February 23, 2024: Overheated

February 23, 2024: Overheated
Doug Noland Posted on February 24, 2024

“Periphery and core” and global government finance Bubble analytical frameworks continue to offer a fruitful perspective for better understanding today’s extraordinary backdrop.

At the “periphery,” China’s Bubble deflation has reached another critical stage. Here at the “core,” “Terminal Phase Excess” is also at a critical juncture.

Bloomberg’s Jonathan Ferro: “You think the biggest risk here is they hold too long, not too soon?”

Mohamed El-Erian: “Correct. If they don’t cut in June, you will hear me say, ‘oh no.’ We’re now making the opposite policy mistake that we made back in ‘20/’21.”

“Terminal Phase Excess” dynamics create great analytical and policy dilemmas. It’s likely that the Fed will be viewed as having waited too long to begin easing policy. I fully expect the course of 2024 monetary policy to be debated for years and even decades. The ECB is still pilloried for a final rate hike in early-July 2008, just weeks ahead of all hell breaking loose.

The Fed, on the other hand, began aggressive easing in September 2007, having slashed rates 325 bps by April 30th, 2008. Extending the duration of “Terminal Phase Excess” only exacerbated systemic fragilities, though I’ve not come across analysis exploring this issue. Elevated system Credit growth was sustained, with Q3 2008’s $728 billion Non-Financial Debt expansion second only to Q1 2004.

Importantly, the “Repo” market jumped $319 billion during Q1 2008 to a then record $5.167 TN. Money Fund Assets surged $356 billion during Q1 (to a record $3.443 TN), capping off unprecedented one-year growth of $1.025 TN, or 42%. Agency Securities expanded $1.100 TN in four quarters ended Q2 2008 – to a record $7.886 TN. In short, post-Bubble economic adjustment was postponed, while historic financial imbalances expanded parabolically (and fatefully)

Today’s excesses (including “repo”, money market funds and Agency securities) dwarf those from the mortgage finance Bubble period. Indeed, one must look back to the “Roaring Twenties” for anything comparable. December’s “dovish pivot” signaling to acutely speculative markets was quite a policy blunder. Current Fed talk of impending rate cuts (i.e., Williams, Waller and Goolsbee) is Bubble complicity. And so long as the current environment persists, actual rate cuts would be reckless.

Chair Powell’s assertion of a “policy rate well into restrictive territory, meaning that tight policy is putting downward pressure on economic activity and inflation” is lacking even more credibility today. There’s a decent case to make that financial conditions haven’t been looser since the mortgage finance Bubble period. For sure, stock prices have never been higher.

Investment-grade spreads (to Treasuries) traded down to 89 bps on Thursday, the low back to November 12, 2021. Excluding 2021’s QE-depressed risk premiums, investment-grade spreads haven’t been this narrow since March 2007. And, for further perspective, investment-grade spreads averaged 138 bps over the past three decades.

High yield spreads narrowed to 306 bps this week, the low since January 20, 2022. It’s worth adding that 2021’s QE-depressed high yield spreads were the narrowest since (pre-subprime eruption) June 2007. High yield spreads averaged 497 bps over the past thirty years.

Investment-grade CDS traded down to 51 bps Thursday, the low back to December 31, 2021. High yield CDS sank to 336 bps, the low since February 1, 2022.

Bank CDS this week plumbed further into multiyear lows. JPMorgan CDS traded down to 36.8 bps in Friday trading, the low back to pre-pandemic February 24, 2020. At 56 bps, Bank of America CDS has fallen to the low since January 25, 2022. Goldman Sachs CDS dropped to 59 bps this week, the low back to November 19, 2021. Citigroup CDS declined to 58 bps, the low since January 17, 2022.

Loose conditions are a global phenomenon. European Bank (subordinated) CDS fell to 115 bps, the low since January 13, 2022. European high yield (crossover) CDS dropped to 301 bps, the low since February 3, 2022. Emerging Market CDS sank 11 this week to 167 bps, the low back to September 17th, 2021.

With everyone bewitched by the likes of Nvidia, AI and a phenomenal stock market melt-up, equally significant (but less recognized) excess unfolds in Credit. It appears record January corporate debt issuance ($190bn) will be followed by a record February (estimates $170bn). Bloomberg headlines: “US High-Grade Sales Top $60 Billion in Busiest Week Since 2022.” “High Grade Bond Spreads Are Tightest in Years.” “Wave of Cash Seen Washing Into Credit as Investors Seek Duration.”

February 23 – Bloomberg (Tasos Vossos): “Cash may still be king for the moment, but after more than $1 trillion flowed into money-market funds last year as short-term rates rose, investors are trying to figure out where it goes next. Bank of America Corp. projects a record $500 billion of flows to high-grade corporate debt in 2024, based on the current pace of inflows. Barclays Plc strategists expect $400 billion to $600 billion could move into risk assets from money-market funds over the next year, with investors likely to favor credit over equities in that shift… Annuities — an insurance product that consumers use to help fund their retirements — are another source of potential demand for credit. Sales of annuities reached an all-time record high of $385 billion last year, up 23% from the year before. Money raised by annuities often goes toward investment-grade debt.”

February 19 – Bloomberg (Alex Harris and Nina Trentmann): “Investors are plowing billions into money-market funds by the day. Corporate treasurers are hoarding record amounts of cash. The market is digesting a glut of Treasury bills without a hiccup. For an asset class that many market prognosticators all but left for dead to start the year, there’s still plenty of life left in cash. Investors have added $128 billion to US money-market funds since the start of the year… Companies were sitting on a record $4.4 trillion of cash at the end of the third quarter, and after a flood of more than $1 trillion of T-bills since mid-2023, the market has room for more.”

February 23 – Bloomberg (Stephan Kahl): “Pacific Investment Management Co. attracted about $21.6 billion in third-party money in the first six weeks of 2024, approaching the level for the entire year before. The bond giant had an ‘absolutely stunning’ development this year, Oliver Baete, chief executive officer of Pimco parent Allianz SE, said…”

February 20 – Bloomberg (Fareed Sahloul): “The US is leading a revival in global mergers and acquisitions that many dealmakers didn’t think would emerge until later in the year. The latest big transactions in the country are led by Capital One Financial Corp.’s $35 billion offer to buy Discover Financial Services. Elsewhere, Truist Financial Corp. is selling its insurance brokerage business… and Walmart Inc. has agreed to acquire smart-TV maker Vizio Holding… These take the value of deals announced globally this year to roughly $425 billion… — a figure that’s up 55% on this point in 2023.”

February 20 – Bloomberg (Simon White): “It’s been a tough time for pessimists. From a bear market that was historically mild to a recession that has gone missing in transit, the markets and the US economy keep surprising to the upside. To add to that, the credit cycle is showing clear signs of re-accelerating – with spreads expected to tighten further – after a downturn looked inevitable last year… The beneficial thing about trying to be process-driven and data-led is that no matter how resolute your view, it must be jettisoned if the contrary evidence becomes impossible to ignore. When it comes to credit, it’s becoming undeniable that it’s in the midst of an upturn.”

“The credit cycle is showing clear signs of re-accelerating… it’s becoming undeniable that it’s in the midst of an upturn.” “Overheated” is apt. The Credit market is Overheated. So-called “private Credit” is Overheated. Equities are desperately Overheated. And there are strong arguments that Overheated finance is increasingly fueling economic overheating. The Atlanta Fed GDPNow Forecast is currently at 2.9%, after beginning the year at 1.9%. And this growth follows Q4 and Q3 GDP of 3.3% and 4.9%.

The Fed’s failure to tighten market financial conditions has historic consequences. The backdrop has degenerated into a full-fledged financial mania. Fed officials were out in force this week, pushing back against rate cut expectations. Markets scoff. There is no fear today that the Federal Reserve will actually tighten conditions. They will instead be on the sidelines with the rest of us watching the interplay of loose finance, speculative excess, market liquidity abundance, and a historic AI mania.

Today’s Super Bubble shares little in common with the late nineties “tech” (“”) bubble, financed by the likes of WorldCom, Global Crossing, 360networks and an aggressive band of junky telecom borrowers. Mortgage finance Bubble excesses eventually hit a wall. There were only so many subprime homebuyers, with inflated price Bubbles in Phoenix, Las Vegas and around the country unsustainable.

