January 5, 2024: Issues 2024

January 5, 2024: Issues 2024
Doug Noland Posted on January 6, 2024

As my thoughts turned this week to “Issues 2024,” my mind returned to the great American economist Hyman Minsky (1919-1996). The dynamic evolution of Capitalistic systems, innovation and financial structures, the “Financial Instability Hypothesis,” “Ponzi finance”, “stability is destabilizing”… No economist’s work is more germane to Issues 2024 than the brilliant Minsky.

Minsky theorized that U.S. Capitalism had evolved through four distinct stages: “Commercial Capitalism,” “Finance Capitalism”, “Managerial Capitalism”, and “Money Manager Capitalism.”

“The financial structure of the American economy has undergone significant evolution over the history of the republic. In the initial era of commercial capitalism, external finance was used primarily to facilitate commerce by financing goods in process or in transit. The present period, in contrast, is one of money-manager capitalism, where financial markets and arrangements are dominated by institutional investors.” Hyman Minsky, “Economic Insecurity and the Institutional Prerequisites for Successful Capitalism,” Journal of Post Keynesian Economics, Winter 1996/97

Five years after Minsky’s 1996 passing, I humbly “updated” Minskian analysis to incorporate a fifth stage, “Financial Arbitrage Capitalism”. The rapid rise of the levered speculator community had superseded more traditional money management – for its impact on market function, policymaking, and economic development. In short, financial and economic systems had become more levered and fragile, provoking an even greater interventionist and inflationist policy regime.

The hedge fund industry had surpassed $500 billion by 2001, up from about $35 billion to begin the nineties. Speculative leverage had become both a major force in market behavior and a powerful source of liquidity for U.S. economic development. In particular, the leveraging of mortgage Credit was instrumental in the fledgling mortgage finance Bubble and associated real estate boom. Speculative leverage/financial arbitrage had become a major factor shaping both U.S. financial and economic structure.

After ending 2001 at $7.45 TN, total mortgage Credit would almost double in six years to close 2007 at $14.61 TN. More pertinent to Issues 2024, Treasury Securities expanded 45% in six years to $8.028 TN – only then to balloon another $22.22 TN, or 276%, to end Q3 2023 at $30.27 TN.

“It should be noted that the stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government, then debt-financing of positions in capital assets is encouraged.” Minsky, “Inflation Recession and Economic Policy,” 1982.

“Big government” today includes $2 TN annual fiscal deficits and a central bank with a long history of market bailouts and open-ended “money” printing (including $5 TN covid stimulus) and liquidity backstopping operations. As for profits, we can think of real economic profits, as well as speculative profits in the asset markets. Big government’s unprecedented measures to inflate both types of profits have for years incentivized risk-taking and leveraging.

A paramount Issue 2024 could be presented simplistically: History’s greatest Bubble either inflates or bursts. As I wrote one year ago, “last year’s Bubble inflation went to perilous extremes. This significantly raised the odds for a destabilizing 2022 bursting episode.” The bottom line: Bubble excess went from “perilous extremes” to precarious “terminal phase” blow-off excess. Highly speculative markets suffered upside dislocations, the type of end-of-cycle dysfunction that has preceded major market collapses (i.e., 1929).

Simplistic analysis does not suffice in today’s extraordinarily complex environment. Not after a spectacular “everything short squeeze” and such systemic market dysfunction. Not in the 16th year of a historic global government finance Bubble. Not after two decades of Financial Arbitrage Capitalism severely disfiguring financial and economic structures. Not with a multi-decade super cycle in transition.

That finance and financial structures evolve from robustness to progressively more fragility is the foundation of Minsky’s Financial Instability Hypothesis.

“Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows… Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to “roll over” their liabilities… For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow.” Minsky, The Financial Instability Hypothesis, 1992

“Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and businessmen to debt finance a wide variety of organizations.”

Speculative leverage by its nature resides in the domain of Minsky’s Ponzi finance. Liabilities are extinguished through the sale of levered holdings, with inherent liquidity risk and fragility. To be sure, from such a prolonged period of Financial Arbitrage Capitalism and speculative leveraging, we have witnessed the most atypically enduring Ponzi financing. Minsky surely never contemplated a $1 TN “basis trade,” a $4 TN hedge fund industry, a $9 TN Fed balance sheet, or $34 TN of Treasury debt obligations.

