December 22, 2023: Bubble Kings

December 22, 2023: Bubble Kings
Doug Noland Posted on December 23, 2023

From an analytical perspective, it’s fascinating how things can turn wild at the end of cycles. While mortgage Credit expanded at double-digit annual rates between 2001 and 2005, terminal phase Bubble excess went into overdrive with 2006’s $1 TN of subprime mortgage derivatives. Wall Street alchemists worked overtime to create sophisticated structures that intermediated increasingly high-risk mortgage debt into enticing securitizations and derivative instruments.

Articles, books, documentaries and even Hollywood films have documented the chicanery and insanity of it all. Still, the broad financial, economic, and social impacts of Wall Street’s alchemy have never received the attention they deserve. Especially late in the cycle, the capacity for Wall Street to intermediate the riskiest mortgage Credit was integral to sustaining the deeply systemic mortgage finance Bubble. It ensured the marginal home buyer could pay up to purchase a home, providing the seller the wherewithal to leverage up in a bigger, more expensive property.

Inflating home prices ensured only more speculative interest and ongoing mortgage Credit excess. Strong system Credit growth fueled general asset inflation, market liquidity excesses, and inflated perceived wealth, along with attendant malinvestment, structural maladjustment and corrosive wealth inequality.

Back then, Wall Street firms and their hedge fund clients could have argued that their operations were providing strong support for “the American dream”. Without their intermediation and leverage, many would-be buyers would not have had access to a mortgage, while millions more would have faced higher mortgage rates. Home prices would have been lower, the economy and wealth creation slower. And financial and economic systems would have been more stable and crisis-resistant.

The Wall Street subprime alchemy blew up in the summer of 2007, marking the beginning of the end to the great mortgage finance Bubble. But during the 15 months between the subprime implosion and the Great Financial Crisis, a collapsing Fed funds rate and sinking bond yields kept the game going. Trillions of perceived money-like AAA-rated GSE MBS were instrumental in prolonging late-cycle terminal phase Bubble excess.

From post-mortgage finance Bubble reflationary policymaking inflated the great global government finance Bubble. I have over the years discussed the powerful Bubble fuel attributes of perceived safe and liquid money-like instruments (enjoying idiosyncratic insatiable demand). This insatiable demand dynamic has been all-powerful – and nothing short of incredible – of late.

The Financial Times’ Gillian Tett was the preeminent journalist reporting on subprime and Wall Street excess during the mortgage finance Bubble period. At the time, I pondered how closely U.S. and global central bankers/regulators followed her work. My thoughts returned to Ms. Tett’s investigative journalism this week while reading a Bloomberg article, “The Kings of a Colossal Bond Trade That’s Spooking Regulators,” by Nishant Kumar, Donal Griffin, and William Shaw.

The so-called “basis trade” is simultaneously mundane and utterly phenomenal. Hedge funds buy Treasury bonds while shorting a corresponding Treasury futures contract, capturing a tiny spread between the yields on the two instruments. Done for decades and not a big deal, except when the moon and stars align late in the cycle, with the “basis trade” inflating into one of history’s greatest levered speculations – in the most important market in the world.

And “late cycle” is paramount. Late in the cycle ensures that Wall Street has had years and decades to master the processes of lending, intermediation, and speculation through the ups and downs; that the Fed has had years and decades to orchestrate ever more egregious inflations and market bailouts (“coins in the fuse box”); while the public has had years and decades to be conditioned that markets invariably recover to ever higher highs. Ignoring risk pays. Taking more risk boosts paydays. Believe in the wonders of markets and the all-powerful Fed (and disregard analysts like me).

I’ll state up front that the “basis trade” is surely only one facet of leverage that has engulfed Treasury and Agency markets – along with sovereign bond markets around the world. I can only assume a proliferation of massive global “carry trades,” where cheap borrowings from Japan and elsewhere finance levered holdings in higher-yielding instruments, including U.S. bonds. Moreover, Treasury short positions are financing huge “carry trade” speculative leverage in higher-yielding corporate debt, with Trillions of leverage embedded in global derivatives.

Yet the “basis trade” has singularly become systemically important. There were warnings this summer of a “basis trade” that had inflated to $650 billion, exceeding even the level going into the 2020 crisis. Last month, the Bank of England pegged the size at $850 billion. Still inflating, a Reuters article from a couple weeks back ran with the headline, “Praying for ‘Soft Landing’ of $1 Trillion Basis Trade.”

Egregious amounts of speculative leverage accumulated during the mortgage finance Bubble period. Faulty, to be sure, but there were market constraints on the amount of leverage lenders were willing to offer against risky mortgage Credit. Over recent years, the Treasury marketplace has evolved into the Wild West of unfettered leverage and speculation. At $26 TN, the Treasury market is the largest and most liquid marketplace in our solar system. One can finance Treasury purchases in the “repo” market with minimal margin (“down payment”) requirements. Hedge funds are said to employ “repo” financing of Treasuries at 50 to 100 times leverage.

From “The Kings of a Colossal Bond Trade That’s Spooking Regulators”:

“As part of a core group of 10 or so firms, they rely on vast sums of money borrowed from Wall Street banks — often 50 times what they invest themselves — to pump tens of billions of dollars into the trade and supercharge returns. So colossal are their bets that some say they’ve become central to the buying and selling of Treasuries, it’s the cornerstone of global capital markets.”

The Bloomberg article highlighted ringleaders from three prominent “basis trade” firms, ExodusPoint Capital Management, Millennium Management, and Citadel. Also mentioned as major players were Capula Investment Management, Symmetry Investments, Balyasny Asset Management, and Kedalion Capital Management.

“A senior Wall Street figure who’s worked for years with the core players estimates they account for roughly 70% of hedge fund basis-trade bets. The firms and traders named in this piece all declined to comment.”

“Now regulators have the hedge funds in their sights, fearing a repeat of March 2020 when the bet blew up spectacularly — just before the Federal Reserve had to jump in to resuscitate the Treasury market…”

“But regulators are in a bind. Crack down too hard and they could threaten the orderly running of a US Treasuries market that’s ballooned to $26 trillion since the pandemic… The size of the traders’ positions means the Fed may have to intervene if they hit trouble again.”

“‘There are only a couple of players and these players have made themselves too big to fail,’ says Kathryn Kaminski, chief research strategist at AlphaSimplex Group… ‘If you limit this arbitrage, you weaken market liquidity.’”

“Because the gap [differences in price between Treasuries and Treasury futures] is usually mere fractions of a penny this is only worth doing at scale, ramping up returns through the use of leverage. That largely limits the activity to a few trusted individuals at hedge funds with enough clout to borrow big from banks in overnight money markets. As the availability of this short-term lending has surged this year, the basis trade has boomed.”

“Critics ask whether it’s wise to lean so heavily on a few hedge funds, pointing to Covid’s early days in March 2020 when market turmoil forced them to rapidly unwind their positions… The Fed had to intervene to keep markets running, pledging trillions of taxpayer dollars… The 2020 episode may have fed a belief among some in the group that the central bank will always ride to the rescue, market participants say.”

“’There’s an implicit ‘Fed put’,” says Eric Rosenfeld, formerly of Salomon Brothers’ government- arbitrage desk in the 1980s and a cofounder of Long-Term Capital Management… But it’s not a question of ‘too big to fail,’ he asserts, more that the ‘Fed is responsible for maintaining a liquid, free-flowing Treasury market.’”

“Enabling all this is the group’s abundant access to the magic ingredient that lets it happen: leverage. Wall Street giants such as JPMorgan… and Bank of America Corp. lend to them in massive volumes in exchange for fees. Banks have only a fixed amount of leverage to dole out, so they tend to favor their best clients. Multi-strategy hedge funds such as Millennium, Citadel and ExodusPoint are a perfect match because they have other high-turnover businesses attractive to Wall Street lenders… For hedge funds, part of basis trading’s beauty is that they often borrow at ‘zero margin’ from banks, meaning no extra collateral has to be put up and they can take more profit.”

Ironically, Fed “tightening” spawned the ideal backdrop for Wall Street Treasury market intermediation and levered speculation – a speculative Bubble that generated liquidity abundance and loosened conditions, countering higher policy rates and QT.

For starters, significantly higher yields made the spread between Treasury bonds and futures just a little wider, ensuring robust demand from the big “basis trade” hedge funds. At the same time, the Wall Street firms were seeing strong institutional demand for Treasury futures from mutual/pension fund managers and insurance companies capitalizing on higher market yields (and likely “risk parity” and other levered hedge fund strategies that prefer Treasury futures). Other clients were dumping Treasury cash bonds to mitigate losses.