Today’s Bubble has evolved at the “core” of “money” and Credit, fueled largely by massive deficit spending from a borrower who enjoys insatiable market demand for its securities (despite $30 TN of debt). Private sector Bubble dynamics are these days also driven by excesses at “core” industry heavyweights. Over this protracted Bubble cycle, the so-called “magnificent seven” have accumulated extraordinary market dominance along with incredible financial resources (cash and borrowing capacity). It’s a group incredibly enriched for an arms race.

February 21 – Bloomberg Intelligence (Mandeep Singh): “Generative AI, a market we project could reach $1.3 trillion in 2032, remains this year’s dominant catalyst of positive estimate revisions and multiple expansion for most tech segments, including hardware, software and internet. Cloud and semiconductor suppliers offering GPU capacity for training large language models (LLMs) continue to reap some of the most notable sales gains… Generative AI also should accelerate the shift toward digital ads, while adding incremental revenue to established markets like cybersecurity and gaming.”

February 1 – Bloomberg Intelligence (Nishant Chintala): “Generative AI may expand to about 10-12% of the total IT hardware, software, services, ad spending and gaming markets by 2032 from less than 1%, based on our calculations. Additions to generative-AI revenue will likely come from infrastructure-as-a-service (about $309bn by 2032) used for training large language models (LLMs), along with digital advertisements ($207bn) and specialized assistant software ($95bn). Other contributors in hardware include AI servers ($105bn), AI storage ($57bn), computer-vision products ($58 billion) and conversational devices ($110bn).”

February 21 – The Motley Fool (Danny Vena): “A much more bullish take comes courtesy of Cathie Wood’s Ark Investment Management, which estimates that AI software alone could drive incremental spending of $13 trillion by the end of the decade. With the market still in its infancy, nobody really knows for sure. What is clear is that an opportunity of this magnitude can’t be ignored.”

Huge data centers can’t be built fast enough. This historic boom will also require massive investment in cooling and energy infrastructure, for a global arms race evolving into a spending black hole.

Combining the AI arms race with myriad other spending booms (i.e., renewable energy, climate change-related, supply chain management, national defense, etc.) and loose Credit heightens economic overheating risks.

Nvidia added $155 billion of market capitalization (reaching $2 TN), as stocks surged further into record territory. Yet 10-year Treasury yields slipped a few bps this week. Why is the bond market not more alarmed by Overheating? For one, the Fed has already signaled that interest rates are coming down. Not oblivious to Bubble Dynamics, bonds see in AI and equities (and elsewhere) an unsustainable boom that will end with quite a bust. Moreover, there are already significant cracks globally, with Bubble deflation gathering momentum in China.

February 22 – Bloomberg (Ye Xie): “China’s equity rout a few weeks ago was exacerbated by quantitative funds stampeding to exit positions, akin to a 2007 episode in the US when such investors suffered an abrupt meltdown that roiled markets. That’s the analysis of Man Group’s Ziang Fang, who said… the unwinding of these funds’ positions was so massive that it spurred small-cap stocks to underperform by a historic margin. China’s intervention to stem the turmoil also caused significant market dislocations, compounding the losses for these funds… Crowded positioning and high leverage contributed to the Chinese quants’ woes, resembling the events of August 2007 when a number of US model-driven hedge funds saw similarly sudden losses, he said. ‘China’s recent ‘quant quake’ has revealed systemic financial risks as a series of interconnected events and highlights the perils of crowding and leverage,’ according to Fang…”

February 21 – Reuters (Samuel Shen and Vidya Ranganathan): “Chinese hedge fund managers are scrambling to soothe investors after a rout in small-value stocks, even as regulators step up scrutiny of major market players’ activities as they try to revive the country’s ailing stock markets… Chinese quant funds… are highly exposed to small-cap stocks which started plunging in early February, triggering panic-selling. Many quant products lost more than 15% of their value in just a week… ‘Onshore quant funds are facing severe losses and liquidation pressure, apart from stricter regulatory scrutiny,’ UBS said in note. ‘If they reduce fund size and decrease trading activities, it may affect market liquidity, especially for small caps.’”

February 22 – Bloomberg: “China’s quantitative hedge funds are admitting to unprecedented failures by their stock-trading models during one of the wildest two-week stretches in the market’s history. One manager described it as the industry’s ‘biggest black swan event.’ Another said its models ‘switched from doing it right to getting it wrong repeatedly.’ While historical data on China quant returns is limited, all signs point to record underperformance for such funds… ‘That was the first ever liquidity crisis triggered by a stampede from crowded quant strategies in China,’ said Li Minghong, a fund-of hedge-funds manager at Beijing Yikun Asset Management LP. While such risks were anticipated, ‘I didn’t know it would come so early, so abruptly.’”

February 22 – Bloomberg: “Some of China’s largest quantitative hedge funds, including High-Flyer Quant Investment, have denied rumors of them nearing bankruptcy or forced liquidation following recent market decline, the 21st Century Business Herald reported, citing the firms.”

Significant de-risking/deleveraging hit the Chinese stock market. A domestic hedge fund industry that expanded rapidly over recent years is now reeling. And while Beijing had no issue when the levered players were long the market, they today have little tolerance for selling or shorting. The impaired “quants” and hedge funds will now face the specter of investor redemptions and forced liquidations.

The Shanghai Composite rallied 4.8% this week. The “national team” was hard at work, along with the view that near market meltdown was enough to get Beijing’s attention. Volatility and bear market rallies notwithstanding, contagion is becoming a more pressing issue. Crisis of confidence dynamics inch closer.

February 23 – Wall Street Journal (Cao Li): “China’s real-estate downturn is getting worse. The latest bad news: A sharp drop in the average price of a home in 70 big cities in mainland China, a proxy for the national market. New home prices fell 1.24% from a year earlier, accelerating from December’s 0.89% decline, according to… China’s National Bureau of Statistics. Secondhand home prices did even worse, falling by 4.4% in January compared with a year earlier. It was the steepest such decline in almost nine years.”

Mounting China fragility might explain this week’s downward pressure on global yields in the face of bubbling equities. It has taken awhile, but Japan’s Nikkei 225 Index this week finally surpassed its 1989 Bubble peak. The late-eighties Japanese Bubble was part of my introduction to macro analysis. I remember the period clearly. Japanese manufactures and banks were going to take over the world. It was all a Bubble Illusion.

I used to think we had learned important lessons. Major speculative asset Bubbles inflate during periods of low consumer price inflation. Protracted Bubbles leave a legacy of deep structural maladjustment. Chinese officials carefully studied the Japanese experience and then forgot everything. And I guess if the Federal Reserve can’t even recall lessons from the mortgage finance Bubble experience, we can’t expect much was gleaned from Japan’s eighties fiasco.

For the Week:

The S&P500 gained 1.7% (up 6.7% y-t-d), and the Dow added 1.3% (up 3.8%). The Utilities increased 1.1% (down 2.5%). The Banks (down 0.1%) and the Broker/Dealers (up 1.4%) gained 0.5%. The Transports jumped 1.9% (up 0.1%). The S&P 400 Midcaps added 1.1% (up 2.7%), while the small cap Russell 2000 declined 0.8% (down 0.5%). The Nasdaq100 advanced 1.4% (up 6.6%). The Semiconductors jumped 1.9% (up 10.5%). The Biotechs gained 1.2% (down 4.3%). While bullion rallied $22, the HUI gold index declined 0.7% (down 15.1%).

Three-month Treasury bill rates ended the week at 5.2425%. Two-year government yields rose five bps this week to 4.69% (up 44bps y-t-d). Five-year T-note yields added a basis point to 4.28% (up 43bps). Ten-year Treasury yields declined three bps to 4.25% (up 37bps). Long bond yields fell seven bps to 4.37% (up 34bps). Benchmark Fannie Mae MBS yields declined six bps to 5.81% (up 54bps).

Italian yields dropped nine bps to 3.80% (up 10bps y-t-d). Greek 10-year yields fell eight bps to 3.40% (up 35bps). Spain’s 10-year yields declined five bps to 3.25% (up 26bps). German bund yields dipped four bps to 2.36% (up 34bps). French yields declined five bps to 2.83% (up 27bps). The French to German 10-year bond spread narrowed one to 47 bps. U.K. 10-year gilt yields fell seven bps to 4.04% (up 50bps). U.K.’s FTSE equities index was little changed (down 0.3% y-t-d).

