers and the private sector… Authorities will increase mid to long-term funding for the manufacturing industry and further lower financing costs for private companies, the PBOC said.”
December 15 – Reuters (Lusha Zhang and Ryan Woo): “China’s new home prices grew at their weakest pace in nearly two years in November while property investment also eased, with tightening policies continuing to cool the market even as some local easing is expected to prevent a sharp slowdown… Average new home prices in China’s 70 major cities rose 0.3% in November from the previous month, lower than the 0.5% growth reported in October and the weakest since February 2018… On an annual basis, average new home prices in the 70 cities rose 7.1% in November, down from 7.8% in October… Most of the 70 cities surveyed still reported monthly price increases for new homes, but the number was down to 44 from 50 in October.”
December 18 – Financial Times (Don Weinland): “A top adviser to China’s central bank has warned of a possible ‘chain reaction’ of defaults among the country’s thousands of local government financing vehicles after one of these entities nearly missed a payment this month. Ma Jun, an external adviser to the People’s Bank of China, called on the government to introduce ‘intervention mechanisms’ to contain the risk associated with LGFVs — special entities used in the country to fund billions of dollars of roads, bridges and other infrastructure. ‘Among the tens of thousands of platform-style institutions nationwide, if only a few publicly breach their contracts it may lead to a chain reaction,’ Mr Ma said…”
December 16 – South China Morning Post (Amanda Lee): “Faced by the ‘cliff-like’ plunge in the main business of their largest group of clients, which has entered an ‘unprecedented cold winter period’, the tale in northern Hebei province is one that is replicated across the country, China’s small rural banks are scrambling to raise new capital as they struggle to contain a rapidly rising number of overdue loans. Due to sluggish domestic growth and the impact of the trade war with the United States, 29 rural banks this year have applied to the China Securities Regulatory Commission (CSRC) to raise capital by selling new shares to replenish their balance sheets… A total of 10 out of the 29 banks reported a non-performing loan ratio of more than 5%… Fitch… estimated that there are around 4,000 banks, including rural banks, in China that have assets of less than 100 billion yuan (US$14.2bn) but they account for 20% to 25% of the nation’s banking system assets.”
December 19 – Wall Street Journal (Nathaniel Taplin): “China is bailing out a large regional lender to the tune of $14 billion. It likely won’t be the last big check Beijing needs to write to solve its mounting bad-debt problem. In retrospect, Hengfeng Bank’s original choice of English name—’Evergrowing Bank’—should have raised a large red flag… Indeed, the troubles of Hengfeng… have been well known for some time. It hasn’t released an annual financial report for years—a reliable sign of serious problems—and authorities said earlier in 2019 that a restructuring was under way. Details are now arriving: The bank said… that an arm of China’s sovereign-wealth fund and the local government will together purchase most of a new 100 billion yuan ($14.3bn) equity issue, with UOB and other unnamed investors chipping in four billion yuan.”
December 16 – Bloomberg: “Six privately owned companies in one of China’s wealthiest provinces have defaulted on their debt or come perilously close in the last three months. With 68.1 billion yuan ($9.7bn) in outstanding debt among those six companies alone, the distress in Shandong has rattled even seasoned investors. The problem isn’t the defaults themselves… It’s the practice common among Shandong companies of guaranteeing each others’ debts. Firms don’t have to make public these liabilities, leaving investors to wonder who’s on the hook and for how much. With the once-strong industrial economy flagging, the murky ties between the province’s private companies threaten to drag them all down together.”
December 16 – Financial Times (Don Weinland): “Over the past two decades, a handful of private entrepreneurs transformed Zouping county in China’s Shandong province from a rural backwater best known for its yams into an industrial hub home to one of the world’s largest aluminium producers. But the years of aggressive, highly leveraged expansion have also turned Zouping and several neighbouring counties into a hotspot for corporate defaults, most recently with privately held corn oil producer Xiwang Group’s failure to repay a Rmb1bn ($143m) bond. The distress in Shandong has become a harbinger for financial risk across the country this year. A wave of defaults on corporate bonds has pushed China’s private sector default rate to a record 4.9% as of the end of November, according to Fitch…, up from 0.6% in 2014.”
December 14 – Reuters (Kevin Yao): “China plans to set a lower economic growth target of around 6% in 2020 from this year’s 6-6.5%, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources said. Chinese leaders are trying to support growth to limit job losses that could affect social stability, but are facing pressure to tackle debt risks caused by pump-priming policies.”