The big “basis trade” players were eager to take the opposite sides of these trades, selling Treasury futures and buying cash bonds – and doing so in enormous size. Meanwhile, money flooded into the money fund complex, generating more fund demand for money market instruments such as repurchase agreements (“repos”). This created essentially unlimited demand for the other side of hedge fund “repo” borrowings, with the money fund complex providing the critical source of funding for “basis trade” cash Treasury bond purchases.

It’s the ultimate “Fed put,” “too big to fail” and “Fed secures Treasury and ‘repo’ liquidity’ all neatly wrapped up in a historic Trillion dollar “basis trade” levered speculation. Wall Street is overjoyed to profit handsomely as middlemen for Trillions of Treasury trades in the biggest and most liquid market in the world. The money fund complex, flush with an extra Trillion of liquidity, is content to lend in the “repo” market with “risk-free” Treasuries as collateral. And the big “basis trade” players, boy are they rendered speechless while raking in billions utilizing beyond egregious leverage – cocksure the Fed understands it must act immediately to ensure liquid and continuous trading in Treasury and Treasury derivatives markets.

The Fed’s restart of QE in the summer of 2019 in response to “repo” market instability emboldened Wall Street and their “basis trade” partners. And then the Fed’s direct market bailout in March 2020, leading to $5 TN balance sheet expansion, confirmed there were no longer any limits on Federal Reserve market liquidity backstop operations. Importantly, the Fed/FHLB’s $700 billion liquidity injection this past March assured the levered players that “tightening” would in no way detract the Fed from its backstop commitment. Indeed, the Fed was prepared to move forcefully and hastily to nip de-risking/deleveraging in the bud.

In a November 5th Financial Times article (Costas Mourselas and Harriet Agnew), “Citadel’s Ken Griffin Warns Against Hedge Fund Clampdown to Curb Basis Trade Risk,” Griffin made a key point:

“He noted that the basis trade brought down the cost of issuing government bonds, as hedge funds buy large quantities of Treasuries to pair against their short futures positions. ‘The ability for asset managers to efficiently gain exposure to Treasuries through futures allows them to free up cash to invest in corporate bonds, residential mortgages and other assets,’ he said. This is because futures are leveraged products requiring a fraction of the cash posted as collateral to maintain the position, rather than paying full price for a Treasury bond now.”

“Free up cash to invest in corporate bonds, residential mortgages and other assets” – with “other assets” these days certainly including stocks. Markets awash in liquidity in the face of higher rates and significant Fed QT (balance sheet liquidation) have been an incredible 2023 Bubble manifestation. Such speculative excess and asset inflation are upshots of some underlying monetary disorder.

Analysts focused on QT and the contraction of M2 would be hard-pressed to explain the monetary inflation behind bubbling equities prices. The unprecedented $1.129 TN (24%) one-year growth in money market fund assets and the explosion of “basis trade” leverage suggest that levered speculation has become a pivotal source of system liquidity.

As a student of “Roaring Twenties” excesses (culminating in the 1928/29 speculative melt-up and subsequent crash), I worry greatly about how leveraged speculation has evolved into the prevailing marginal source of late-cycle system liquidity excess.

From the September 13th Financial Times article (Kate Duguid, Costas Mourselas and Ortenca Aliaj), “The Debt-Fuelled Bet on US Treasuries That’s Scaring Regulators:

“‘My biggest concern is that if we get a big unwind in this leveraged trade, it could really cause liquidity to dry up in the Treasury market,’ says Matthew Scott, head of rates trading at AllianceBernstein. In such a situation, it would be highly unlikely for the US central bank to simply stand back and watch. The executive at the large US bank says: ‘The assumption is that the Fed will step in to save the repo market, which they have in the past, so my view is that they will step in again if anything happens.’ Intervention could involve buying bonds, thus undermining the central bank’s mission to tighten policy until it defeats inflation, and resembles an official safety net for the trade.”

It’s a huge problem when leveraged speculation becomes such a prominent source of liquidity for markets and economies. In contrast to corporate and mortgage finance, there are basically no market constraints on Treasury issuance or levered speculation in Treasury instruments. The global government finance Bubble has inflated so far beyond all previous Bubble cycles.

I have been concerned for the inflationary consequences when the Fed is again compelled to use its balance sheet (QE) to accommodate speculative deleveraging. But the immediate risk is that this Bubble has become completely unhinged. Perhaps “basis trade” blowup worries were a factor in Powell’s dovish pivot, though he only stoked speculation raging in equities and derivatives markets.

It’s worth noting that the list of economic data upside surprises is adding up quickly. This week’s Housing Starts, Consumer Confidence, Initial Jobless Claims, and Durable Goods Orders support the thesis that the dramatic loosening of conditions is working its magic. A spectacular late-year rally ensured strong 2023 returns for corporate Credit, while salvaging the year for Treasury bonds. But loosened conditions and all the market euphoria underpin economic activity, while increasing the likelihood for upside 2024 inflation surprises.

The rate market ended the week pricing 156 basis points of rate cuts over the next year. Not surprisingly, markets are having none of the Fed pushback against rate cut expectations. On the one hand, six rate cuts are at odds with Fed forecasts and economic prospects following a major loosening of conditions. On the other hand, with out-of-control speculative Bubbles raising the risk of a crash scenario, it’s not unreasonable for the market to price in probabilities of aggressive Federal Reserve rate cuts. Could the backdrop heading into 2024 possibly be more unstable?

For the Week:

The S&P500 increased 0.8% (up 23.8% y-t-d), and the Dow added 0.2% (up 12.8%). The Utilities declined 1.4% (down 13.2%). The Banks dipped 0.5% (down 5.5%), while the Broker/Dealers rose another 2.7% (up 22.8%). The Transports added 0.3% (up 20.0%). The S&P 400 Midcaps rose 1.5% (up 14.7%), and the small cap Russell 2000 jumped 2.5% (up 15.5%). The Nasdaq100 advanced 0.9% (up 53.4%). The Semiconductors increased 0.4% (up 63.2%). The Biotechs gained 1.8% (up 1.7%). With bullion jumping $33, the HUI gold index rose 3.9% (up 7.9%).

Three-month Treasury bill rates ended the week at 5.20%. Two-year government yields dropped 12 bps this week to 4.32% (down 11bps y-t-d). Five-year T-note yields declined four bps to 3.87% (down 13bps). Ten-year Treasury yields dipped two bps to 3.90% (up 2bps). Long bond yields gained four bps to 4.05% (up 9bps). Benchmark Fannie Mae MBS yields dropped seven bps to 5.30% (down 9bps).

Italian yields sank 17 bps to 3.56% (down 114bps). Greek 10-year yields dropped 17 bps to 3.00% (down 157bps y-t-d). Spain’s 10-year yields fell 10 bps to 2.90% (down 62bps). German bund yields declined four bps to 1.98% (down 44bps). French yields fell six bps to 2.48% (down 50bps). The French to German 10-year bond spread narrowed about two to 50 bps. U.K. 10-year gilt yields sank 18 bps to 3.51% (down 17bps). U.K.’s FTSE equities index rose 1.6% (up 3.3% y-t-d).

Japan’s Nikkei Equities Index added 0.6% (up 27.1% y-t-d). Japanese 10-year “JGB” yields dropped seven bps to 0.625% (up 20bps y-t-d). France’s CAC40 slipped 0.4% (up 16.9%). The German DAX equities index dipped 0.3% (up 20.0%). Spain’s IBEX 35 equities index added 0.2% (up 22.9%). Italy’s FTSE MIB index was little changed (up 28.0%). EM equities were mostly higher. Brazil’s Bovespa index rose 2.0% (up 21.0%), and Mexico’s Bolsa index added 0.3% (up 18.3%). South Korea’s Kospi index gained 1.4% (up 16.2%). India’s Sensex equities index declined 0.5% (up 16.9%). China’s Shanghai Exchange Index fell 0.9% (down 5.6%). Turkey’s Borsa Istanbul National 100 index sank 5.5% (up 37.2%). Russia’s MICEX equities index rose 1.9% (up 43.6%).

Federal Reserve Credit declined $10.8bn last week to $7.691 TN. Fed Credit was down $1.210 TN from the June 22nd, 2022, peak. Over the past 223 weeks, Fed Credit expanded $3.964 TN, or 106%. Fed Credit inflated $4.880 TN, or 174%, over the past 580 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.6bn last week to $3.387 TN. “Custody holdings” were up $78.3bn, or 2.4%, y-o-y.

Total money market fund assets declined $16bn to $5.870 TN, with a 41-week gain of $976bn (25% annualized). Money funds were up $1.129 TN, or 23.8%, y-o-y.

Total Commercial Paper jumped $19.3bn to $1.262 TN. CP was down $16bn, or 1.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates sank 33 bps to a six-month low 6.49% (up 29bps y-o-y). Fifteen-year rates dropped 36 bps to 5.91% (up 41bps). Five-year hybrid ARM rates fell 20 bps to 6.42% (up 103bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 23 bps to a six-month low 7.15% (up 64bps).