Japan’s Nikkei Equities Index added 1.6% (up 16.8% y-t-d). Japanese 10-year “JGB” yields slipped two bps to 0.72% (up 11bps y-t-d). France’s CAC40 jumped 2.6% (up 5.6%). The German DAX equities index rose 1.8% (up 4.0%). Spain’s IBEX 35 equities index gained 2.5% (up 0.3%). Italy’s FTSE MIB index surged 3.1% (up 7.7%). EM equities were mixed. Brazil’s Bovespa index increased 0.5% (down 3.6%), while Mexico’s Bolsa index declined 0.7% (down 1.3%). South Korea’s Kospi index gained 0.7% (up 0.5%). India’s Sensex equities index rose 1.0% (up 1.2%). China’s Shanghai Exchange Index rallied 4.8% (up 1.0%). Turkey’s Borsa Istanbul National 100 index gained 1.3% (up 25.5%). Russia’s MICEX equities index dropped 3.1% (up 1.4%).

Federal Reserve Credit dropped $49.5bn last week to $7.548 TN. Fed Credit was down $1.342 TN from the June 22nd, 2022, peak. Over the past 232 weeks, Fed Credit expanded $3.821 TN, or 103%. Fed Credit inflated $4.786 TN, or 170%, over the past 589 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.5bn last week to $3.368 TN. “Custody holdings” were up $15.6bn, or 0.5%, y-o-y.

Total money market fund assets slipped $5.3bn to $6.009 TN. Money funds were up $1.194 TN, or 24.8%, y-o-y.

Total Commercial Paper jumped $9.8bn to $1.268 TN. CP was up $29.5bn, or 2.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 13 bps to an 11-week high 6.90% (up 24bps y-o-y). Fifteen-year rates rose 17 bps to 6.29% (up 39bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 7.37% (up 40bps).

Currency Watch:

For the week, the U.S. Dollar Index slipped 0.3% to 103.93 (up 2.6% y-t-d). For the week on the upside, the New Zealand dollar increased 1.2%, the Swedish krona 1.1%, the British pound 0.6%, the Australian dollar 0.5%, the euro 0.4%, the South Korean won 0.3%, and the Singapore dollar 0.3%. On the downside, the South African rand declined 2.2%, the Brazilian real 0.6%, the Mexican peso 0.4%, the Norwegian krone 0.3%, the Japanese yen 0.2%, and the Canadian dollar 0.2%. The Chinese (onshore) renminbi declined 0.04% versus the dollar (down 1.34%).

Commodities Watch:

February 20 – Reuters (Brijesh Patel): “Copper and gold are expected to see the largest immediate price boost in the commodities sector from potential U.S. Federal Reserve interest rate cuts, analysts at Goldman Sachs said. ‘The immediate price boost from a Fed driven 100 basis point decline in U.S. 2-year rates is the largest for metals, especially copper (6%), and then gold (3%), followed by oil (3%),’ Goldman Sachs said…”

February 19 – Wall Street Journal (Bob Henderson): “A U.S. shale boom that helped suppress oil-price surges over the past two years is waning. The country’s crude oil output is expected to increase by just 170,000 barrels a day in 2024 from last year, down from a jump of 1 million barrels a day in 2023… That is the smallest annual increase since 2016… Gushers of new U.S. crude have helped cap soaring oil prices despite OPEC production cuts and global turmoil, including most recently in the Middle East. The gains were driven by private producers that commandeered rigs after Russia’s invasion of Ukraine sent prices soaring to more than $120 a barrel in early 2022. Now, that growth is expected to slow dramatically.”

February 22 – Reuters (Tom Polansek): “Illinois farmer Dan Henebry regrets not selling more of his corn crop last summer, when the Midwest needed rain and prices were high. He is not alone. Farmers across the United States are kicking themselves for putting off corn sales after fields dried up in May and June, fueling expectations for higher prices and smaller harvests. Instead, prices tanked as rains saved the crop. The size and speed of the price collapse stung farmers and left their storage bins stuffed with record amounts of corn.”

February 19 – Financial Times (Susannah Savage): “Investors are pouring record amounts of money into US farmland as they snap up an asset expected to outperform as the world’s population grows sharply while natural resources become scarcer. The value of farmland held by investment groups has more than doubled over the past three years, according to the National Council of Real Estate Investment Fiduciaries (NCREIF).”

February 20 – Yahoo Finance (Ines Ferré): “The critical metal used to make electric vehicle batteries, once described as ‘the new oil,’ has been crashing in price amid a slowdown in EV demand. Lithium prices are down more than 80% from their 2022 peak — the same year in which Tesla’s CEO Elon Musk noted the metal has gone to ‘insane levels!’… ‘We’re in another bear market,’ Piedmont Lithium CEO Keith Phillips told Yahoo Finance. ‘I really think we went from euphoria two years ago to despair today. Someone described it…as peak pessimism.’”

The Bloomberg Commodities Index declined 0.9% (down 3.3% y-t-d). Spot Gold rallied 1.1% to $2,035 (down 1.3%). Silver dropped 2.0% to $22.95 (down 3.6%). WTI crude retreated $2.70, or 3.4%, to $76.46 (up 6.8%). Gasoline dropped 2.5% (up 8%), while Natural Gas slipped 0.4% to $1.60 (down 36%). Copper rose 1.6% (unchanged). Wheat gained 2.3% (down 9%), while Corn sank 4.0% (down 15%). Bitcoin fell $1,150, or 2.2%, to $50,780 (up 19.5%).

Middle East War Watch:

February 18 – Associated Press (Wafaa Shurafa, Kareem Chehayeb and Melanie Lidman): “Israeli Prime Minister Benjamin Netanyahu… brushed off growing calls to halt the military offensive in Gaza, vowing to ‘finish the job’ as a member of his War Cabinet threatened to invade the southern city of Rafah if remaining Israeli hostages are not freed by the upcoming Muslim holy month of Ramadan… Retired general Benny Gantz, part of Netanyahu’s three-member War Cabinet, represents an influential voice but not the final word on what might lie ahead. ‘If by Ramadan our hostages are not home, the fighting will continue to the Rafah area,’ Gantz told a conference… Ramadan, expected to begin March 10, is historically a tense time in the region.”

February 23 – Times of Israel (Emanuel Fabian): “The Israeli Navy’s fleet of missile boats carried out “extensive” exercises over the past week, the IDF said on Friday, as the military prepares for potential war in the north while Israel warns that its patience for a diplomatic solution is running out. Israel and Hezbollah also continued to exchange cross-border fire on Friday, as the Iran-backed terror group claimed to target a regional council building while the IDF said it intercepted a “suspicious” drone that crossed into its airspace.”

February 21 – Financial Times (Mehul Srivastava, Neri Zilber and Heba Saleh): “Humanitarian aid distribution in Gaza has almost ground to a halt in recent days as desperately hungry Palestinians and criminal gangs loot aid trucks before they can reach their destinations. More than 450 trucks carrying food and medical supplies are lined up at a holding area on the Gazan side of the Kerem Shalom crossing with Israel as aid agencies struggle to enable more than a handful of convoys to travel securely through the besieged strip. The dire humanitarian situation had already affected law and order, but that worsened after blue-uniformed Palestinian police… stopped operating after months without salaries, and in the face of Israeli air strikes on police stations and cars.”

February 20 – Associated Press (Jon Gambrell): “Despite a month of U.S.-led airstrikes, Yemen’s Iran-backed Houthi rebels remain capable of launching significant attacks. This week, they seriously damaged a ship in a crucial strait and downed an American drone worth tens of millions of dollars. The continued assaults by the Houthis on shipping through the crucial Red Sea corridor… underscore the challenges in trying to stop the guerrilla-style attacks they have used to hold onto Yemen’s capital and much of the war-ravaged country’s north since 2014. The campaign has boosted the rebels’ standing in the Arab world, despite their human rights abuses in a yearslong stalemated war with several of America’s allies in the region.”

February 20 – Reuters (Mohamed Ghobari): “British maritime security firm Ambrey said that a container ship targeted by Yemen’s Houthis on Tuesday was Liberia-flagged and headed for Somalia. The Iran-aligned Houthi militia said it had targeted an Israeli cargo ship, the ‘MSC Silver’, in the Gulf of Aden, next to the Red Sea, with a number of missiles. Houthi military spokesman Yahya Sarea did not elaborate, but in a statement said the group had also used drones to target a number of U.S. warships in the Red Sea and Arabian Sea as well as sites in the southern Israeli resort town of Eilat.”

February 22 – Bloomberg (Sam Dagher and Mohammed Hatem): “Houthi militants and their Iranian backers are preparing for a lengthy confrontation with the US and allies around the Red Sea regardless of how the Israel-Hamas war plays out. The… group is shoring up military and defense capabilities to continue attacking ships around the vital waterway… Steps include fortifying mountain hideouts for more secure and effective missile launches and testing unmanned vessels above and below water, they said.”