It is critical to appreciate the forces perpetuating what in any other backdrop would have been unsustainable Ponzi dynamics and acute fragility. This is where we must focus on anomalous government finance Bubble dynamics. Government debt and central bank Credit, the core of money and Credit along with finance more generally, enjoy unique attributes of moneyness. Perceived safety and liquidity attributes ensure uniquely insatiable demand for these liabilities.

Melding with Minsky’s framework, governments and central banks evolved over this long cycle into “Ponzi financing units”. Importantly, the latest phase of Financial Arbitrage Capitalism has been dominated by levered speculation in perceived risk-free obligations of Ponzi units. And the wild inflation of Ponzi central bank “money”/liabilities – along with interest-rate/market manipulation – has been fundamental to sustaining system Credit expansion dominated by Ponzi government debts (along with the levered speculation of these obligations). In short, the Fed (and global central community) has repeatedly inserted “Coins in the Fuse Box,” sustaining government Ponzi finance and history’s greatest Bubble.

Issue 2024: Systemic fragility is at the most extreme level since 1929. This fragility has its roots in three decades of Credit and financial excess, along with attendant economic maladjustment. Fragilities were exacerbated by the multi-decade expansion of speculative finance, a historic Bubble that succumbed to late-cycle parabolic excess exemplified by last year’s $1 TN “basis trade” (levered 50 to 1).

Moreover, 2023’s Everything Squeeze, derivatives melt-up, and frenetic FOMO buying only intensified acute fragilities. Last year showcased super cycle transition period indecision and volatility, along with end-of-cycle crazy speculative blow-off excess. Such artificial buying is not only unsustainable, it increases the likelihood of abrupt reversals and destabilizing selling and dislocations. Such intense short squeezes are prone to destabilizing reversals, and never have squeeze dynamics simultaneously overpowered markets in equities, Treasuries, corporate Credit, currencies, EM, and derivatives (including options and CDS). Issue 2024: Having posted big 2023 gains, does the leveraged speculating community err on the side of reducing leverage and risk this year.

It’s incredible to witness speculative market Bubbles work their (black) magic. Inflating market prices definitely spawn their own news and analyses. Bull market moves create genius – along with seductive bullish narratives. “Stocks for the long-term” has been further crystallized. Risks should be ignored. Selling is for losers. And, considering the backdrop, the intensity of market optimism is nothing short of phenomenal.

Talk is of “soft landings,” disinflation, and the start of a Fed easing cycle – while a multi-decade Bubble teeters on the precipice. The everything squeeze rally only extended the chasm between bullish perceptions and the reality of acute vulnerability. The marketplace enters 2024 remarkably distracted and unprepared.

Issue 2024: Liquidity – or the potential lack of it. It’s difficult to envisage an environment more susceptible to market illiquidity and dislocation. Markets – at home and abroad – have likely never been as levered. Fifty to one levered trades equate to unprecedented leverage in a tens of Trillions Treasury and agency marketplace. That said, the “basis trade” is surely only a fraction of fixed-income levered speculation. And there are yen and other “carry trades” globally. The Q4 melt-up in the big Nasdaq stocks and indices generated enormous derivatives-related leverage, especially in the bustling options marketplace.

And as historic levered speculation generated hundreds of billions (Trillions?) of new marketplace liquidity, Fed securities sales (QT) last year went off without a hitch. As always, speculative leveraging, squeezes, and derivatives-related buying feed the illusion of liquidity abundance. Meanwhile, risks of a destabilizing de-risking/deleveraging episode stealthily soar.

As we ponder 2024 market dynamics, a brief “periphery and core” analytical framework diversion. The more financially challenged “periphery” is inherently susceptible to shifts in financial conditions. Tighter liquidity conditions immediately place the “periphery” at risk of higher funding costs, waning availability of finance, financial outflows, and even a complete loss of access to new Credit. At the same time, the “periphery” is viewed as a major beneficiary of a “risk on” shift to looser conditions – as we saw in the second half (especially Q4). Short squeezes boost liquidity and recovering markets spur inflows, with relatively higher market yields a magnet for levered speculation in “risk on” backdrops. Resulting optimism and speculative leverage create vulnerability to the next bout of “risk off.”

Global markets wasted no time signaling 2024 liquidity concerns.