Currency Watch:

December 18 – Bloomberg (Garfield Reynolds): “Goldman Sachs Group added its voice to a chorus of expectations of a weaker dollar after the US central bank’s clearest sign yet that interest-rate cuts are coming. The bank made sweeping changes to its exchange-rate forecasts after the Federal Reserve signaled a more-rapid move to ‘non-recessionary’ interest-rate cuts, Goldman analysts including Michael Cahill wrote…”

For the week, the U.S. Dollar Index declined 0.8% to 101.70 (down 1.7% y-t-d). For the week on the upside, the Swedish krona increased 2.7%, the Norwegian krone 2.5%, the Swiss franc 1.7%, the Brazilian real 1.7%, the Australian dollar 1.5%, the New Zealand dollar 1.4%, the Mexican peso 1.4%, the euro 1.1%, the Canadian dollar 0.8%, the Singapore dollar 0.7%, and the British pound 0.2%. On the downside, the South African rand declined 0.7%, the South Korean won 0.5%, and the Japanese yen 0.2%. The Chinese (onshore) renminbi declined 0.2% versus the dollar (down 3.32%).

Commodities Watch:

The Bloomberg Commodities Index recovered 0.5% (down 11.9% y-t-d). Spot Gold rose 1.7% to $2,053 (up 12.6%). Silver gained 1.4% to $24.19 (up 1.0%). WTI crude rallied $2.13, or 3.0%, to $73.58 (down 8%). Gasoline slipped 0.3% (down 13%), while Natural Gas rallied 4.8% to $2.61 (down 42%). Copper increased 0.4% (up 3%). Wheat dropped 2.1% (down 22%), and Corn fell 2.1% (down 30%). Bitcoin rallied $1,448, or 3.4%, to $43,570 (up 163%).

Middle East War Watch:

December 22 – Wall Street Journal (Benoit Faucon and Dov Lieber): “Iran’s paramilitary forces are providing real-time intelligence to Yemen’s Houthis that the rebels are using to direct drones and missiles to target ships passing through the Red Sea, Western and regional security officials said. Tracking information gathered by a surveillance vessel controlled by Iran’s paramilitary forces in the Red Sea is passed to the Houthis, who have used it to attack commercial vessels passing through the Bab el-Mandeb strait in recent days… Many vessels sailing in the strait have been switching off their radios to avoid being tracked online, but an Iranian vessel stationed in the Red Sea is enabling the Houthi drones and missiles to accurately target the ships, the officials said.”

December 18 – Wall Street Journal (Costas Paris and Joe Wallace): “The U.S. unveiled a multinational naval force to protect merchant vessels in the Red Sea after Houthi rebel attacks threatened the Suez Canal’s central role in global trade. On Monday, the Pentagon said it was establishing a security operation to protect seaborne traffic from ballistic missiles and drone attacks launched by the Houthi groups in Yemen. The effort, called Operation Prosperity Guardian, will include the U.K., Bahrain, France, Norway and other countries… ‘This is an international problem. And it deserves an international response,’ U.S. Defense Secretary Lloyd Austin said…”

December 20 – Bloomberg (Henry Meyer and Omar Tamo): “Yemen’s Houthi rebels vowed to continue targeting ships in the Red Sea despite a US move to compile an international naval task force to protect maritime trade in one of the world’s most important waterways. The Iran-backed group also warned Washington it’s willing to retaliate if the US opts for military attacks on Houthi bases. ‘We’re seeking to develop our military capabilities to overcome any obstacles and reach our targets,’ Houthi leader Abdul Malik al-Houthi said… If the US attacks Yemen, ‘we will target it’ by firing missile and drones at US battleships and other vessels, he added.”

December 20 – Wall Street Journal (Megha Mandavia): “Global trade is under threat again. This time from missile attacks linked to the Israel-Hamas war targeting commercial ships passing through the Red Sea, near the Suez Canal. That may force many vessels to take the longer but safer route around Africa and is boosting oil prices. For shipping owners, the development both gives and takes away: Clients will be forced to pay up for higher rates, but shippers will also have to absorb higher fuel costs. Tanker and liquid petroleum gas shippers look best placed since capacity utilization is tight and trouble at another major canal—the one in Panama—has already given them a huge boost in bargaining power.”

December 20 – Bloomberg: “Attacks in the Red Sea linked to the Israel-Hamas war will cause shipping delays and drive up the price of goods, bringing a new inflation risk to the economy. Shipping companies are diverting cargoes after Iran-backed Houthi militants attacked commercial vessels plying the Red Sea. The vessels will have to sail around Africa instead of taking the shorter route through the Suez Canal. This rerouting will mean higher shipping costs and longer delivery time, Bloomberg Economics analysts including Gerard DiPippo wrote in a note. The Red Sea is one of the world’s most important shipping lanes, carrying about 14% of global maritime trade.”

December 20 – Financial Times (Editorial Board): “Supply chain wobbles are back. Just as the effects of pandemic-era backlogs and port closures have unwound, two continental shipping passages, the Suez and Panama canals, are suffering from obstructions to trade traffic. Unlike the past few festive seasons, there is less concern about any delays spoiling Christmas… The problems have however introduced a new risk for the global economy in 2024. Around 12% of global trade passes through the Red Sea, which is bookended by the Suez Canal to the north and the Bab-el-Mandeb strait — known as the Gate of Tears — to the south. Since mid-November more than 10 transiting vessels have been attacked by Yemen’s Iran-aligned Houthi militants. Many shipping companies have responded by postponing journeys through the region — a crucial passage between Asia and Europe.”

December 19 – Wall Street Journal (Costas Paris, Joe Wallace and Gordon Lubold): “Hours after the U.S. announced a multinational task force to protect commercial traffic through the Red Sea, shipping giant A.P. Moller-Maersk said it would send its vessels around the Cape of Good Hope in southern Africa instead. The message was clear: Shipping firms, oil companies and insurers remain jittery about a possible snarl to one of the world’s most crucial trade routes.”

Ukraine War Watch:

December 21 – Reuters (Max Hunder and Yuliia Dysa): “Russia has launched about 7,400 missiles and 3,700 Shahed attack drones at targets in Ukraine during its 22-month-old invasion, Kyiv said…, illustrating the vast scale of Moscow’s aerial assaults. Ukrainian air defences were able to shoot down 1,600 of the missiles and 2,900 of the drones, air force spokesperson Yuriy Ihnat said… ‘We are faced with an enormous aggressor, and we are fighting back,’ he said.”

Market Instability Watch:

December 15 – Financial Times (Katie Martin): “The only thing Jay Powell could have done to deliver a stronger impression of a festive giveaway to global markets this week would have been to conduct his press conference decked in an oversized red suit with fluffy white trimmings and a matching hat. The public appearance by the chair of the US Federal Reserve on Wednesday was a big opportunity to use the central banker Jedi mind tricks we all know and love to hint to investors that they have read the situation all wrong… So after leaving rates on hold this time around, Powell was widely expected to give a subtle wink and a nod to markets that ‘you’re overdoing it, knock it off’. He did not do that at all. Instead, first he took a bit of a victory lap…”

December 18 – Bloomberg (Emily Graffeo and Vildana Hajric): “An unprecedented amount of cash flowed into the world’s largest and oldest exchange-traded fund last week, as stocks rallied to near-record highs after the Federal Reserve indicated it could cut interest rates next year. State Street’s $478 billion SPDR S&P 500 ETF (ticker SPY) raked in $20.8 billion on Friday… According to Bloomberg Intelligence, it was the largest one-day flow for any ETF. For the week, the ETF garnered more than $24 billion, also a record…”

December 22 – Bloomberg (Farah Elbahrawy): “Investors poured record amounts into cash this year, according to Bank of America Corp. strategists… Cash funds attracted $1.3 trillion of inflows, dwarfing the $152 billion that flowed into global stocks, a BofA team led by Michael Hartnett said, citing EPFR Global data. Investors also staked more on US Treasuries than ever before, at $177 billion.”

December 19 – Bloomberg (Farah Elbahrawy): “Investors are the most optimistic since the beginning of 2022 as expectations of policy easing by the Federal Reserve are fueling a rush into stocks, according to a Bank of America Corp. survey. The sentiment of global fund managers surveyed in December was the most upbeat since January 2022 on a Goldilocks environment… as the case for next year, a team of strategists led by Michael Hartnett wrote…”

December 20 – Financial Times (Jennifer Hughes): “A brief jump in US overnight lending rates this month is a likely harbinger of strains in money markets next year as the US government sells more Treasuries to cover its deficits, analysts have warned. Concerns were sparked by a sudden rise early this month in the rate for borrowing cash overnight in the market for short-term funds, a move that was not mirrored in the rate charged by the Federal Reserve to take in excess cash. A divergence between the two rates, which historically track each other closely, has raised fears over the potential for broader strains in the market lending rates for banks and customers, as cash becomes scarcer after years of excess liquidity.”