February 17 – Reuters: “Iran unveiled new weaponry… including what it said was the locally made Arman anti-ballistic missile system and the Azarakhsh low-altitude air defense system, the official IRNA news agency reported. The announcement came amid heightened tensions in the region… ‘With the entry of new systems into the country’s defense network, the air defense capability of the Islamic Republic of Iran will increase significantly,’ IRNA said.”

February 19 – Financial Times (Robert Wright): “Container shipping lines are struggling to cope with congested ports and shortages of ships as the crisis in the Red Sea drags into a third month, one of the sector’s most senior executives has warned. Jeremy Nixon, chief executive of Japan’s Ocean Network Express, said many shipping lines were facing scheduling problems. The issue has emerged since attacks by Yemen’s Houthis in December prompted most carriers to stop using the normal Asia-to-Europe route through the Red Sea and Suez Canal. This meant that vessels were frequently arriving at ports on days when they were not scheduled… ‘Everybody is struggling with schedule integrity and therefore we’re getting berthing clashes in a number of ports,’ he told the Financial Times. Diversions to a route round the Cape of Good Hope have added 10 days to two weeks to each voyage between Asia and north Europe and vastly complicated the task of serving some parts of the world.”

February 21 – Associated Press (Jon Gambrell): “An Israeli sabotage attack on an Iranian natural gas pipeline last week caused multiple explosions on the line, Iran’s oil minister alleged…, further raising tensions between the regional archenemies against the backdrop of Israel’s war on Hamas in the Gaza Strip. The accusations by Iran’s Oil Minister Javad Owji come as Israel has been blamed for a series of attacks targeting Tehran’s nuclear program. The ‘explosion of the gas pipeline was an Israeli plot,’ Owji said… ‘The enemy intended to disturb gas service in the provinces and put people’s gas distribution at risk.’”

February 21 – Financial Times (Robert Wright): “The head of the UN organisation for maritime issues has warned shipping companies to be on high alert for piracy off the African coast after ship seizures in recent months raised concerns that diversions away from the Red Sea and Suez Canal would prompt an increase in hijackings. Arsenio Dominguez, secretary-general of the International Maritime Organization, said his organisation had spoken to the authorities in Somalia, in east Africa, and countries around the Gulf of Guinea on the western side of the continent… Many shipping companies have since December diverted sailings away from the Red Sea and Suez Canal… This has sent vessels into waters in the Indian Ocean and off West Africa that generally attract less traffic.”

Ukraine War Watch:

February 19 – Reuters (Marc Jones and Olena Harmash): “The head of Ukraine’s steel giant Metinvest has called Russia’s advance in eastern Ukraine, where its has some of its biggest operations, ‘alarming’ and urged the United States to urgently approve a stalled military aid package. Russia’s capture of Avdiivka saw it claim full control of Metinvest’s vast Soviet-era coking coal plant on Monday, marking the loss of another of the company’s facilities after the Azovstal steel plant that became a symbol of Ukrainian resistance in the early days of the war. The frontline now lies within 24.85 miles of Pokrovsk, where Metinvest runs Ukraine’s largest coal mine, and its biggest steel plant in Zaporizhzhia further to the south.”

February 20 – Reuters (Guy Faulconbridge): “President Vladimir Putin said… Russian troops would push further into Ukraine to build on their success on the battlefield after the fall of the town of Avdiivka where he said Ukrainian troops had been forced to flee in chaos. The town, which once had a population of 32,000, fell to Russia on Saturday, Putin’s biggest battlefield victory since Russian forces captured the city of Bakhmut in May 2023… ‘As for the overall situation in Avdiivka, this is an absolute success, I congratulate you. It needs to be built on,’ Putin told Defence Minister Sergei Shoigu…”

Taiwan Watch:

February 21 – Wall Street Journal (Austin Ramzy): “The deaths of two Chinese fishermen after a pursuit by Taiwan’s coast guard has set off a series of testy maritime encounters between Beijing and Taipei, heightening tensions along the Taiwan Strait… Beijing says it is stepping up law enforcement around Kinmen, a Taiwan-controlled archipelago that sits 3 miles from the Chinese mainland and more than 100 miles from Taiwan’s main island. This week, Chinese coast guard officials boarded a Taiwanese sightseeing boat near Kinmen, prompting complaints from Taiwanese officials.”

Market Instability Watch:

February 22 – Bloomberg (Nazmul Ahasan): “Former Treasury Secretary Lawrence Summers said financial markets are underestimating risks of global political and social tumult resulting from populist policies and the potential erosion of rule of law. ‘The world is potentially headed into a period where there is less of a sense of what the order is going to be and therefore more risk of disorder, chaos and associated suffering,’ Summers said… ‘I’m not sure that kind of risk is fully priced in to markets.’”

February 20 – Reuters (Noel Randewich): “Chipmaker Nvidia is replacing Tesla as Wall Street’s most traded stock by value, adding to its prominence after becoming the third-most valuable U.S. company and showing more evidence of how central AI-related bets have become to investors… About $30 billion worth of Nvidia shares changed hands daily on average over the past 30 sessions, pulling ahead of Elon Musk’s electric car maker, which averaged $22 billion per day over the same period.”

February 21 – Bloomberg (Alexandra Semenova): “JPMorgan Chase & Co.’s Marko Kolanovic, who drew attention for his gloomy stock-market calls through last year’s rally, is raising a risk that’s mostly gone out of vogue on Wall Street: a return of 1970s-style stagflation. The bank’s chief market strategist said a recent pickup in consumer and producer prices has cast a shadow over the economic enthusiasm that powered equity markets in recent months. He said the recent data is likely to chip away at investors’ expectations that the economy is heading for a ‘Goldilocks’ scenario… and renew concerns about entering a period similar to the stagflation of the 1970s… ‘Investors should be open-minded that there is a scenario in which rates need to stay higher for longer, and the Fed may need to tighten financial conditions,’ Kolanovic wrote…”

February 20 – Reuters (Gertrude Chavez-Dreyfuss): “Investors in interest rate options are paying for trades that benefit from a sharp slowdown in the U.S. economy, contrary to the upbeat outlook held by many bond market participants. Analysts said they have seen increased demand from hedge funds in the U.S. options market for so-called ‘receiver swaptions,’ a type of trade that pays off when interest rates fall. In general, receiver swaptions give buyers the right to enter into an interest rate swap where they receive the fixed rate and pay the floating one.”

February 18 – Financial Times (Kate Duguid, Costas Mourselas, Nikou Asgari and Stefania Palma): “The top US securities regulator has played down the impact on hedge funds of a new rule tightening oversight of the Treasury bond market… Gary Gensler, chair of the Securities and Exchange Commission, said… that the so-called dealer rule his agency passed this month is more focused on big high-speed trading firms than on hedge funds. The rule mandates that more large traders must register as dealers — firms that are regularly engaged in providing liquidity to the market place — a status that requires them to hold capital and report trades to the regulator.”

February 23 – Bloomberg (Denitsa Tsekova and Katie Greifeld): “How many Wall Street buzzwords can you fit into one security? The limit is being tested by a new breed of options-fueled exchange-traded funds making inroads with the retail crowd. Nosebleed yields. Elevated volatility. Single-stock ETFs. They all come together in a parlay of complex risk taking marketed with mundane labels like the ‘option income strategy,’ with around $1.7 billion flowing into such products since catching on last year. Issuers are planning more… The ETFs are the high-octane cousin of booming option strategies that trade in volatility: Hybrid funds that hold indexes of stocks and sell derivatives against them to generate yield. Unlike their index-linked brethren, though, the new incarnations put all their chips on one company, using the ETF structure to layer multiple options trades that are sold as a one-stop, cash-spewing investment.”

Bank Watch:

February 19 – Financial Times (Stephen Gandel): “Bad commercial real estate loans have overtaken loss reserves at the biggest US banks after a sharp increase in late payments linked to offices, shopping centres and other properties. The average reserves at JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley have fallen from $1.60 to 90 cents for every dollar of commercial real estate debt on which a borrower is at least 30 days late… The sharp deterioration took place in the last year after delinquent commercial property debt for the six big banks nearly tripled to $9.3bn.”

February 23 – Reuters (Nupur Anand and Jonathan Stempel): “JPMorgan… CEO Jamie Dimon has sold about $150 million of his shares in the bank…, marking the first time the head of the largest U.S. lender has sold shares since taking charge in 2005. Dimon and his family intend to sell 1 million of their 8.6 million shares… Dimon… has sold off 821,778 shares of the bank so far.”