Emerging bond markets began the year on the back foot. Dollar bond yields surged 42 bps in Columbia, 42 bps in Turkey, 41 bps in Panama, 33 bps in Indonesia, 32 bps in Peru, 31 bps in Saudi Arabia, 27 bps in Chile, 27 bps in Brazil, and 22 bps in Mexico.

EM CDS jumped 14.5 this week to 182 bps, the largest one-week move since mid-August. After trading at a five-month high of 245 bps in October, EM CDS collapsed 78 bps to end the year at 167 bps.

“Periphery” currency losers to begin the year: the South Korean won declined 2.1%, the South African rand 1.7%, the Thai baht 1.7%, the Russian ruble 1.6%, the Malaysian ringgit 1.3%, the Chilean peso 1.3%, the Turkish lira 1.1%, the Polish zloty 1.1%, and the Taiwanese dollar 1.0%.

Bloomberg: “Traders Wrong-Footed by Dollar’s Best Start to Year Since 2011.” With vulnerability quickly emerging at the “periphery,” the dollar index gained 1.1% to start the new year. And within the major currency universe, the Japanese yen has evolved into a susceptible peripheral currency. Through much of 2023, the yen was pressured lower by a confluence of rising policy rates and market yields globally, along with ongoing negative rates and BOJ yield curve control (YCC) bond purchases. But then the yen rallied almost 8% in the final weeks of 2023, as perceptions of looser global conditions took hold.

Bloomberg: “Yen Closes Worst Week Since 2022 as Earthquake Shifts BOJ Calls.” The yen was hammered 2.5% to start 2024 trading. China’s renminbi similarly enjoyed a Q4 rally, only to drop 0.66% this week – the largest decline since early-September.

European bank (subordinated) CDS jumped 11.5 this week to 134 bps, the largest weekly rise in 13 weeks. After rising to a five-month high of 190 bps in late October, European bank CDS collapsed 67 to end 2023 at 123 bps.

European high yield (crossover) CDS surged 28.5 this week to 339 bps, the largest gain since the week of September 22nd (29bps). After trading to a seven-month high 473 bps in October, European crossover CDS ended the year 163 lower at 310 bps.

Peripheral European bonds were also under pressure this week. Greek yields surged 26 bps (to 3.31%), Italian yields 15 bps (3.85%), Portuguese yields 15 bps (2.81%), and Spanish yields 16 bps (3.15%). The UK bond market has evolved into a susceptible periphery market. Ten-year gilt yields surged 25 bps this week to 3.88%. UK two-year yields jumped a notable 27 bps to 4.23%.

Here at home, MBS yields surged 24 bps during the first week of the year. MBS can be viewed at the “periphery of the core,” susceptible to shifts in market yield and liquidity expectations. MBS is also a bastion of leveraged speculation, hedging and derivatives trading. High yield CDS rose 15 to 371 bps, the largest move since October.

Bank America CDS jumped six this week to 75 bps, the largest weekly move since October. Citigroup CDS rose seven to 70.5 bps, also the biggest increase since October. In general, this week’s rise in U.S. and European bank CDS was the largest since October.

Bloomberg: “Wall Street Euphoria Ends in Worst New Year Kick-Off Since 2003.” The Semiconductors dropped 5.8% this week, as the Nasdaq100 fell 3.1%. We can assume enormous leverage accumulated in the big tech stocks and related indices. This week’s sharp reversal portends 2024 market liquidity issues. And bullish traders waiting for “magnificent seven” weakness to provide a broader market buy signal are missing the general market liquidity impact from big tech de-risking/deleveraging. Susceptible to a shift in the liquidity backdrop, the small cap Russell 2000 reversed 3.8% lower. At the top of this week’s leaderboard, the defensive NYSE Healthcare Index rose 2.2%, and the Utilities advanced 2.0%.

Friday closing prices had the market expecting a 73% probability of a rate cut by the March 20th FOMC meeting. This was down from last Friday’s 100%. The market is pricing a 3.95% policy rate at the December 18th meeting, implying 138 bps of rate cuts this year. This is up from last week’s 3.75% (158bps of cuts).

Add Friday’s stronger-than-expected 216,000 gain in December Non-Farm Payrolls (3.7% Unemployment Rate) to data suggesting Q4 loose conditions and market gains have underpinned economic activity. And at 0.4% (4.1% y-o-y), Average Hourly Earnings was stronger-than-expected and suggestive of ongoing labor tightness and wage inflation. At 164,000, the ADP employment change also meaningfully beat forecasts (125k). Weekly Jobless Claims (202k) declined to the lowest level since October – and remain not much above historic lows.