December 20 – Reuters (Huw Jones): “Tackling hidden leverage across the multi-trillion dollar ‘shadow banking’ sector is next year’s priority, global financial regulators said…, but the challenge of accessing data could hamper the process. The G20’s Financial Stability Board (FSB) and IOSCO… issued tougher liquidity management guidance for asset managers of open-ended investment funds… Both types of funds are part of the $218 trillion non-bank financial intermediation (NBFI) sector, which also includes hedge funds, property funds and insurance companies. This now makes up almost half of all global financial assets, and is also dubbed ‘shadow banking’ given its role in the economy.”

December 20 – Reuters (Marc Jones): “The U.S. and China on downgrade warnings, Turkey hoping for its first upgrade in a decade and Israel facing its first cut – plus more than 50 elections to navigate – means 2024 could bring pivotal moves in some sovereign credit ratings. Next year might be starting with highest share of ‘stable’ sovereign ratings for years, but with record debts now meeting higher borrowing costs, spluttering growth and multiple wars, there are big names are in play. Moody’s has negative outlooks on both the United States and China, the world’s two biggest economies. A downgrade would cost the U.S. its only remaining triple-A rating. Marie Diron at Moody’s said it wants to see if Washington can address a threatened ‘very steep deterioration in debt affordability’ and whether China can stop its property and local government debt woes worsening.”

Bubble and Mania Watch:

December 18 – Wall Street Journal (Hannah Miao): “The share of Americans who own stocks has never been so high. About 58% of U.S. households owned stocks in 2022, according to the Federal Reserve’s survey of consumer finances… That is up from 53% in 2019 and marks the highest household stock-ownership rate recorded in the triennial survey. The cohort includes families holding individual shares directly and those owning stocks indirectly through funds, retirement accounts or other managed accounts… Stuck at home during the pandemic with extra cash, millions jumped into the stock market for the first time. The elimination of commission fees on stock trading across U.S. brokerages made investing cheaper than ever. ‘It created a whole generation of investors,’ said Anthony Denier, chief executive of mobile brokerage Webull U.S.”

December 20 – Bloomberg (Farah Elbahrawy): “A stellar year on Wall Street is propelling the biggest rally since 2019 in the MSCI World Index of developed-market equities, pushing the gauge closer to its record high and leaving emerging-market peers trailing far behind. The global benchmark is now just 3% from its all-time peak after climbing 21% this year, while the MSCI Emerging Markets Index is up 4%. The US stock market has been a major driving force, with the S&P 500 also a few points shy of its highest-ever level and the Nasdaq 100 on track for its best annual performance since 1999.”

December 16 – Bloomberg (Lisa Lee): “No longer a backwater, private credit is now the buzziest corner of Wall Street. These loans to companies charge floating rates, and the Federal Reserve’s tightening campaign has lenders collecting double-digit yields where they used to get 7%. By some measures, investors in this kind of credit are earning higher returns than the buyout artists of private equity, and the market is now worth $1.6 trillion and climbing. Alongside Blackstone, financial titans including KKR, Ares Management and Oaktree Capital Management are making enormous bets. The asset management company BlackRock Inc. forecasts private credit ballooning to a $3.5 trillion market in five years.”

December 18 – Bloomberg (Shruti Singh): “US state and local retirement funds are pumping billions into private credit, joining the stampede into a booming sector of finance in the pursuit of higher returns. These systems are collectively allocating at least $100 billion of their roughly $5 trillion in assets into private debt, according to Equable, a bipartisan pension researcher… While that’s only a sliver of their holdings at present, funds’ private credit positions have been steadily growing and are poised to take off as pension plans including the California Public Employees’ Retirement System — the largest among its peers and a bellwether — show a keen interest in committing more to the space.”

December 21 – Reuters (Anirban Sen and Anousha Sakoui): “Mergers and acquisitions (M&A) activity fell to its lowest level in ten years globally in 2023…, but bankers and lawyers expect a pick-up as conditions improve. Total M&A volumes fell 18% to about $3 trillion, according to… Dealogic, the lowest since 2013 when deal volumes were at $2.8 trillion.”

December 18 – Bloomberg (Michelle F. Davis, Ryan Gould and Crystal Tse): “Dealmakers are coming to the end of their worst year for mergers and acquisitions in a decade, having seen hopes of any meaningful recovery choked off by reluctant lenders and geopolitical flare-ups. The value of M&A and related transactions is down roughly a quarter this year to $2.7 trillion going into the holiday period… That’s the lowest annual total since 2013, which was also the last time deal values failed to hit $3 trillion in a calendar year…”

December 21 – New York Times (Ben Casselman and Jordyn Holman): “‘Buy now, pay later’ loans are helping to fuel a record-setting holiday shopping season. Economists worry they could also be masking and exacerbating cracks in Americans’ financial well-being. The loans, which allow consumers to pay for purchases in installments, often interest-free, have soared in popularity… Retailers have used them to attract customers and to get people to spend more. But such loans may be encouraging younger and lower-income Americans to take on too much debt… And because such loans aren’t routinely reported to credit bureaus or captured in public data, they could also represent a hidden source of risk to the financial system. ‘The more I dig into it, the more concerned I am,’ said Tim Quinlan, a Wells Fargo economist who recently published a report that described pay-later loans as ‘phantom debt.’”

December 18 – Wall Street Journal (Hyung-Jin Kim): “Office building owners, hammered by falling demand and high interest rates, struggled in 2023. But they mostly managed to stay afloat. That is going to be a lot harder to do next year. Many landlords have been able to extend their loans… But a lot of those extensions are now expiring, and owners are losing hope that occupancy rates will rebound soon. That means many more office landlords will be compelled to pay off their mortgages, sell their properties at a steep discount or hand their buildings over to their creditors. ‘In 2024, it’s game time,’ said Scott Rechler, chief executive of RXR Realty, a major owner of office buildings in the New York region. ‘Owners and lenders are going to have to come to terms as to where values are, where debt needs to be and right-sizing capital structures for these buildings to be successful.’”

Banking Watch:

December 21 – Bloomberg (Alex Harris): “Banks borrowed a record amount from the Federal Reserve’s newest backstop facility in the most recent week as increasing wagers on interest-rate cuts made it a more attractive choice. Data from the Fed showed an all-time high $131 billion in borrowing from the Bank Term Funding Program, or BTFP, in the week through Dec. 20. That compares to a previous record of $124 billion, reached in the week ended Dec. 13. Launched amid this year’s banking crisis, the BTFP allows banks and credit unions to borrow funds for up to one year, pledging US Treasuries and agency debt as collateral valued at par.”

December 20 – Bloomberg (Josyana Joshua): “Bankers expect issuance in the US blue-chip loan market to pick up in 2024 after rising interest rates this year largely kept borrowers on the sidelines. Investment-grade companies raised about $1.01 trillion through revolving credit facilities, term loans, and other syndicated loans this year through Dec. 20, according to data compiled by Bloomberg. That’s down about 26% from last year.”

U.S./Russia/China/Europe Watch:

December 20 – NBC (Kristen Welker, Courtney Kube, Carol E. Lee and Andrea Mitchell): “Chinese President Xi Jinping bluntly told President Joe Biden during their recent summit in San Francisco that Beijing will reunify Taiwan with mainland China but that the timing has not yet been decided, according to three current and former U.S. officials. Xi told Biden… that China’s preference is to take Taiwan peacefully, not by force… The Chinese leader also referenced public predictions by U.S. military leaders who say that Xi plans to take Taiwan in 2025 or 2027, telling Biden that they were wrong because he has not set a time frame… Chinese officials also asked in advance of the summit that Biden make a public statement after the meeting saying that the U.S. supports China’s goal of peaceful unification with Taiwan and does not support Taiwanese independence, they said. The White House rejected the Chinese request.”

December 20 – Reuters (Don Durfee and Antoni Slodkowski): “After a year that brought panic over spy balloons, a fight over semiconductors and an intensifying military rivalry, China and the U.S. are ending the year with an uneasy detente. This follows a November meeting between U.S. President Joe Biden and Chinese President Xi Jinping where both men signaled a desire to stop the free fall in their countries’ relations. 2024 could bring new turbulence. From presidential elections in Taiwan and the U.S. to continued U.S.-China trade fights, Biden and Xi face no shortage of problems that could cause a stumble in the new year.”