December 15 – Reuters (Kevin Yao and Stella Qiu): “Growth in China’s industrial and retail sectors beat expectations in November, as government support propped up demand in the world’s second-largest economy and amid easing trade hostilities with Washington. Industrial production rose 6.2% year-on-year in November…, beating the median forecast of 5.0% growth…”
December 15 – Wall Street Journal (Mike Bird): “The favored funding source of China’s real-estate developers is under scrutiny in one of the country’s largest urban areas, posing a threat to a sector that has stretched creative financing to its limits. On Friday, the city of Xi’an in central China opened a consultation process on instituting an escrow system that would ensure developers hold on to funds worth 1.2 times the cost of building a new property when booking a presale. There is no existing escrow system of this kind in China, so funds from presales are used to cover existing liabilities… For developers, better-known funding routes are already congested. After a borrowing binge this year, Chinese developers make up half of the Asian high-yield dollar bond market… While investment by real-estate developers has risen by 46% in the last five years, funding from deposits and other advance payments has more than doubled. It is likely to reach around 6 trillion yuan ($859.4bn) this year, the source of more than one-third of total investment.”
December 17 – Bloomberg (Balkis Ammal, Wendy Tan and Si Hang Xie): “China’s offshore junk bonds returned 12% this year and issuance reached an all-time high as investors hunted for returns amid plunging global yields… S&P Global Ratings and Fitch Ratings made the most downgrades or withdrawals of ratings on China junk bonds since Bloomberg started compiling the data in 2009. Yet issuance climbed 70% this year to $34.3 billion.”
December 14 – Financial Times (Yuan Yang and Patrick Mathurin): “Tech spats between China and the US have encompassed smartphones and social media apps — and now the humble office keyboard. This week’s news that Beijing has ordered all government offices and public institutions to remove foreign computer equipment and software within three years marked another example of ‘decoupling’ between the two countries’ tech sectors. The new directive, nicknamed ‘3-5-2’, aims to increase China’s reliance on homemade technology and could deal a blow to foreign technology groups such as HP, Dell Technologies and Microsoft.”
Central Banking Watch:
December 19 – Financial Times (Richard Milne): “Sweden’s central bank ended its five-year experiment with negative rates amid growing concern about the implications for the economy, businesses and investors from sub-zero monetary policy. The Riksbank raised its main repo rate… by a quarter percentage point to zero, a level it was last at in February 2015…. The world’s oldest central bank has been under heavy scrutiny for its monetary policy ever since the 2008 global financial crisis. It raised rates in 2010 and 2011 leading to accusations of ‘sadomonetarism’ from Nobel laureate Paul Krugman before consistently cutting rates down to a record low of minus 0.5%… The Riksbank… repeated its warning from October that if negative rates continued for too long ‘the behaviour of economic agents may change and negative effects may arise’.”
December 19 – Reuters (Simon Johnson): “Sweden’s central bank ended five years of negative interest rates… when it raised benchmark borrowing costs by a quarter point to zero… The increase from -0.25% makes the Riksbank the first of the central banks that pushed rates below zero to inch its way back to what was long considered the floor for interest rates. Rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary, and with the exception of Hungary, are expected to remain so for some time to come. Riksbank Governor Stefan Ingves said negative rates had worked well, boosting inflation and the economy. ‘But it is a completely different question what would happen in an economy if you had negative rates for a very long period,’ he told reporters.”
December 15 – Reuters (Elizabeth Piper): “British Prime Minister Boris Johnson will ‘get Brexit done’ by Jan. 31 and then agree a new trade deal with the European Union by the end of 2020, cabinet office minister Michael Gove said…, vowing to deliver on the government’s top priority. Johnson and his team were triumphant last week when he won a commanding majority of 80 at an early election he said he was forced to call to break the Brexit deadlock. Winning over many traditionally Labour voters in northern and central England, Johnson has proclaimed he will lead a ‘people’s government’.”
December 15 – Reuters (Elizabeth Piper): “Scotland’s first minister, Nicola Sturgeon, warned Prime Minister Boris Johnson… that he could not keep Scotland in the United Kingdom against the country’s will. Johnson and his government have repeatedly said they will not give the go ahead for another referendum on Scottish independence, but Sturgeon said after the Scottish National Party won 48 of Scotland’s 59 seats in the UK parliament, her party had been given a mandate for one. ‘If he thinks … saying no is the end of the matter then he is going to find himself completely and utterly wrong,’ Sturgeon told the BBC…”
December 19 – Wall Street Journal (Francis Yoon): “Companies in developing nations sold a record $118 billion of high-yield dollar bonds this year, and are likely to keep up a fast pace in 2020. The total has more than doubled from five years earlier, according to Dealogic… The figures cover debt in dollars with subinvestment grade credit ratings, or no rating, and run to Dec. 18. They don’t include bonds sold by governments.”
December 17 – Associated Press: “A closely watched survey showed… that business confidence in Germany, Europe’s biggest economy, rose for the second consecutive month in December. The Ifo institute said that managers’ assessment of both their current situation and their outlook for the next six months brightened. Its monthly index was up to 96.3 points from 95.1 in December, the latest evidence of an uptick in sentiment since it bottomed out in August.”