Issues 2024: Economic instability. “Soft landing” talk misses the key point. The U.S. economy today is remarkably impacted by financial conditions and asset market performance. Q4 loosening and asset inflation should underpin relatively strong Q1 spending and growth. Holiday spending and travel were generally robust. “Risk on” and liquidity abundance continue to support Credit Availability, both for households and businesses.

But with markets acutely vulnerable to “risk off” deleveraging and resulting liquidity issues, the deeply maladjusted U.S. economy enters 2024 only more susceptible to abrupt tightening conditions (following 2023 excesses). Last year’s AI mania was critical in sustaining speculative flows into the general technology sector, in the process extending the lives of scores of uneconomic enterprises. While AI will undoubtedly continue its rapid development, any waning enthusiasm – including stock market risk aversion – risks triggering a major shift in industry financial conditions.

But AI wasn’t the only major Bubble manifestation to gain momentum in 2023. “Private Credit” became an only bigger force. In consumer finance, Credit Availability generally remained loose, as “Buy Now, Pay Later” became a greater driver of retail spending. In general, “De-Fi” (decentralized finance) was largely immune to Fed rate increases.

With loose conditions continuing to underpin consumers, businesses, and the overall economy, for the most part Credit fears have remained limited to commercial real estate. Issue 2024: market illiquidity and dislocation risk a problematic tightening of non-bank Credit. And a tightening of Credit would spur a major reassessment of prospects for both consumer and business Credit. Such a development would mark a critical Credit cycle inflection point, with tightening conditions bolstering fears of mounting loan losses. Today’s “soft landing” crowd fails to contemplate the potential for tightened market-based Credit – and the profound ramifications such a tightening would have at this stage of the cycle.

The Fed’s December “dot plot” indicated a median forecast of three rate cuts this year, while the market is pricing almost six. Like last year, I tend to see market rate cut expectations incorporating odds of the Fed being forced to respond to crisis dynamics. I expect the Fed to be on hold so long as financial conditions remain loose. Yet odds of a 2024 market accident and Fed response are not low.

Sometimes there are clear catalysts for deflating Bubbles. Not always. Nasdaq peaked during March 2000 (a high not broken for 15 years), reversing lower after a major short squeeze and derivatives-related melt-up. That squeeze was made all the more powerful because of deteriorating industry fundamentals. There was no major catalyst. Selling gathered momentum following an upside dislocation, and the market simply lost its capacity to disregard fundamentals.

I can see this week as the starting point for closing the wide gap between inflated market prices and deteriorating prospects. But there is no shortage of potential catalysts.

If you haven’t noticed, it’s an election year. I’m not alone in my struggles with foreboding feelings. Most Americans would prefer neither Biden nor Trump. And no matter the winner, a majority will see the President as unfit for office. With a backdrop so inviting for third party candidates, it’s not difficult to envisage a scenario where the leading candidate does not secure the necessary 270 electoral college votes. This election cycle could easily turn into a huge mess. Just getting to November is problematic. Legal battles will engulf the Supreme Court in ugly political partisanship. And a felony conviction before November would only add to the chaos.

Our nation is so deeply and irreparably divided. I believe this social tinderbox has remained somewhat stifled in an environment of robust markets and a strong economy. All bets are off when the Bubble bursts. We begin an unprecedented election year deeply divided, and I fear by year-end our nation could test the limits of divisiveness.

I wish I could feel more optimistic about the geopolitical environment. Taiwanese elections are next weekend (13th).

January 1 – Bloomberg (Betty Hou): “Taiwan’s final election polls put the ruling party on track to win a record third straight term in power, a setback to President Xi Jinping’s efforts to bring the island closer to Beijing. The Democratic Progressive Party’s Vice President Lai Ching-te was the frontrunner in three surveys in recent days, with his lead over main opposition rival, Hou Yu-ih of the Kuomintang, ranging from 3 to 11 percentage points.”

Lai Ching-te is a staunch proponent of Taiwan independence. “On so-called Taiwan independence, Taiwan’s basic position is that Taiwan’s sovereignty and independence belong to its 23 million people not the People’s Republic of China.” To Beijing, he’s a dangerous separatist.