December 19 – Bloomberg (Minxin Pei): “For Chinese President Xi Jinping, 2023 is on course to end very differently than he expected. When the year began, he was counting on a strong economic rebound but bracing for potential geopolitical calamities. His friend Russian President Vladimir Putin faced military defeat if Ukraine’s summer counter-offensive achieved a decisive breakthrough. Sino-American tensions were poised to plummet after the downing of a Chinese spy balloon over the US in early February. As 2023 draws to a close, Xi’s much-anticipated economic bonanza has failed to materialize. The Chinese economy remains burdened by a collapsing real estate sector, gargantuan local government debt, falling exports, and pervasive pessimism among private entrepreneurs. On the other hand, China is doing much better than expected abroad. Russia has stymied Ukrainian forces, lessening pressure on Xi to provide Putin more support in defiance of Western sanctions.”

December 20 – Bloomberg: “Chinese President Xi Jinping vowed to ‘amplify’ ties with Moscow during a meeting with Russian Prime Minister Mikhail Mishustin, as the two sides continue to deepen relations. The Chinese leader said the ‘robust resilience’ of their cooperation was demonstrated by bilateral trade hitting its annual goal of $200 billion last month… ‘Maintaining and developing China-Russian relations well is a strategic choice made by both sides on the basis of the fundamental interests of the two peoples,’ Xi said…”

December 19 – Reuters (Lidia Kelly and Liz Lee): “Beijing intends to expand energy cooperation with Russia along all stages of production, Chinese Ambassador to Russia Zhang Hanhui told the Russian state RIA news agency… ‘China expects to expand cooperation along the entire production chain in the energy industry,’ RIA cited the envoy as saying, ahead of a meeting of Russian Prime Minister Mikhail Mishustin and China’s top leaders.”

December 18 – Reuters (Ryan Woo and Liz Lee): “China’s Foreign Minister Wang Yi held talks with a senior North Korean official in Beijing…, coinciding with Pyongyang’s launch of a missile capable of reaching anywhere in the United States. China always views its ties with North Korea from a strategic and long-term perspective, the foreign ministry said in a statement, citing Wang’s comments in the meeting with North Korean Vice Minister of Foreign Affairs Pak Myong Ho.”

De-globalization and Iron Curtain Watch:

December 21 – Reuters (Siyi Liu and Dominique Patton): “China, the world’s top processor of rare earths, banned the export of technology to extract and separate the critical materials on Thursday, the country’s latest step to protect its dominance over several strategic metals. Rare earths are a group of 17 metals used to make magnets that turn power into motion for use in electric vehicles, wind turbines and electronics. While Western countries are trying to launch their own rare earth processing operations, the ban is expected to have the biggest impact in so-called ‘heavy rare earths,’ used in electric vehicle motors, medical devices and weaponry, where China has a virtual monopoly on refining.”

December 18 – Bloomberg: “China should gradually reduce its holdings of Treasuries and balance trade by boosting imports to control its exposure to US debt risks, a former adviser to its central bank said. America’s debt levels may continue rising relative to the size of the US economy, Yu Yongding said… The US has accumulated $18 trillion in net overseas debt, which is equivalent to some 70% of its gross domestic product, he said, adding that this figure could climb to 100%. The appeal of American debt to other countries is also declining given the ‘weaponization’ of the dollar by Washington, Yu said…”

Inflation Watch:

December 22 – Bloomberg (Augusta Saraiva): “The Federal Reserve’s preferred gauge of underlying inflation barely rose in November and trailed policymakers’ 2% target by one measure, reinforcing the central bank’s pivot toward interest-rate cuts next year. The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.1% from a month earlier after a downwardly revised 0.1% gain in October… From a year ago, the Fed’s preferred gauge of underlying inflation advanced 3.2%.”

December 20 – Bloomberg (Kelsey Butler): “A dramatic increase in child-care costs since the pandemic is forcing parents to find new ways of making ends meet, from working part time at a daycare for a discount to driving for a ride-share service on weekends… Monthly payments for child care were 32% higher in September than the pre-pandemic average, according to an analysis by the Bank of America Institute of the lender’s customer data… The average cost in the US for full-time, in-home infant care like a nanny is around $39,270 per year…, and is even higher in cities like New York and San Francisco… Center-based care can also be pricey: In cities like Washington, care for a toddler at a center can exceed $24,000 annually.”

December 20 – Wall Street Journal (Melissa Korn and Shane Shifflett): “Arizona State University students will pay more than $9,600 this year to live in a shared bedroom at Manzanita Hall, a 15-story dorm on the edge of campus… About a decade ago, a private developer took over Manzanita and gave it a $50 million refresh… Then the cost of living there shot up. Now, after multiple increases, ASU students pay about 80% more than what Sun Devils paid to live in the building about 20 years ago, adjusted for inflation. Housing is one of the biggest drivers of rising college prices in the U.S., fueling the $1.6 trillion federal student loan crisis… Though school administrators often boast of keeping tuition in check as a sign they’re sensitive to students’ financial concerns, they rarely rein in costs for living on campus. The Journal examined the price of residence halls going back roughly two decades at 12 public universities around the country. The least expensive bed increased by a median of 70% in today’s dollars.”

December 16 – Bloomberg (Ilena Peng): “Bonbons and candy canes may dominate the American holiday aesthetic, but US confectionery companies are feeling anything but jolly as they head into one of the sugar market’s tightest years in recent memory… ‘We just found that it was better to just pay more for sugar and pass it along to the consumer than to be completely out of sugar,’ said Kirk Vashaw, chief executive officer of Dum Dums lollipop maker Spangler Candy Co. ‘And there’s a lot of other companies that I think thought the same thing.’”

Biden Administration Watch:

December 21 – Wall Street Journal (Andrew Duehren): “The Biden administration is discussing raising tariffs on some Chinese goods, including electric vehicles, in an attempt to bolster the U.S. clean-energy industry against cheaper Chinese exports, people familiar… said. Biden administration officials, long divided over trade policy, have left in place Trump-era tariffs on roughly $300 billion of Chinese goods. But officials at the White House and other agencies are debating the levies again, the people said, with an eye on wrapping up a long-running review of the tariffs early next year. Chinese EVs are already subject to a 25% tariff, which has helped prevent subsidized Chinese automakers from making inroads into the U.S. market.”

December 22 – Reuters (Daphne Psaledakis and Andrea Shalal): “U.S. President Joe Biden on Friday will sign an executive order allowing Washington to impose sanctions on financial institutions that help Russia evade sanctions, U.S. Treasury Secretary Janet Yellen said. The executive order, part of a wider U.S. crackdown on sanctions evasion, also gives Washington the ability to ban products originating in Russia but processed in third countries, such as seafood and diamonds… ‘Today we are taking steps to level new and powerful tools against Russia’s war machine,’ Yellen said. ‘And we will not hesitate to use the new tools provided by this authority to take decisive and surgical action against financial institutions that facilitate the supply of Russia’s war machine.’”

Federal Reserve Watch:

December 18 – Bloomberg (Bill Dudley): “The US Federal Reserve and its chair, Jerome Powell, are betting that they can have the best of both worlds — that they’ll be able to defeat excessive inflation without forcing the economy into recession. I hope it goes well. Unfortunately, there’s still a significant chance it won’t. Powell surprised markets last week with his extraordinarily dovish comments on the outlook for interest rates. He took further increases off the table and put the prospect of cuts firmly on. This was a big shift: Only two weeks earlier, he had opined that any talk of rate reductions was premature. ‘Higher for longer’ is now in the trash bucket. Instead, officials are expecting further declines in inflation that will make earlier and more rapid rate cuts possible, even necessary.”

December 17 – CNBC (Stephanie Landsman): “Market optimism over the potential for interest rate cuts next year is dangerously overdone, according to former FDIC Chair Sheila Bair. Bair, who ran the FDIC during the 2008 financial crisis, suggests Federal Reserve Chair Jerome Powell was irresponsibly dovish at last week’s policy meeting by creating ‘irrational exuberance’ among investors. ‘The focus still needs to be on inflation,’ Bair told CNBC… ‘There’s a long way to go on this fight. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far.’”

December 20 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chair Jerome Powell was asked at a recent gathering what he does for fun. He paused, then grinned. ‘For me, a really big party—this is as fun as it gets—is a really good inflation report,’ he said… Powell is finally getting what he wanted: A meaningful decline in inflation. But that is creating a familiar headache by making it harder for Fed officials, who want to keep their options open, to dissuade investors that rate cuts are imminent. After their policy meeting last week, Fed officials released projections of at least three rate cuts next year. They have since been flummoxed that investors expect even faster and deeper cuts. The result: Confusion over when and how quickly the Fed might cut as the central bank tries to bring inflation down without a painful recession.”

December 17 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Chicago President Austan Goolsbee said it’s too early to declare victory in the central bank’s inflation fight, and decisions on interest-rate cuts will be based on incoming economic data. ‘We’ve made a lot of progress in 2023, but I still caution everyone, it’s not done,” Goolsbee said… ‘And so the data is going to drive what’s going to happen to rates.’”