Global Bond Watch:

February 20 – Bloomberg (Allison Nicole Smith): “The US corporate-bond market is expected to see more than $50 billion of new debt sales this week from investment-grade companies, spurred by the continued pickup in mergers and acquisitions… ‘The message for the market is, ‘Get ready,’” said Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo… ‘It will be very busy, and M&A is going to be a big piece of it.’”

February 20 – Bloomberg (Olivia Raimonde and Alicia Clanton): “The $1.4 trillion US junk-bond market is getting junkier, as more debt gets either downgraded or elevated out of the high-yield universe altogether, leaving greater potential risks for investors. Credit quality is starting to erode as pandemic-fueled ‘seismic changes’ that altered the mix of the high-yield market are now reversing, according to Barclays Plc strategists. Higher-rated junk bonds… are returning to investment-grade as large companies that were downgraded amid the disruptions of amid Covid-19 improve their balance sheets. But more bonds in this tier are also facing ratings downgrades, too.”

February 18 – Financial Times (Harriet Clarfelt): “The riskiest US corporate bonds have come under fresh pressure this year, setting them apart from a rally across broader debt markets as investors remain fearful about stop-start access to funding and deepening distress for low-grade borrowers. Triple C-rated US bonds — the bottom rung of the credit quality ladder — are yielding 13.6% on average…, up from just over 13% at the end of 2023… In turn, the spread — meaning the premium that those lowly-rated borrowers must pay to issue debt over the US Treasury — has ballooned to 9.28 percentage points from 8.51% in late December.”

Bubble and Mania Watch:

February 19 – Wall Street Journal (Asa Fitch): “The U.S. government is giving chip maker GlobalFoundries $1.5 billion in grants to build and expand facilities in New York and Vermont, the first major award in a program that aims to reinvigorate domestic chip production. The award from the Commerce Department kicks off what is expected to be a series of cash injections into semiconductor manufacturing projects in Arizona, Texas, New York and Ohio in the coming weeks. Chip makers Intel, Taiwan Semiconductor Manufacturing, Samsung Electronics and Micron Technology have all submitted applications for the government to cover a portion of the billions of dollars it costs to build cutting-edge factories.”

February 20 – Bloomberg (Kat Hidalgo): “Need a loan for a new factory or a buyout deal, but don’t like the terms your bank is offering? There’s a $1.7 trillion industry that’s ready to help. Private credit came of age after the 2008 financial crisis as an alternative to banks at a time when regulators were clamping down on risky lending by deposit-taking institutions. Today it’s become a serious rival to mainstream lending for all kinds of businesses, from real estate firms to tech startups. Money is pouring into private credit funds from wealthy investors, retirement plans, sovereign wealth funds, and even the banks that compete with them. Some have argued that private credit should become a permanent fixture in capital markets and investment portfolios. Yet it’s not clear how this opaque corner of finance will cope when the next big recession hits.”

February 22 – Bloomberg (Harry Suhartono and Megawati Wijaya): “The rapid growth of private credit has helped rein in delinquencies and fostered stronger acceptance among bondholders for debt extensions over restructurings, according to investment firm Muzinich & Co. ‘The bond market generally has become the market that is taking less risk,’ Tatjana Greil Castro, the… company’s co-head of public markets wrote… Private credit’s expansion has prompted the public debt market to start to ‘entertain amend and extend structures rather than pushing companies into restructurings.’”

February 22 – Reuters (Wayne Cole, Mariko Katsumura, Rocky Swift, Anton S. Bridge, and Rae Wee): “As Japanese shares finally reclaim past peaks it harks back to a time when everyone in the country seemed to be a stock market millionaire – a Tokyo car park was worth more than New York’s Central Park and the future looked like one endless party. It is difficult now, after three long decades of deadening deflation, to imagine how truly wild the 1980s’ bubble was in Japan, and how speculation upended its strait-laced culture. Kazukuni Yamazaki, an 87-year-old investor and a former Nomura Securities employee, remembers there used to be a digital board showing stock prices on the first floor of his building. ‘Everyone, including groups of young office ladies, was standing there, checking stock prices and squealing in excitement,’ he says.”

February 22 – Bloomberg (Kat Hidalgo and Francesca Veronesi): “Global demand for new infrastructure to service everything from clean energy to data has created a lucrative new market for some of the biggest names in private credit. Investors including Blackstone Inc, Brookfield Asset Management Ltd and Ares Management Corp raised almost $9 billion last year for funds that will be used to finance infrastructure projects. The market has the potential to grow to $1.5 trillion, according to a white paper published by Ares…”

February 19 – Associated Press (Ken Sweet): “Capital One Financial said it will buy Discover Financial Services for $35 billion, in a deal that would bring together two of the nation’s credit card companies as well as potentially shake up the payments industry… Under the terms of the all-stock transaction, Discover Financial shareholders will receive Capital One shares valued at nearly $140. That’s a significant premium to the $110.49 that Discover shares closed at Friday. The deal marries two of the largest credit card companies that aren’t banks first…”

February 17 – Financial Times (Christopher Grimes): “When plans for the Oceanwide Plaza development were unveiled in 2015, it was billed as a gleaming symbol of downtown Los Angeles’ renaissance. The development’s Chinese backers laid out a $1bn vision of 500 luxury condos, a five-star Plaza Hotel and retail space — all sitting in a prime location just across from the arena where the LA Lakers play basketball. A 700-foot LED screen would wrap around the building, giving a pulse to the burgeoning entertainment destination. Today, however, Oceanwide Plaza remains unfinished and its parent company is out of money. Instead of a prime downtown destination, Oceanwide has become another vexing problem for LA officials who are already grappling with a homelessness crisis and a serious lack of affordable housing. Oceanwide’s three unfinished towers are covered with the work of seemingly gravity-defying graffiti writers…”

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

February 20 – Reuters (Steve Holland and Trevor Hunnicutt): “The U.S. will announce a major package of sanctions against Russia on Friday over the death of opposition leader Alexei Navalny and the two-year Ukraine war, President Joe Biden said… Biden, speaking to reporters as he departed on a trip to California, did not give details. The latest sanctions on Russia will target a range of items, including the country’s defense and industrial bases, along with sources of revenue for the economy, White House national security adviser Jake Sullivan said.”

February 22 – Reuters (Guy Faulconbridge and Andrew Osborn): “Russian President Vladimir Putin flew on a modernised Tu-160M nuclear-capable strategic bomber…, in a move likely to be seen in the West as a pointed reminder of Moscow’s nuclear capabilities. The giant swing-wing plane, codenamed ‘Blackjacks’ by military alliance NATO, is a modernised version of a Cold War-era bomber that the former Soviet Union would have deployed in the event of nuclear war to deliver weapons at long distances.”

February 19 – CNBC (Karen Gilchrist): “The U.S. is considering slapping sanctions on Chinese companies it believes are helping Russia fuel its war in Ukraine, members of Congress told CNBC, marking the first direct apportioning of blame toward Beijing since the start of the war. Democratic Congressman Gerald Connolly… said that lawmakers were already considering such plans after similar measures were proposed last week by the European Union. The provisions would mark the first direct penalties against Beijing… ‘China has to understand that the same kinds of sanctions which are beginning to really take hold in Russia and are affecting Russian productivity, economic performance and quality of life, can also be applied to China,’ he told CNBC…”

February 18 – Wall Street Journal (Harriet Clarfelt): “As intelligence chiefs and policymakers gathered for this city’s annual security conference focused on the wars in Ukraine and the Middle East, the director of the Federal Bureau of Investigation urged them not to lose sight of another threat: China. Christopher Wray… said Beijing’s efforts to covertly plant offensive malware inside U.S. critical infrastructure networks is now at ‘a scale greater than we’d seen before,’ an issue he has deemed a defining national security threat. Citing Volt Typhoon, the name given to the Chinese hacking network that was revealed last year to be lying dormant inside U.S. critical infrastructure, Wray said Beijing-backed actors were pre-positioning malware that could be triggered at any moment to disrupt U.S. critical infrastructure. ‘It’s the tip of the iceberg… it’s one of many such efforts by the Chinese,’ he said… China, he had earlier told delegates, is increasingly inserting ‘offensive weapons within our critical infrastructure poised to attack whenever Beijing decides the time is right.’”