December 31 – Financial Times (Edward White): “Chinese President Xi Jinping has used his annual new year address to the nation to sound a warning to Taiwan’s voters days ahead of the island’s presidential election, while highlighting his country’s technological prowess and economic strength. In the televised speech on Sunday evening, Xi said the ‘reunification’ of Taiwan and China was a ‘historical inevitability’. He added that ‘compatriots’ on both sides of the Taiwan Strait must share in the glory of ‘national rejuvenation’.”

If the DPP retains the presidency, I would expect China to begin tightening the screws. I have been concerned that China has an unspoken “plan B.” In the event of worsening financial and economic crisis, Beijing would use Taiwan “reunification” to distract the Chinese people from domestic policy failures. I’m assuming various measures (i.e., sanctions, trade embargos, blockades, cyber-attacks, etc.) would be employed prior to direct military confrontation. I see no reason not to expect this process to commence early this year. Chinese hostilities would garner a U.S. response.

China’s deflating apartment Bubble took a decisive turn for the worse in 2023. I expect broadening Chinese financial instability to be a key Issue 2024.

January 5 – Bloomberg (Lisa Du and Zheng Li): “Chinese regulators have sought for years to get to grips with the $2.9 trillion trust industry, a corner of the country’s shadow-banking sector that offers bigger returns than regular bank deposits but can be fraught with risk. A reckoning arrived on Jan. 5, when one of the sector’s biggest players, Zhongzhi Enterprise Group Co., filed for bankruptcy, victim of a property crisis that’s bedeviled the world’s second-largest economy. China’s banking regulator had vowed in November to use ‘strong medicine’ to tackle major risks in the country’s financial sector. But the collapse of Zhongzhi in one of China’s biggest ever bankruptcies still came as a shock to investors, given the government’s past willingness to throw an occasional lifeline to struggling firms.”

The domino collapse of Chinese developers is increasingly spilling into the $3 TN trust industry and the $12 TN local government debt market. Just this week, Fitch downgraded the four huge national asset management companies (AMCs). These “bad banks” were created to absorb problem loans after late-nineties lending excesses. Also this week, Reuters reported that China’s big banks are increasingly working to limit exposures to the troubled “small” banking sector, a potentially significant tightening of Credit and liquidity. It’s only a matter of time until the financial rot makes its way to China’s major banks.

A crisis of confidence in China would not be a surprising 2024 development. November’s rally pulled the renminbi back from the ledge. I expect currency market instability to be a major Issue 2024, and the renminbi will likely be right in the thick of it.

I could see a crisis of confidence in the renminbi and China’s banking system as a catalyst for a more globalized crisis of confidence. Cracks are widening in South Korean Credit, with highly levered Asian economies vulnerable to Chinese contagion and tightened global conditions.

Last year, we saw how Chinese and global instability can underpin the U.S. dollar. All the major currencies are hopelessly unsound. Huge trade deficits and massive government deficits create dollar vulnerability to crisis of confidence dynamics. For now, the U.S. dollar remains the “core” currency expected to benefit somewhat from instability at the “periphery.” But a Fed move to slash rates and/or restart QE could easily unleash dollar weakness that might prove difficult to control.

As part of the transition to a new cycle, I expect currency and global financial asset fragility to underpin the value of hard assets. And geopolitical instability is fundamental to unfolding new cycle dynamics. Deepening global conflict is a key Issue 2024. Expanding hostilities in the Middle East seem a forgone conclusion. How long do the IDF and Hezbollah maintain restraint? Does Israel directly confront Iran? When might Iran acquire a nuclear weapon? Russia has a new supply of North Korean missiles to terrorize Kiev and other Ukrainian cities. The Ukraine military has acquired more capabilities to retaliate deeper inside Russia.

But there are myriad geopolitical flashpoints, including in the South China Sea (China v. Philippines), the Korean peninsula, and Eastern Europe. Cyber and terrorism risks are rising. And the trajectory of climate instability is troubling, with ramifications for inflation and social stability.

Sure, history’s greatest Bubble could inflate for yet another year. But all the elements are present for things to turn sour. Issue 2024: a confluence of acute Bubble fragility, social instability, and geopolitical hostilities creates a high-risk backdrop without precedence. Key Issue 2024: Hope and pray for the best, while diligently preparing for the worst.