December 18 – CNBC (Jesse Pound): “A Federal Reserve official said… the market may have misunderstood the central bank’s intended message last week after stocks and bonds rallied sharply. The Fed voted last week to hold rates steady once again, and its updated projections showed an expectation of three rate cuts in 2024. That caused a rally in stocks and bonds, with the Dow Jones Industrial Average jumping to a record high. ‘It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,’ said Chicago Fed President Austan Goolsbee said… ‘I was confused a bit — was the market just imputing, here’s what we want them to be saying?’”

December 18 – Financial Times (Colby Smith): “A top official at the Federal Reserve has warned that financial markets have jumped ‘a little bit ahead’ by pencilling in early interest rate cuts next year, in the latest attempt by the US central bank to rein in the exuberance that has driven up stocks and bonds globally. Loretta Mester, president of the Cleveland Fed…, pushed back on expectations that the central bank will abruptly pivot towards lowering borrowing costs… ‘The next phase is not when to reduce rates, even though that’s where the markets are at… It’s about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%… The markets are a little bit ahead… They jumped to the end part, which is ‘We’re going to normalise quickly’, and I don’t see that.’”

December 18 – Reuters (Juby Babu): “San Francisco Federal Reserve Bank President Mary Daly said… that cuts to the U.S. central bank’s benchmark rate are likely be appropriate next year because of an improvement in inflation this year… The Fed must make sure ‘we don’t give people price stability but take away jobs,’ Daly told the Journal… The Fed aims to bring inflation down to its 2% goal, she said, but wants to ‘continue to do this gently, with as few disruptions to the labor market as possible.’”

December 20 – Reuters (Howard Schneider): “There is no current ‘urgency’ for the Federal Reserve to reduce U.S. interest rates given the strength of the economy and the need to be sure that inflation will return to the central bank’s 2% target, Atlanta Federal Reserve President Raphael Bostic said… Inflation ‘is going to come down relatively slowly in the next six months, which means that there’s not going to be urgency for us to start to pull off of our restrictive stance,’ Bostic said… ‘This economy is far stronger than I would have imagined it would be 12 months ago, and I’m really grateful for that,’ Bostic said… Households and businesses ‘have been able to absorb a lot,’ he said.”

December 19 – Yahoo Finance (Jennifer Schonberger): “Richmond Federal Reserve President Tom Barkin said… the central bank has made good progress on bringing down inflation, but he needs to see more consistency in the data before rate cuts can begin. ‘I think we’re nicely positioned now with a 3% inflation rate moving down, and a 3.7% unemployment rate staying relatively steady,’ Barkin told Yahoo Finance… ‘If you’re going to assume that inflation comes down nicely, then of course, we’d respond appropriately …[But,] I’ve got a perspective that inflation is a little stubborner than I think the average person is in there and I hope I’m wrong on that.’”

December 20 – Reuters (Michael S. Derby): “Philadelphia Federal Reserve President Patrick Harker… said he still opposes any further U.S. central bank interest rate hikes, while signaling openness to lowering short-term borrowing costs, albeit not imminently. ‘I’ve been in the camp of, let’s hold rates where they are for a while, let’s see how this plays out, we don’t need to raise rates anymore,’ Harker said… But looking ahead, ‘it’s important that we start to move rates down,’ he said, adding that ‘we don’t have to do it too fast, we’re not going to do it right away, it’s going to take some time.’”

U.S. Bubble Watch:

December 21 – Associated Press (Paul Wiseman): “The number of Americans applying for unemployment benefits rose slightly last week but still remained at historically low levels… Jobless claims were up by 2,000 to 205,000 the week that ended Dec. 16. The four-week average of claims… fell by 1,500 to 212,000. Overall, 1.87 million Americans were collecting jobless benefits the week that ended Dec. 9, little changed from the week before.”

December 18 – Reuters (Michael S. Derby): “The average wage U.S. employers were willing to offer new workers surged to record levels in November, a report from the New York Federal Reserve showed… The average full-time annual wage offer moved to $79,160 in November from $69,475 in July, the regional Fed bank said in its Survey of Consumer Expectations Labor Market Survey. The wage in November was the highest ever in a survey that dates back to 2014 and likely reflects ongoing labor market tightness, with firms being forced to come up with higher levels of cash to secure employees.”

December 20 – Reuters (Lucia Mutikani): “U.S. consumer confidence increased to a five-month high in December, with Americans growing more optimistic about current and future business conditions as well as the labor market… The jump in confidence reported by the Conference Board… occurred across all age groups and household income levels. Though consumers continued to worry about inflation, many were planning to buy motor vehicles, houses and major appliances like refrigerators and clothes dryers over the next six months. The Conference Board’s consumer confidence index increased to 110.7 this month, the highest reading since July, from a downwardly revised 101.0 in November… The survey’s present situation index… rose to 148.5 from 136.5 last month. Its expectations index, based on consumers’ short-term outlook for income, business and labor market conditions, jumped to 85.6 from 77.4 in November…”

December 20 – Yahoo Finance (Josh Schafer): “Americans are getting good vibes from the US economy and stock market. New data from the Conference Board… shows consumers haven’t felt this good about the path forward for stocks in more than two years. According to the report, 37.4% of respondents see stocks increasing next year, up from 32.9% in November. That marks the highest level of optimism for stocks since July 2021. The renewed optimism comes amid a blistering rally in the stock market in which the Dow Jones has set record highs.”

December 19 – CNBC (Steve Liesman): “It looks like it’s going to be both a green and a blue Christmas. The CNBC All-America Economic Survey finds American views on the economy in a continued slump… and yet holiday spending plans are buoyant. The survey shows intended holiday spending per person rocketed up to $1,300 this year, 31% above last year. While the number was driven by a small number of respondents saying they will spend large sums, the gains still amount to double digits when those answers are removed. What’s more, 18% say they will spend more, up from just 11% last year and the highest since 2019. Among those spending more, 32% say it’s because they are being paid more or have higher incomes…”

December 22 – Bloomberg (Paulina Cachero): “American consumers continued to splurge in 2023… But a lot of it was funded with debt. Credit card balances in the US increased by about $48 billion in the third quarter alone, pushing the total to $1.08 trillion, according to the New York Federal Reserve… One specific area of concern is the increasing popularity of ‘buy now, pay later’ services, which typically allow consumers to pay for purchases in four installments, often with no fee unless a payment is missed… Adobe Analytics reported consumers using $67 billion worth of the installment loans this year through Cyber Monday, a 16% increase compared with 2022. Wells Fargo, meanwhile, estimated consumers spent about $46 billion using the products this year.”

December 21 – Bloomberg (Prashant Gopal): “Mortgage rates in the US continued their slide, dropping to the lowest level since June and bolstering hopes for a housing rebound in the new year. The average for a 30-year, fixed loan was 6.67%, down from 6.95% last week, Freddie Mac said…”

December 19 – Bloomberg (Michael Sasso): “US new-home construction unexpectedly surged in November to a six-month high, benefiting from a dearth of existing houses on the market and suggesting the crunch in residential real estate is easing. Residential starts increased 14.8% last month to a 1.56 million annualized rate… The median forecast… called for a 1.36 million pace. Construction of single-family houses jumped 18% to the highest level since April 2022, while starts of multifamily projects increased 6.9%. Permit applications… decreased to a 1.46 million pace due to a drop in multifamily projects. Permits for one-family homes increased to the highest level since May 2022…”

December 20 – Yahoo Finance (Rebecca Chen): “Homebuying activity picked up slightly in November, but the housing market is still pretty much stalled as home prices continue to climb higher. Total existing home sales inched up 0.8% in November… compared to the previous month… Although November’s sales fell 7.3% year over year, the annual rate of 3.82 million exceeded Bloomberg’s forecast of 3.78 million… The median sales price for existing homes rose 4% year over year to $387,600, marking the fifth consecutive month of increases. The inventory of unsold existing homes dropped 1.7% from last month to 1.13 million units at the end of November, or the equivalent of 3.5 months’ supply. Housing experts recommend six months of housing supply for a balanced market.”

December 22 – Bloomberg (Michael Sasso): “US new-home sales unexpectedly slumped in November, led by a sharp drop in the South and suggesting a bumpy road to recovery for the housing market. Purchases of new single-family homes decreased 12.2% to a 590,000 annual pace last month, a one-year low… The median forecast… called for a 690,000 rate.”

December 20 – CNBC (Diana Olick): “Mortgage demand fell last week compared with the previous week, despite a continued drop in rates, according to the Mortgage Bankers Association’s seasonally adjusted index… Applications for a mortgage to purchase a home declined 1% for the week and were 18% lower than the same period last year.”