December 17 – New York Times (Liz Alderman): “Europe’s economy is struggling to gain traction after years of anemic growth. But the rock-bottom interest rates meant to power a recovery are fueling a property boom that is creating a new set of problems. Money is so cheap — a 20-year mortgage can be had in Paris or Frankfurt at a rate of less than 1% — that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe. In some parts of Europe, said Jörg Krämer, the chief economist at Commerzbank…, valuations have already returned to or exceeded levels that preceded the Continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.”
Global Bubble Watch:
December 18 – Bloomberg (Shelly Hagan): “Canadian underlying inflation hit the highest in a decade in November, reinforcing a decision by policy makers this month to refrain from cutting interest rates despite concerns around slowing growth. Inflation rose 2.2% in November from a year earlier, compared with 1.9% in October…”
December 14 – Reuters (Matthew Green and Jake Spring): “A handful of major states resisted pressure on Sunday to ramp up efforts to combat global warming as a U.N. climate summit ground to a close, angering smaller countries and a growing protest movement that is pushing for emergency action. The COP25 talks in Madrid were viewed as a test of governments’ collective will to heed the advice of science to cut greenhouse gas emissions more rapidly, in order to prevent rising global temperatures from hitting irreversible tipping points.”
December 17 – CNBC (Saheli Roy Choudhury): “Artificial intelligence used to carry out automated, targeted hacking is set to be one of the major threats to look out for in 2020, according to a cybersecurity expert. The tools and knowledge for developing malicious AI and machine learning codes are becoming more mainstream and there is a lot more data out there for hackers to gather and use, Etay Maor, chief security officer at cyberintelligence company IntSights, told CNBC. ‘We will see the adoption of AI tools for targeted and automated attacks,’ Maor said.”
December 16 – Bloomberg (Ayai Tomisawa): “Struggling to revive profits as low yields persist, a handful of troubled Japanese regional banks are wading deeper into riskier credits such as near-junk rated overseas bonds, according to a Bloomberg survey. Weaker regional lenders are fighting for survival as the government presses for consolidation in the industry, which has been wracked by shrinking rural populations. Unlike megabanks that can mitigate the blow from negative interest rates by diversifying more into businesses like investment banking, regional lenders sometimes lack the resources for such shifts. The country’s low rates have forced some of the traditionally conservative local lenders to dive into riskier assets after cutting holdings of Japanese government bonds, which have been their mainstay.”
December 15 – Bloomberg (Taiga Uranaka and Takahiko Hyuga): “Masayoshi Son’s Japanese bankers are taking a hard look at their most important client. After the costly rescue of office-sharing startup WeWork and a series of other high-profile setbacks for Son, senior executives at two of Japan’s biggest banking groups have said privately that they’ve grown less comfortable with the eccentric billionaire’s management of SoftBank Group Corp.’s $100 billion Vision Fund… Japanese banks have helped finance Son’s ventures for almost four decades and are currently sitting on at least $15 billion of loans to SoftBank and the Vision Fund.”
December 17 – Reuters (Daniel Leussink): “Japan’s exports slipped for a 12th straight month in November, as declining shipments to the United States and China hit the trade-reliant economy, raising the risk of a fourth-quarter contraction. …Japan’s exports fell 7.9% year-on-year in November, a smaller decline than the 8.6% decline expected…”
Leveraged Speculation Watch:
December 15 – Bloomberg (David Ramli): “On most mornings, Chong Chin Eai starts his day with a jog through Singapore’s Botanic Gardens. After taking his son to school, he trades futures on his laptop at home until it’s time for lunch, after which he might have a massage or perhaps a nap. If that sounds snoozy, Chong’s returns are anything but. His Vanda Global Fund Ltd., started with $24 million from friends and family and named after Singapore’s national orchid, is the world’s best-performing hedge fund this year, gaining more than 300%. Singapore is far from the skyscrapers of New York and The City of London, yet somehow it’s producing hedge funds that are trouncing global rivals. The city-state is home to two of the top 10 in 2019, and a third is partly based in the island nation.”
December 13 – Reuters (Heekyong Yang and Josh Smith): “North Korea said it had successfully conducted another test at a satellite launch site, the latest in a string of developments aimed at ‘restraining and overpowering the nuclear threat of the U.S.’, state news agency KCNA reported…”
December 18 – Bloomberg (Pankaj Mishra): “India has exploded into protests against a citizenship law that explicitly discriminates against its 200 million-strong Muslim population. Narendra Modi’s Hindu nationalist government has responded with police firing on demonstrators and assaults on university campuses. The global wildfire of street protests, from Sudan to Chile, Lebanon to Hong Kong, has finally reached the country whose 1.3 billion population is mostly below the age of 25. The social, political, and economic implications couldn’t be more serious. It was only last month that students on the campus of Hong Kong Polytechnic University were throwing petrol bombs at the police, and fielding, in turn, teargas, rubber bullets and water cannons. This violent resistance to an authoritarian state is novel to Hong Kong…. The campaigners for democracy in Hong Kong today have also traveled very far away from the Chinese students who occupied Tiananmen Square in 1989, and to whom they have been wrongly compared.”