For the Week:

The S&P500 fell 1.5% (up 20.6% y-o-y), and the Dow dipped 0.6% (up 11.4%). The Utilities jumped 1.9% (down 11.3%). The Banks gained 1.2% (down 7.7%), while the Broker/Dealers declined 1.3% (up 18.8%). The Transports dropped 2.5% (up 11.8%). The S&P 400 Midcaps fell 2.5% (up 8.9%), and the small cap Russell 2000 dropped 3.7% (up 8.8%). The Nasdaq100 slumped 3.1% (up 47.7%). The Semiconductors sank 5.8% (up 49.2%). The Biotechs were little changed (up 0.3%). With bullion declining $18, the HUI gold index dropped 4.2% (down 7.5%).

Three-month Treasury bill rates ended the week at 5.215%. Two-year government yields rose 13 bps this week to 4.38% (up 13bps y-o-y). Five-year T-note yields jumped 16 bps to 4.01% (up 31bps). Ten-year Treasury yields gained 17 bps to 4.05% (up 49bps). Long bond yields gained 17 bps to 4.20% (up 51bps). Benchmark Fannie Mae MBS yields surged 24 bps to 5.51% (up 52bps).

Italian yields rose 15 bps to 3.85% (down 37bps y-o-y). Greek 10-year yields surged 26 bps to 3.31% (down 103bps y-o-y). Spain’s 10-year yields gained 16 bps to 3.15% (down 12bps). German bund yields jumped 13 bps to 2.16% (down 5bps). French yields gained 14 bps to 2.70% (down 2bps). The French to German 10-year bond spread widened about one to 54 bps. U.K. 10-year gilt yields surged 25 bps to 3.79% (up 32bps). U.K.’s FTSE equities index slipped 0.6% (unchanged y-o-y).

Japan’s Nikkei Equities Index slipped 0.3% (up 28.5% y-o-y). Japanese 10-year “JGB” yields were unchanged at 0.61% (up 11bps y-o-y). France’s CAC40 fell 1.6% (up 8.2%). The German DAX equities index declined 0.9% (up 13.6%). Spain’s IBEX 35 equities index increased 0.6% (up 16.8%). Italy’s FTSE MIB index gained 0.3% (up 20.9%). EM equities were mixed. Brazil’s Bovespa index lost 1.6% (up 21.2%), and Mexico’s Bolsa index fell 2.1% (up 8.6%). South Korea’s Kospi index dropped 2.9% (up 12.6%). India’s Sensex equities index slipped 0.3% (up 20.2%). China’s Shanghai Exchange Index fell 1.5% (down 7.2%). Turkey’s Borsa Istanbul National 100 index rallied 2.1% (up 42.8%). Russia’s MICEX equities index gained 1.2% (up 45.4%).

Federal Reserve Credit fell $25.3bn last week to $7.660 TN. Fed Credit was down $1.241 TN from the June 22nd, 2022, peak. Over the past 225 weeks, Fed Credit expanded $3.933 TN, or 106%. Fed Credit inflated $4.849 TN, or 173%, over the past 582 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3bn last week to $3.389 TN. “Custody holdings” were up $64.1bn, or 1.9%, y-o-y.

Total money market fund assets jumped $78.1bn to a record $5.985 TN, with a 43-week gain of $1.071 TN (26% annualized). Money funds were up $1.173 TN, or 24.9%, y-o-y.

Total Commercial Paper dropped $55.4bn to $1.215 TN. CP was down $66bn, or 5.2%, over the past year.

Currency Watch:

January 1 – Reuters: “In recent months, China has sought to stabilise the yuan by orchestrating buying by state banks and giving market guidance to bankers. The strategy of moral suasion marks a sharp break from Beijing’s approach the last time the currency was on the ropes, in 2015. Back then, the People’s Bank of China (PBOC) resorted to official intervention as the central bank burned $1 trillion in reserves to shore it up. This year, as China’s economy wobbled and money left the country, the PBOC took a starkly different approach… Interviews with 28 market participants show at least two dozen cases where regulators closely and frequently steered market participants through a range of co-ordinated actions this year to resist strong downward pressure on the yuan.”

January 4 – Bloomberg (Masahiro Hidaka and Yumi Teso): “The yen is coming under renewed pressure as a powerful earthquake that hit Japan on New Year’s Day makes it harder for the Bank of Japan to abolish negative interest rates this month.”