December 17 – Wall Street Journal (Nicole Frieman): “The lowest mortgage rates since the summer are starting to lure frustrated home shoppers back to the market. The problem is that few homeowners who have locked in much lower rates appear ready to sell. Home sales this year are on track to be the lowest since at least 2011. But as mortgage rates retreated from nearly 8% in October to below 7% last week, buyers are responding… Real-estate agents say they expect more buying activity in the new year, after home shoppers return from a break over the holidays. ‘There’s just a lot of pent-up demand,’ said Lisa Sturtevant, chief economist at Bright MLS… ‘There’s a lot of people out there who are still waiting to get into the market, and they’re making it work however they can.’”

December 16 – Bloomberg (Claire Ballentine): “It’s a tough time to be a car owner in the US. Prices for new vehicles are high. Interest rate hikes have made loans more expensive. And many car owners now owe more on their loans than their vehicle is worth. This situation — commonly called being ‘underwater’ or having ‘negative equity’ — occurs when the price of a car falls faster than the owner can pay down the loan for it. In November, people with negative equity were underwater by an average of $6,054, the most since April 2020 and well above pre-pandemic averages…”

December 20 – Reuters (Lisa Baertlein and Arriana McLymore): “Roxanne Ross of Florida is one of a growing number of Americans dodging higher interest rates on credit cards by instead turning to ‘buy now, pay later’ services as they shop for holiday merchandise. Ross has her eyes on the latest Apple AirPods for $249… She was considering using Klarna, a buy now, pay later service, to spread the cost across four installments… Demand for debt counseling services is up significantly from last year…, said Bruce McClary, spokesman for the National Foundation for Credit Counseling. The increased use of buy now, pay later loans from providers like Klarna, Affirm, PayPal and Afterpay ‘signal an increase of short-term debt on top of the more than $1 trillion in outstanding credit card balances,’ McClary said.”

December 18 – CNBC (Annie Nova): “In October, the pandemic-era pause on student loan payments expired, and the bills resumed for some 22 million people. Just 60% of those borrowers had made a payment by mid-November, new U.S. Department of Education data shows… U.S. Department of Education Under Secretary James Kvaal suggested that the repayment troubles predated the Covid-19 pandemic. Millions ‘were not making payments prior to the payment pause because they were delinquent or obtained a deferment or forbearance,’ Kvaal wrote.”

December 21 – Reuters (Pratyush Thakur): “U.S. new-vehicle sales are expected to rise about 13% in December from a year earlier, driven by strong discounts and vehicle availability, industry consultants J.D. Power and GlobalData said… Total new-vehicle sales, which include retail and non-retail transactions, are estimated to reach about 1,396,700 units in December, a 13.2% increase from a year ago…”

Fixed Income Watch:

December 21 – Bloomberg (Gowri Gurumurthy): “The US junk bond rally accelerated in the fourth quarter after the Federal Reserve signaled that the most aggressive rate-hike campaign was ending and reinforced market consensus that it was ready to consider a series of rate cuts. This is the best fourth quarter for high-yield bonds in more than three years, with 6.54% gains. The fourth quarter rally pushed annual returns to 12.79%, the first year of double-digits returns since 2019.”

December 18 – Reuters (Matt Tracy): “Some investors are predicting an increase in corporate bond issuance in the New Year, after bond yields slid last week, opening the door for companies to refinance existing debt or issue new debt at lower costs. Total U.S. investment-grade corporate debt issuance in 2023 is expected to be similar to 2022’s total of roughly $1.23 trillion…, well below 2021 and 2020 totals of $1.47 trillion and $1.85 trillion… But investors and other market participants now see issuance picking up next year following expectations of a quicker pace of interest-rate easing after last week’s Federal Reserve meeting. There are $770 billion in investment-grade bonds due in 2024, according to… Morgan Stanley.”

China Watch:

December 19 – Bloomberg (Rebecca Choong Wilkins): “In 2020, one of the world’s most heavily traded bonds was a 2025 note for China Evergrande Group. Investors loved the debt of the Chinese real estate conglomerate… It was liquid; it was tied to one of the biggest companies in the country; and it gave them a piece of the world’s ­second-largest economy… Now the Evergrande bond trades for pennies on the dollar, and its fate tells the story of an epic crash that’s affected everyone in China. For decades, real estate has been a surefire way to make money in the country—for homeowners who bought first, second and even third or fourth apartments as prices kept rising; for property companies borrowing to build projects to match demand; and for local governments relying on land sales to provide cash and infrastructure projects to help meet Beijing’s ambitious economic growth targets.”

December 17 – Bloomberg: “Stock investments: down 30%. Salary package: down 30%. Investment property: down 20%. As Thomas Zhou reflects on 2023, his household finances are front of mind. ‘It’s just heart-breaking,’ the 40-year-old financial worker from Shanghai said. ‘The only thing that still keeps me going is the thought of keeping my job so I can support my big family.’ Zhou’s predicament will resonate with many people in China… Now, middle class households are being forced to rethink their money priorities, with some pulling away from investing, or selling assets to free-up liquidity. At the heart of the decline in family wealth is China’s real estate meltdown, which having a pervasive effect on a society where 70% of family assets are tied up in property. Every 5% decline in home prices will wipe out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics.”

December 20 – Financial Times (Sun Yu): “House sellers in Beijing are cutting prices aggressively, according to brokers, despite official statistics that show the housing market in the Chinese capital remains buoyant. Interviews with more than two dozen real estate brokers across the capital, long one of China’s most desirable real estate markets, show transaction prices have fallen between 10 and 30% from their peak in 2021. Their testimony runs counter to a widely watched National Bureau of Statistics index of existing home sale prices in Beijing and adds to concerns about the impact of the property market slowdown on the broader Chinese economy’s struggle to recover from the coronavirus pandemic.”

December 20 – Bloomberg: “Two of China’s biggest cities posted a jump in home transactions, following the latest policy easing efforts to improve sector sentiment. The transaction area of Shanghai’s second-hand homes increased by 25.7% from Dec. 15 to Dec. 18, compared with the previous week, according to an HSBC… report… The average daily sales of new home units in the city rose nearly 41%, while that of Beijing jumped 122%.”

December 18 – Bloomberg: “Chinese retail investors are turning their backs on mutual funds, disillusioned with their once-preferred investment vehicles’ performance and preferring to hoard cash. The amount of money that mutual funds raised this year has plummeted to the lowest in a decade… The 152 billion yuan ($21bn) worth of new portfolios issued up to end-November is about half of last year’s total and marks a third consecutive annual drop. That’s a major shift from 2020, when retail investors rushed to hand over their savings to professional stock pickers.”

December 17 – Reuters (Samuel Shen and Tom Westbrook): “Chinese banks are putting bad loans up for sale at a record pace, as regulators push for faster disposal of sour debts amid rising consumer defaults during an ailing post-COVID economic recovery. Issuance this year of securities backed by non-performing loans (NPLs) is set to jump about 40% from a year ago to a record… This week alone, six banks including China Everbright Bank and Bank of Jiangsu plan to issue 1.5 billion yuan ($210.49 million) worth of asset-backed securities (ABS) based on bad loans… Typical buyers include fund managers, wealth management firms, specialist distressed debt investors and some hedge funds.”

Central Banker Watch:

December 18 – Bloomberg (Daniel Hornak): “Cutting interest rates too soon would be much worse than leaving them where they are for too long, according to European Central Bank Governing Council member Peter Kazimir. ‘The policy mistake of premature easing would be more significant than the risk of staying tight for too long,’ the Slovak official said… ‘Prudence is the key. We’re closely watching the economic indicators but will not make hasty moves. This isn’t the time to relax our vigilance.’”

December 15 – Reuters (David Ljunggren and Dale Smith): “The Bank of Canada… made clear that interest rates were not coming down any time soon, putting it on a divergent path from the U.S. Federal Reserve… ‘The Fed is going to do what they need to do. We’re going to focus on what needs to be done here in Canada,’ Governor Tiff Macklem told a business audience… ‘We have not started having that discussion (about cutting rates), because it’s too early to have that discussion. We’re still discussing whether we raised interest rates enough and how long they need to stay where they are.’”

Global Bubble Watch:

December 17 – Bloomberg (John Authers): “Credit is a big deal. Over the past decades it’s inexorably risen as a share of the global economy, fueled by credit markets that have steadily displaced the role of banks. That growth has often been too rapid, and flaws in credit markets sparked a global seizure in the 2008 financial crisis. And yet even that proved little more than a road bump in the rise of credit. According to the International Monetary Fund, global public debt has tripled since the mid-1970s to reach 92% of the world’s combined gross domestic product (more than $91 trillion) by the end of 2022. Since 1960, private debt has tripled to 146% of GDP (or close to $144 trillion).”