February 22 – Washington Post (Christian Shepherd, Cate Cadell, Ellen Nakashima, Joseph Menn and Aaron Schaffer): “A trove of leaked documents from a Chinese state-linked hacking group shows that Beijing’s intelligence and military groups are carrying out large-scale, systematic cyber intrusions against foreign governments, companies and infrastructure — exploiting what the hackers claim are vulnerabilities in software systems from companies including Microsoft, Apple and Google. The cache — containing more than 570 files, images and chat logs — offers an unprecedented look inside the operations of one of the firms that Chinese government agencies hire for on-demand, mass data-collecting operations. The files — posted to GitHub last week and deemed credible by cybersecurity experts… — detail contracts to extract foreign data over eight years and describe targets within at least 20 foreign governments and territories…”

February 20 – Financial Times (John Paul Rathbone): “Russia’s secret services are aggressively pursuing regime change and destabilisation across Europe, Africa and the Middle East, according to a report from a western think-tank. As part of a revamp sparked by Russia’s invasion of Ukraine, its GRU military intelligence unit is seeking to rebuild its European network of illegal and semi-illegal agents, using tactics recognisable to any reader of cold war spy novels. These efforts are bolstered by more overt GRU initiatives in Africa… In the Middle East, meanwhile, an anti-western public relations drive is being led by Ramzan Kadyrov, a loyalist warlord from the Muslim-majority Chechen region.”

February 21 – Reuters (Parisa Hafezi, John Irish, Tom Balmforth and Jonathan Landay): “Iran has provided Russia with a large number of powerful surface-to-surface ballistic missiles, six sources told Reuters, deepening the military cooperation between the two U.S.-sanctioned countries. Iran’s provision of around 400 missiles includes many from the Fateh-110 family of short-range ballistic weapons, such as the Zolfaghar… This road-mobile missile is capable of striking targets at a distance of between 186 and 435 miles, experts say.”

De-globalization and Iron Curtain Watch:

February 18 – Financial Times (Demetri Sevastopulo and Edward White): “Washington has warned Beijing that the US and its allies will take action if China tries to ease its industrial overcapacity problem by dumping goods on international markets… Two senior Treasury officials told the Financial Times that a US delegation made its concerns clear in a recent visit to China… ‘We are worried that Chinese industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from are both careening towards a situation where overcapacity in China . . . is going to wind up hitting world markets,’ said Jay Shambaugh, the under-secretary for international affairs…”

February 18 – Bloomberg: “Foreign businesses’ direct investment into China last year increased by the lowest amount since the early 1990s, underscoring challenges for the nation as Beijing seeks more overseas funds to help its economy. China’s direct investment liabilities in its balance of payments stood at $33 billion last year… That measure of new foreign investment into the country… was 82% lower than the 2022 level and the lowest since 1993.”

February 21 – Financial Times (Claire Jones, Christine Murray and Keith Fray): “China is shipping more goods to the US via Mexico, circumventing steep tariffs imposed by the Trump administration and retained by Joe Biden’s White House… Figures from Container Trades Statistics… show the number of 20ft containers shipped from China to Mexico hit 881,000 in the first three quarters of 2023…, up from 689,000 in the same period of 2022. The rise came as Mexico overtook China as the biggest exporter of goods to the US last year, and as truck shipments across the border into the US have continued to increase quickly.”

February 21 – New York Times (Erin Griffith): “DCM Ventures, a Silicon Valley venture capital firm, began investing in China’s start-ups in 1999. The move reaped such blockbuster returns that in 2021, DCM said it planned to double down’ on its strategy of investing in China, the United States and Japan. Yet when DCM set out to raise money last fall for a new fund focused on very young companies and promoted its ‘cross-Pacific’ expertise, the firm described plans to invest in the United States, Japan and South Korea… China was not mentioned. DCM’s messaging is one example of an industrywide shift happening between Silicon Valley investors and Chinese start-ups. U.S. venture capital firms that once saw China as the next frontier for innovation and investment returns are backing away…”

Inflation Watch:

February 21 – Wall Street Journal (Jesse Newman and Heather Haddon): “The last time Americans spent this much of their money on food, George H.W. Bush was in office, ‘Terminator 2: Judgment Day’ was in theaters and C+C Music Factory was rocking the Billboard charts. Eating continues to cost more… Prices at restaurants and other eateries were up 5.1% last month compared with January 2023, while grocery costs increased 1.2% during the same period… Relief isn’t likely to arrive soon. Restaurant and food company executives said they are still grappling with rising labor costs and some ingredients, such as cocoa, that are only getting more expensive… ‘If you look historically after periods of inflation, there’s really no period you could point to where [food] prices go back down,’ said Steve Cahillane, chief executive of snack giant Kellanova… ‘They tend to be sticky.’”

February 20 – Financial Times (Steff Chávez and James Fontanella-Khan): “Walmart said prices for some of its products did not decline as much as it had anticipated during the most recent quarter, reflecting the sticky inflationary environment in the US that is prompting investors to reassess when the central bank will start cutting interest rates. Chief executive Doug McMillon said in November that the world’s largest retailer could find itself ‘managing a period of deflation’ in early 2024… McMillon said on Tuesday that Walmart’s general merchandise category in its US operations was ‘there’ in terms of a ‘deflationary position’, but in the three months to January, ‘the slope of the decline softened’.”

Biden Administration Watch:

February 23 – Reuters (Tasos Vossos): “The United States… imposed extensive sanctions against Russia, targeting more than 500 people and entities to mark the second anniversary of Moscow’s invasion of Ukraine and retaliate for the death of Russian opposition leader Alexei Navalny. President Joe Biden said the measures aim to ensure Russian President Vladimir Putin ‘pays an even steeper price for his aggression abroad and repression at home.’ The sanctions targeted Russia’s Mir payment system, financial institutions and its military industrial base, sanctions evasion, future energy production and other areas. They also hit prison officials the U.S. says are linked to Navalny’s death.”

February 21 – Financial Times (Lauren Fedor): “Joe Biden signed an executive order… designed to strengthen cyber security at US ports and directed billions of dollars into new infrastructure amid concerns that hackers from China could exploit the facilities and wreak havoc on supply chains. The announcement comes just days after FBI director Christopher Wray said his bureau was ‘laser-focused’ on preventing Chinese efforts to use malicious software to disrupt critical US infrastructure. The White House said the moves would include investment of more than $20bn over the next five years into improving US port infrastructure, including producing more port cranes domestically.”

Federal Reserve Watch:

February 21 – Yahoo Finance (Jennifer Schonberger): “Most Federal Reserve officials cautioned against cutting rates too quickly at their last policy meeting as they continue to look for convincing evidence that inflation is returning to their 2% target, according to the minutes from the Jan. 31 discussion… ‘Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained,’ the minutes said. Most ‘noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%.’”

February 21 – Associated Press (Christopher Rugaber): “Federal Reserve officials acknowledged at their most recent meeting in January that there had been ‘significant progress’ in reducing U.S. inflation. But some of the policymakers expressed concern that strong growth in spending and hiring could disrupt that progress. In minutes from the Jan. 30-31 meeting…, most Fed officials also said they were worried about moving too fast to cut their benchmark interest rate before it was clear that inflation was sustainably returning to their 2% target. Only ‘a couple’ were worried about the opposite risk… Some officials ‘noted the risk that progress toward price stability could stall, particularly if aggregate demand strengthened’ or that the progress in improving supply chains could falter.”

February 22 – Bloomberg (Steve Matthews): “Federal Reserve Governor Christopher Waller said January’s jump in consumer prices warrants caution in deciding when to start cutting interest rates, though he still expects reductions to begin later this year. ‘The strength of the economy and the recent data we have received on inflation mean it is appropriate to be patient, careful, methodical, deliberative – pick your favorite synonym,’ Waller said… ‘Whatever word you pick, they all translate to one idea: What’s the rush?’”

February 21 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Richmond President Thomas Barkin said recent economic data highlighted how price pressures in some sectors are still too high, despite improvement in the overall inflation picture. Government data… last week showed consumer prices for goods declined in January, but that was more than offset by rising prices for shelter and services, Barkin said… ‘You do worry that when the goods price deflation cycle ends, you’re going to be left with shelter and services higher than you like it’ Barkin said… He added that he’s looking more closely at short-term inflation figures now than year-over-year data.”

February 22 – Bloomberg (Rich Miller): “The Federal Reserve needs to be on guard against cutting interest rates too far in response to falling inflation lest it undermine the achievement of its ultimate goal of price stability, Vice Chair Philip Jefferson said… ‘We always need to keep in mind the danger of easing too much in response to improvements in the inflation picture,’ he said… ‘Excessive easing can lead to a stalling or reversal in progress in restoring price stability.’”