For the week, the U.S. Dollar Index gained 1.1% to 102.41 (down 1.4% y-o-y). For the week on the upside, the Mexican peso increased 0.6%. On the downside, the Japanese yen declined 1.5%, the South Korean won 2.1%, the Swedish krona 1.8%, the South African rand 1.7%, the Australian dollar 1.5%, the Norwegian krone 1.3%, the New Zealand dollar 1.2%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Euro 0.9%, the Singapore dollar 0.7%, the Brazilian real 0.4%, and the British pound 0.1%. The Chinese (onshore) renminbi declined 0.66% versus the dollar (down 3.73%).

Commodities Watch:

January 1 – Wall Street Journal (Collin Eaton): “A surprise surge in American oil and gas production and exports is helping to keep the world stocked, blunting the impact of widening conflict in the Middle East that has crimped key shipping lanes. When Iranian-backed Houthi militants began launching missiles and drones at ships crossing the Red Sea near Yemen in October, many feared disruption to the vital shipping lane would drive up energy prices. But oil and gas prices this past month have sunk… That is largely because of record production of U.S. fossil fuels. Shippers in November moved more oil out of the U.S. than what was produced in Iraq, OPEC’s second-largest member, at a record 4.5 million barrels a day. Likewise, U.S. exports of liquefied natural gas, or LNG, are set to hit a record in December…”

The Bloomberg Commodities Index was unchanged (down 8.8% y-o-y). Spot Gold slipped 0.8% to $2,045 (up 9.6%). Silver dropped 2.5% to $23.19 (down 2.7%). WTI crude rallied $2.16, or 3.0%, to $73.81 (unchanged). Gasoline was little changed (down 6%), while Natural Gas surged 15.1% to $2.89 (down 22%). Copper fell 2.2% (down 3%). Wheat dropped 1.9% (down 17%), and Corn lost 2.2% (down 30%). Bitcoin rallied $1,720, or 4.0%, to $44,230 (up 161%).

Middle East War Watch:

January 2 – Bloomberg (Ben Bartenstein and Sam Dagher): “Iran’s dispatch of a warship to the Red Sea is its most audacious move yet to challenge US forces in the key trade route, emboldening Houthi militants whose missiles have disrupted shipping over the past two months. Tehran is unlikely to want direct confrontation — its old frigate being no match for the US-led maritime task force patrolling the waters off Yemen — but it takes the projection of Iranian power in the region to another level. That’s raising tensions after the Houthis started attacking vessels they claimed were headed to or owned by firms in Israel in a bid to end the military assault on Gaza.”

January 3 – Financial Times (Raya Jalabi): “The influential leader of Lebanese militant group Hizbollah… warned Israel that it would retaliate following the killing of a senior Hamas leader in Beirut, saying the ‘crime’ will ‘not go unpunished’. Hassan Nasrallah vowed revenge in a televised speech just 24 hours after Saleh al-Arouri, Hamas’s deputy political leader, died in an explosion in Beirut, which Lebanon’s prime minister, Hizbollah and Hamas blamed on Israel. ‘What happened yesterday in Dahiyeh is very dangerous,’ Nasrallah said, referring to the neighbourhood in Beirut’s southern suburbs that his Iran-backed group tightly controls. He added it was ‘the first time something like this has happened since 2006’, referring to when Hizbollah fought a devastating 34-day war against Israel.”

January 4 – Wall Street Journal (Stephen Kalin and Aresu Eqbali): “Iranian leaders vowed revenge Thursday for a pair of bombings that killed dozens of people a day earlier in the country’s southeast… Authorities in Iran are investigating the blasts, which took place in the city of Kerman near a public ceremony commemorating the death of Qassem Soleimani, commander of the Islamic Revolutionary Guard Corps’ elite Quds Force, who was killed in January 2020 by a U.S. airstrike. Soleimani’s successor, Esmail Qaani, prayed briefly at the site…, shrouded by supporters who called for revenge against the U.S. and Israel, which some Iranian officials have accused of backing the attacks without providing any evidence.”

January 4 – Financial Times (Felicia Schwartz): “Houthi militants detonated a one-way unmanned surface vessel in the Red Sea on Thursday, marking a defiant escalation by the Iran-backed rebel group a day after the US threatened a military response to such attacks. The detonation — the Houthis’ first use of a USV in their latest Red Sea campaign — did not damage any ships… ‘The introduction of a one-way attack USV is a concern,’ said Vice Admiral Brad Cooper, the top commander of US naval forces in the Middle East.”