December 17 – Financial Times (Valentina Romei): “Corporate bankruptcies are increasing at double-digit rates in most advanced economies as borrowing costs rise and governments unwind pandemic-era measures to support business worth trillions of dollars. Following a decade of decline the number of US corporate bankruptcies rose 30% in the 12 months to September compared with the year-ago period… Germany, the EU’s largest economy, said bankruptcies rose 25% from January to September compared with the year-ago period. Since June, monthly ‘double-digit growth rates have been consistently observed compared to the previous year’, the country’s statistical office Destatis said…”

December 20 – Reuters (William Schomberg): “British house prices fell by 1.2% in the 12 months to October, the Office for National Statistics (ONS) said…, the biggest annual fall since October 2011… House prices in London fell by the most, down by 3.6% from October 2022. The ONS’s gauge of private rents rose by 6.2% in the 12 months to November, the biggest annual increase since data collection started in 2016 and up from 6.1% in the 12 months to October.”

Europe Watch:

December 22 – Reuters (Tom Sims and Rene Wagner): “Residential property prices in Germany continued their fall, dropping 10.2% in the third quarter from a year earlier in a further grim sign for the real-estate sector in Europe’s largest economy… It was the fourth consecutive quarter of declines and the biggest since Germany’s statistics office began keeping records in the year 2000, underscoring the nation’s biggest property crisis in decades. ‘Until 2022, there was a speculative price bubble in Germany, one of the biggest in the last 50 years,’ said Konstantin Kholodilin from… the German Institute for Economic Research (DIW). ‘Prices have been falling ever since. The bubble has burst.’”

December 18 – Reuters (Balazs Koranyi): “Years of effort by German companies to diversify their supply chains is pushing up costs and further increases are still in the pipeline, especially for firms with ties to China, the Bundesbank said… after surveying 8400 businesses. Companies have struggled to maintain adequate supplies of raw materials and product components since the onset of the pandemic while Russia’s war in Ukraine… caused further disruption. ‘According to the survey, 45% of German companies expect cost increases due to the supply chain changes,’ the Bundesbank said… ‘Almost a fifth of companies expect the measures to increase their manufacturing costs significantly, by 5% or more.’”

Japan Watch:

December 19 – Reuters (Leika Kihara and Tetsushi Kajimoto): “The Bank of Japan maintained ultra-loose policy settings… in a widely expected move, as the bank opted to await more evidence on whether wages and prices would rise enough to justify a shift away from massive monetary stimulus. The central bank also made no change to its dovish policy guidance, dashing hopes among some traders it would tweak the language to signal a near-term end to negative interest rates. BOJ Governor Kazuo Ueda said prices and wages appeared to be moving in the right direction with labour unions and big firms signalling the chance of sustained wage gains next year. But he warned conditions remained uncertain. ‘The chance of trend inflation accelerating towards our price target is gradually heightening,’ Ueda said… ‘But we still need to scrutinise whether a positive wage-inflation cycle will fall in place.’”

December 20 – Bloomberg (Erica Yokoyama, Takashi Hirokawa and Emi Urabe): “Japan is set to propose an annual budget that keeps spending at historically high levels after factoring out the impact of reduced pandemic-related outlays. The initial budget for the fiscal year beginning in April will be ¥112 trillion ($784bn) compared with the record ¥114.4 trillion for the current year…”

December 18 – Reuters: “Tokyo prosecutors… searched the offices of two powerful political factions within the ruling Liberal Democratic Party (LDP)…, in connection with the biggest fundraising scandal to engulf the party in decades. Prosecutors suspect the Abe faction of failing to report as much as 500 million yen ($3.5 million) in funds over five years, while the smaller Nikai faction was believed not to have reported 100 million yen, NHK said… The scandal has eroded public support for the LDP and Prime Minister Fumio Kishida’s government…”

EM Watch:

December 21 – Bloomberg (Patrick Gillespie): “President Javier Milei announced sweeping reforms to reduce the hand of the state in Argentina’s economy, including steps to privatize companies, facilitate exports and end price controls, in a bold political move that’s likely to face pushback in congress and courts. The libertarian leader listed 30 initial points of his plan in a televised address Wednesday night, adding they’re part of a broader package containing over 300 measures.”

Levered Speculation Watch:

December 20 – Bloomberg (Mark Cranfield): “The yen carry trade versus G-10 peers will run as a theme into the first quarter of next year after the Bank of Japan’s dovish guidance this week. For FX traders, the key takeaway from yesterday’s press conference was Governor Ueda dismissing speculation the BOJ may try and squeeze in a policy tightening before the Federal Reserve starts on a cycle of lowering interest rates. By distancing itself from the Fed’s timetable it points to a BOJ exit only in the second half of 2024, as Bloomberg Economics has been forecasting.”

December 21 – Reuters (Carolina Mandl, Nell Mackenzie and Summer Zhen): “A blistering rally in stocks and elevated bond yields are pressuring global hedge funds to boost returns as they fight to staunch investor outflows… Investors have pulled about a net $75 billion from hedge funds so far in 2023 and allocations to the $3.4 trillion industry have slowed, data from Nasdaq eVestment showed. The outflows come on the heels of some $112 billion that left hedge funds last year. Hedge funds in 2023 averaged a 5.7% return this year through November, according to… PivotalPath. Strategies focused on equities and credit were the best performers, while macro and managed futures lagged. By contrast, the S&P 500 is up about 24% this year…”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 18 – Axios (Andrew Solender): “The 118th Congress is on track to be one of the most unproductive in modern history, with just a couple dozen laws on the books at the close of 2023, according to… Quorum… It’s the product of not only divided partisan control of Washington, but infighting within the House Republican majority that has routinely ground legislative business to a halt. That includes the three-week period this fall in which Congress was paralyzed Republican’s inability to find a replacement for ousted Speaker Kevin McCarthy… Just 20 bills have been passed by both chambers and signed into law this year… That’s far below even historically unproductive first years: The 104th, 112th and 113th Congresses, in which Republicans controlled one or both chambers with Democrats Bill Clinton and Barack Obama in the White House, passed between 70 and 73 laws. 2023 also marks the low point in a years-long trend toward gridlock: Five of the six most unproductive first years have been since 2011.”

December 16 – Reuters (Sam McKeith): “Large parts of Australia… sweltered under heat wave conditions that prompted the nation’s weather forecaster to issue bush fire warnings in several states. In New South Wales, Australia’s most populous state, more than 50 fires were burning on Saturday and a total fire ban was in place for many areas, including Sydney, the state’s rural fire service said.”

Geopolitical Watch:

December 21 – Wall Street Journal (Yaroslav Trofimov): “Beaming at every turn, North Korean dictator Kim Jong Un toured the jewels of Russia’s military industries in September. A guest of President Vladimir Putin, he gawked at the plant making Su-35 jet fighters, inspected a Russian Navy frigate and examined the Kinzhal missiles at the Vostochny spaceport. Soon thereafter, trainloads of North Korean artillery shells started rolling to Russian troops in Ukraine… Another increasingly important partner of Russia, Iranian President Ebrahim Raisi, visited with Putin this month. Iranian ammunition and drones have played a major role in the Russian war effort. Now Raisi discussed the desired payback: sophisticated Russian aircraft and air defenses that would make it much harder for the U.S. or Israel to strike Iran and its nuclear program. President George W. Bush used the term ‘axis of evil’ to describe North Korea, Iran and Iraq in 2002… But now an axis uniting Moscow, Tehran and Pyongyang has become a geopolitical reality…”

December 20 – Reuters (Soo-hyang Choi): “North Korean leader Kim Jong Un said Pyongyang would not hesitate to launch a nuclear attack if an enemy provokes it with nuclear weapons, state media reported… Kim made the remark as he met with soldiers under the military’s missile bureau over its recent launching drill of an intercontinental ballistic missile (ICBM), KCNA news agency said.”

December 18 – Associated Press (Hyung-Jin Kim): “North Korean leader Kim Jong Un threatened ‘more offensive actions’ to repel what he called increasing United States-led military threats after he supervised the third test of his country’s most advanced missile designed to strike the mainland U.S., state media reported… Kim’s statement suggests he is confident in his growing missile arsenal and will likely continue weapons testing activities ahead of the 2024 U.S. presidential election. But many observers say North Korea still needs to perform more significant tests to prove it has functioning missiles targeting the U.S. mainland.”

December 18 – Reuters (Hyunsu Yim and Josh Smith): “International troops stationed on the South Korean side of the truce village of Panmunjom on the border with North Korea who had been unarmed can resume carrying guns, the United Nations Command (UNC) said… The U.S.-led UNC is a multinational military force and oversees affairs in the heavily fortified Demilitarized Zone (DMZ) between the two Koreas…”

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July 19, 2024: Election on the Brink
July 12, 2024: Houston, We Have a Bubble Problem
July 5, 2024: Nothing Matters
June 30, 2024: Just the Facts
June 21, 2024: Greatest Threat
June 14, 2024: Potential Catalyst and Q1 2024 Z.1
June 7, 2024: Summer of Discontent and Instability
May 31, 2024: Thesis Corroboration
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