February 22 – Yahoo Finance (Jennifer Schonberger): “Federal Reserve vice chair Philip Jefferson said… he is still eyeing rate cuts ‘later this year’ despite new readings on inflation that were hotter than expected. ‘If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back our policy restraint later this year,’ Jefferson said…”

February 21 – Bloomberg (Katanga Johnson): “Federal Reserve Governor Michelle Bowman argued… that the current economic environment doesn’t warrant the central bank cutting interest rates. ‘Certainly not now,’ Bowman said… while answering a question about rate cuts…”

February 20 – Bloomberg (Alexandra Harris): “While a key Federal Reserve liquidity facility is running low, market analysts say the central bank likely will keep shrinking its balance sheet. Usage of the Fed’s overnight reverse repurchase agreement facility or RRP — where eligible counterparties can park cash to earn a market rate — briefly dropped below $500 billion last week… At the same time, bank reserve balances — another large liability on the central bank’s balance sheet — are $3.54 trillion… That’s higher than the level seen when the Fed’s asset reduction started in June 2022…”

February 21 – Bloomberg (Ven Ram): “Investors must be ready for the possibility that the Fed could slow or halt the unwinding its balance sheet even before it reduces interest rates, should systemic liquidity worsen and inflation continues to prove sticky. Balances at the Fed’s overnight reverse-repo facility have slumped almost 50% so far this year to some $531 billion, putting them near the lowest since 2021. That decline has had some policymakers worried, with Fed Atlanta President Raphael Bostic remarking last week that he is watching the reverse repo balance to see ‘to what extent we are getting close to the edge where there doesn’t appear to be enough liquidity, where there may not be enough liquidity for our money markets to operate the way we need them to…’”

U.S. Bubble Watch:

February 21 – Reuters (Lucia Mutikani): “U.S. labor unions embarked on the highest number of strikes in 23 years in 2023 as they sought hefty wage increases, benefits and better working conditions for their members. There were 33 major work stoppages last year, the most since 2000… It described a major work stoppage as involving 1,000 or more workers and lasting at least one shift during the workweek… The number of strikes averaged 16.7 over the past 20 years. Organized labor scored some major victories last year, with the United Auto Workers union, among others, securing record contracts after a six-week targeted strike. A total 458,900 workers participated in a strike last year, with the services sector accounting for 397,700, or 86.7% of idled workers…”

February 22 – Bloomberg (Vince Golle): “US manufacturing activity expanded at the fastest pace since September 2022, powered by stronger orders growth and suggesting producers are breaking out of an extended slump. The S&P Global flash February purchasing managers index advanced to 51.5 from 50.7… The group’s measure of orders climbed to the highest since May 2022, while factory output expanded the most in 10 months.”

February 22 – Bloomberg (Jarrell Dillard): “Initial applications for US unemployment benefits fell to the lowest in a month last week, underscoring continued strength in the labor market despite a growing number of high-profile job cuts at large companies. Initial claims decreased by 12,000 to 201,000 in the week ending Feb. 17… Continuing claims, a proxy for the total number of people receiving unemployment benefits, dropped to 1.86 million in the week ending Feb. 10, also the lowest in a month.”

February 21 – CNBC (Diana Olick): “Mortgage interest rates surged last week to the highest level since early December, and that hit mortgage demand hard. Total application volume plunged 10.6% compared with the previous week… Applications for a mortgage to purchase a home fell 10% for the week and were 13% lower than the same week one year ago. They sat at the lowest level since early November 2023.”

February 22 – CNBC (Diana Olick): “Sales of previously owned homes rose 3.1% in January to 4 million units on a seasonally adjusted annualized basis… Sales were down 1.7% year over year. The count is based on closings, so the contracts were likely signed in November and December… Inventory of homes for sale in January increased to 1.01 million units, up 3.1% from January 2023, but still at a low 3-month supply. Six months is considered a balanced market… The median existing home price for all housing types in January was $379,100, up 5.1% from a year earlier and an all-time high for the month of January. All four U.S. regions saw price increases, and 16% of homes were sold above list price. ‘Multiple offers are common on mid-priced homes, and many homes were still sold within a month. The elevated share of cash deals – 32% – indicated a market full of multiple offers and propelled by record-high housing wealth,’ Yun said.”

February 20 – Bloomberg (Maxwell Adler): “California’s deficit is likely to rise 26% to $73 billion as new data show that tax receipts fell short of earlier estimates, according to the state’s budget adviser. The new projection for fiscal 2024-25 anticipates the deficit will grow by $15 billion from previous estimates after traditional corporate tax collections declined by more than 33% in December from the year-earlier period, the state’s Legislative Analyst’s Office said… The LAO… also said California’s income tax withholding and estimated payments have been ‘fairly weak’ as of late.”

February 20 – Bloomberg (Spencer Soper): “Jeff Bezos unloaded 14 million Inc. shares worth about $2.4 billion, finishing in just nine trading days the plan he disclosed earlier this month to sell up to 50 million shares. The latest transaction, which brings his cash out total to $8.5 billion, took place over three trading days ending Tuesday…”

China Watch:

February 19 – Bloomberg: “Chinese Premier Li Qiang called for ‘pragmatic and forceful’ action to boost the nation’s confidence in the economy, underscoring the government’s concern with a struggling recovery and stock rout. Li used a meeting of the State Council, China’s cabinet… to urge officials to ‘do more things that are conductive to boosting confidence and expectations, and ensure policymaking and execution are consistent and stable’… Various departments should focus on solving practical problems faced by individuals and companies as the Lunar New Year holiday ends, Li said, adding that they need to ‘win the trust of the people with real work and achievement.’”

February 21 – Bloomberg: “China has banned major institutional investors from reducing equity holdings at the open and close of each trading day, part of the government’s most forceful attempt yet to prop up the nation’s $8.6 trillion stock market. The order from China’s securities watchdog was recently delivered to major asset managers and the proprietary trading desks of brokerages… The China Securities Regulatory Commission, led by newly appointed Chairman Wu Qing, has also created a task force with the nation’s stock exchanges to monitor short selling and issue warnings to firms that profit from the wagers…”

February 20 – Bloomberg: “China’s two main stock exchanges vowed to tighten supervision of quantitative trading after freezing the accounts of a major fund for three days in an unusually harsh punishment. The Shanghai and Shenzhen bourses will enhance monitoring of quant trading, especially leveraged products… The pledges came after the exchanges imposed trading bans on Ningbo Lingjun Investment Management Partnership, which dumped a combined 2.57 billion yuan ($357 million) in shares within a minute Monday when indices fell rapidly.”

February 19 – Bloomberg: “Chinese property-developer shares fall on weak holiday home sales, and after rallying last week. Home sales in 44 key cities during the week-long Lunar New Year holiday dropped 40% from a year earlier to 233,800 square meters, according to CRIC data…”

February 22 – Bloomberg: “The number of foreclosed properties for sale in China rose at a faster pace in January, in a sign of the country’s continued economic slowdown. New listings of foreclosed properties nationwide rose 48% in January from a year earlier, compared with 37% in 2023, according to… China Index Holdings… The 100,400 properties listed for sale last month include residential, commercial and industrial real estate. Transactions in January also rose about 18% on-year.”

February 20 – Bloomberg: “China ramped up support for the troubled property sector with its biggest-ever cut to a key mortgage reference rate. But it was met with a muted response from investors, raising expectations that more aggressive measures to support the economy will be needed in the months to come. Chinese lenders slashed their five-year loan prime rate by 25 bps to 3.95%… It was the first cut since June and the largest reduction since a revamp of the rate was rolled out in 2019. Still, the move failed to impress investors.”

February 20 – Bloomberg: “Long waits at highway charging stations, rapid battery depletion in freezing snow and limits on electric vehicles on car ferries because of safety fears have combined to make the Lunar New Year holiday a frustrating experience for China’s growing number of EV drivers. For Dai Junqi, the 373 mile trip from Shenzhen to her hometown in her Model Y Tesla turned into a 13-hour saga. The combination of high-speed freeway driving with the air-con on meant she could only get about 75% of the car’s designed 420 kilometer range per charge, necessitating two recharging stops. But with Chinese making a record number of trips during the weeklong holiday… charging stations were overwhelmed.”

February 19 – Bloomberg (Linda Lew): “Chinese electric vehicle maker Human Horizons Group Inc. suspended operations for at least six months, adding to signs of an enduring squeeze in the industry as growth slows. The… manufacturer of the premium HiPhi brand suspended production on Sunday and barred workers from entering its factory… Workers will receive January wages at the end of this month, and then salaries will be paid at a 70% rate between Feb. 18 and March 18… After years of rapid growth, the world’s biggest EV market is facing a slowdown as consumer demand wanes and escalating trade tensions hurt the export outlook. That’s pushed a growing number of companies… to the brink of collapse…”

February 22 – Bloomberg (Linda Lew): “China’s auto sales are expected to decline this month due to disruption from the Lunar New Year holiday and customers holding out for more price cuts. Vehicle shipments are projected to drop 15.7% in February from the same period last year, according to preliminary data released Thursday by China’s Passenger Car Association. Demand for electric vehicles is also slowing.”

February 19 – Financial Times (Edward White): “China’s state-owned enterprises have begun setting up in-house reserve military units, a legacy of the Mao Zedong era, in a sign of authorities’ increasing concern about social and political instability amid the country’s economic slowdown, according to analysts. A Financial Times analysis of company announcements and state media reports over 2023 shows that dozens of Chinese SOEs have established new People’s Armed Forces departments… The departments were historically groups affiliated with the People’s Liberation Army’s recruitment efforts at the county and village level under Mao. Today, they typically conduct civil defence activities and contribute to military recruitment, promotion and training.”

Global Bubble Watch:

February 20 – Reuters (Promit Mukherjee and Ismail Shakil): “Canada’s annual inflation rate slowed significantly more than expected to 2.9% in January and core price measures also eased…, bringing forward bets for an early interest rate cut. It was the first time in seven months that headline inflation has dipped below 3%. That prompted money markets to hike bets for a rate cut in April to as much as a 58% chance from a 33% chance before the figures were published.”

Central Banker Watch:

February 23 – Financial Times (Martin Arnolld): “The German central bank has burnt through the entire €19.2bn of provisions it built up to cover financial risks as well as most of its €3.1bn reserves to absorb the huge losses it made last year due to higher interest costs. The Bundesbank warned it expected to make another ‘significant’ loss this year… The sharp downturn in the German central bank’s performance is embarrassing for one of the country’s most respected institutions, especially as it has been aggravated by the European Central Bank’s vast bond-buying programme, which Bundesbank officials opposed.”

February 22 – Bloomberg (Alexander Weber): “The European Central Bank recorded its first loss in two decades following an unprecedented ramp-up in borrowing costs to tackle inflation. The shortfall for 2023 — even after the full release of $7.2bn in risk provisions — totaled €1.27 billion, as rising interest rates increased the cost of past stimulus efforts. While the ECB also warned of negative results ‘over the next few years,’ it said this won’t impede its operations.”

February 20 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s Prime Minister Srettha Thavisin asked the central bank to urgently hold an unscheduled meeting of its Monetary Policy Committee to cut interest rate, saying the latest data indicated that the nation’s economy was in a crisis. ‘I would like to implore the MPC to urgently call a committee meeting to consider reducing interest without waiting for a scheduled meeting,’ Srettha posted on X…”

Europe Watch:

February 19 – Reuters (Balazs Koranyi): “Germany is likely in recession now as external demand is weak, consumers remain cautious and domestic investment is held back by high borrowing costs, the Bundesbank said… Germany has struggled since Russia’s 2022 invasion of Ukraine pushed up energy costs, and its vast, industry-heavy economy is now in its fourth straight quarter of zero or negative growth, weighing on all of the euro zone. ‘There is still no recovery for the German economy,’ the Bundesbank said. ‘Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession.’”

February 19 – Bloomberg (Mark Schroers): “Negotiated pay in the euro zone rose 4.5% at the end of 2023… — soothing fears that rising salaries could sustain inflation above the target. While still high, fourth-quarter pay growth is down from a euro-area record of 4.7%, notched in the previous three months, the ECB’s negotiated wage indicator showed… The gauge — which signals possible pay pressures by crunching non-harmonized country data — had been more eagerly awaited than normal this time as officials in Frankfurt zero in on labor costs as a key factor in deciding when to cut interest rates.”

February 19 – Reuters (Eva Korinkova): “Hundreds of Czech farmers drove their tractors into downtown Prague…, disrupting traffic outside the Agriculture Ministry, as they joined protests against high energy costs, stifling bureaucracy and the European Union’s Green Deal. Farmers across Europe have taken to the streets this year, including in Poland, France, Germany, Spain and Italy, to fight low prices and high costs, cheap imports and EU climate change constraints.”

Japan Watch:

February 21 – Reuters (Sam Nussey, Fanny Potkin and Miho Uranaka): “Japan’s efforts to rebuild its semiconductor industry are getting a shot in the arm as more and more Taiwanese chip companies expand here – not only to support a new TSMC plant but also excited about the Japanese sector’s prospects. The influx comes amid shifting alliances and priorities in the global chip industry as the United States pushes to limit China’s progress in cutting-edge semiconductors and strengthen partnerships between its allies.”

February 21 – Bloomberg (Erica Yokoyama and Brian Fowler): “A key gauge of Japan’s manufacturing activity fell to the weakest in more than three years, sending a cautionary signal to the Bank of Japan as it mulls an exit from its ultra-stimulative policy settings.”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 22 – Bloomberg: “China is at risk of missing all of its major energy and climate goals for 2025 after leaning on heavy industry and facing adverse weather last year. Carbon emissions from the power sector jumped 5.2% in 2023 as lower rainfall and strong electricity demand required more coal burning, the Centre for Research on Energy and Clean Air said… The country will now need even sharper pollution cuts to be able to reduce emissions per unit of gross domestic product by 18% through 2025, as pledged in its 14th five-year plan.”

Leveraged Speculation Watch:

February 23 – Wall Street Journal (Caitlin McCabe and Peter Rudegeair): “Hedge-fund titans Steve Cohen, Izzy Englander and Ken Griffin are killing it. Their imitators are having trouble keeping up. The big three’s advantage comes from having pioneered what has become the hedge-fund industry’s hottest strategy over the past few years: Known as multimanager firms, they divvy up money across as many as hundreds of specialized investment teams with the aim of producing steadier returns that are uncorrelated to broader markets… Huge sums of money have flowed into multimanager firms in the past few years… Assets at multimanager funds ballooned from $185 billion at the end of 2019 to $350 billion at the end of last year…”

February 20 – Bloomberg (Brijesh Patel): “Hedge funds pared exposure to the Magnificent Seven megacap tech stocks in the fourth quarter amid signs of extremes in the market, according to Goldman Sachs… Funds were net sellers of most of the Magnificent Seven stocks,” as their weights rose to records, strategists including Ben Snider and Jenny Ma wrote…”

Geopolitical Watch:

February 19 – Financial Times (Max Seddon, Anastasia Stognei and Courtney Weaver): “For years, Yulia Navalnaya eschewed the political spotlight. She often appeared by her husband Alexei Navalny’s side but left the anti-regime campaigning to him — even during the three years he spent in Russia behind bars. Now, in the aftermath of his death in a remote Arctic prison colony, Navalnaya, a trained economist and mother of two, has vowed to take on his struggle… ‘I was by Alexei’s side all these years: elections, protests, house arrest, searches, detention, prison, poisoning, protests again, arrest again and prison again,’ Navalnaya said… ‘By killing Alexei, Putin killed half of me, half of my heart and half of my soul. But I still have the other half, and it tells me that I have no right to give up,’ she said.”

February 19 – Financial Times (Nic Fildes): “Australia is to more than double the size of its naval fleet with an extra A$11.1bn ($7.2bn) of investment to adapt to China’s military build-up in the Pacific region. The navy will expand to 26 warships, including 11 new frigates and six new large vessels with long-range missile capability, as Canberra toughens its military stance in response to rising regional tension. The investment will give Australia its largest navy since the second world war.”

Stay Ahead of the Market
Receive posts right to your in box.
April 19, 2024: World-Wide De-Risking/Deleveraging
April 12, 2024: Trouble Brewing in Financial Asset Wonderland
April 5, 2024: Global Ring of Fire
March 29, 2024: On Currency Watch Following Melt-Up Q1
March 22, 2024: That’s Our Story…
March 15, 2024: Failed
March 8, 2024: Q4 2023 Z.1: Bubble Confirmation
March 1, 2024: Speak Truth to Crazy
Double your ounces without investing another dollar!