January 2 – CNBC (Lori Ann LaRocco): “The threat to global trade in the Red Sea remains high, even with efforts to protect commercial vessels from attacks by Iranian-backed Houthi militants based in Yemen. Danish shipping giant Maersk’s decision on Tuesday to pause Red Sea and Gulf of Aden transits until further notice underscores the difficulty for the U.S.-led initiative… U.S. Navy helicopters, returning fire, sank three of the four Houthi boats that attacked the Maersk Hanzghou over the weekend, the U.S. military said. Due to the threat, more commercial ships are moving away from the Red Sea and instead going around the Cape of Good Hope on the southern tip of Africa, analytics provider MarineTraffic told CNBC. That’s triggered an increase in container rates from Shanghai.”

January 4 – Reuters (Phil Stewart): “The U.S. military has carried out a strike in Baghdad against an Iraqi militia leader it blames for attacks against U.S. forces in the country, killing him and another person, a U.S. official told Reuters… The U.S. official… said the strike hit a vehicle in Baghdad. It targeted a leader of Harakat al Nujaba, the official said…”

Ukraine War Watch:

January 1 – Bloomberg: “President Vladimir Putin said Russia doesn’t want to fight ‘endlessly’ in Ukraine but won’t give up its positions and is ready for peace only on its own terms. Speaking in televised comments…, Putin said he’s satisfied with the Russian army’s performance in Ukraine as it’s now holding the strategic initiative on the front, while the opponent is ‘gradually deflating.’ Russia is currently occupying about a fifth of Ukraine’s territory. ‘We also want to end the conflict, and as soon as possible’ — but ‘only on our terms,’ Putin said.”

Market Instability Watch:

December 31 – Financial Times (Laura Noonan): “The threat to financial markets from leveraged trades has not abated in the last year, despite regulators’ efforts to rein them in, the head of Europe’s securities regulator has warned. ‘My view is that leverage and liquidity risks in funds remain as high as they were [in the past year],’ Verena Ross, chair of the European Securities and Markets Authority (Esma), told the FT… ‘This continues to be an area where we need to monitor very closely and react where we see risks.’ Deals that use borrowed money to boost investors’ returns have drawn growing scrutiny from global regulators over the past few years, after the early pandemic ‘dash for cash’ exposed the potential for shocks in areas of finance subject to less stringent supervision than traditional banks.”

January 2 – Reuters (David Lawder): “The U.S. federal government’s total public debt has reached $34 trillion for the first time…, as members of Congress gear up for another series of federal funding battles in the coming weeks. The Daily Treasury Statement… showed that the total public debt outstanding rose to $34.001 trillion from $33.911 on Thursday. The debt that counts toward the federal debt ceiling rose to $33.89 trillion on Friday from $33.794 trillion on Thursday.”

January 2 – Bloomberg (Alexandra Harris): “As year-end volatility in overnight funding markets eases, Wall Street is refocusing on how much longer the Federal Reserve can continue unwinding its balance sheet without causing even worse disruptions. Traders are back to scrutinizing funds in the Fed’s so- called overnight reverse repurchase agreement facility — or RRP — where eligible counterparties can park excess cash. Those users have been pulling money from the facility to capitalize on higher yields elsewhere, but as that facility drains toward zero, volatility in the repo market is expected to heat up anew. Gyrations in benchmarks such as the Secured Overnight Financing Rate, which spiked to a record last week, are set to become more common and severe.”

January 3 – Reuters (Harry Robertson): “Bond exchange-traded funds (ETFs) gathered an annual record of $300 billion of assets under management in 2023, BlackRock said…, as investors were lured in by the highest yields in decades. BlackRock, the world’s biggest asset manager, said it expects bond ETFs to grow to $6 trillion under management by 2030, from just over $2 trillion currently. It took 17 years from BlackRock’s launch of the first bond ETF in 2002 for the market to raise $1 trillion, but just three more years to double that amount to $2 trillion by July of last year.”

January 2 – Financial Times (Will Schmitt): “BlackRock’s lead in the US exchange traded fund market is being eroded by Vanguard and smaller rivals as firms jockey for a larger slice of the $8tn industry. BlackRock’s iShares managed about 32% of the US ETF market as of November. That compared with 33.7% in late 2022 and was down more than 7 percentage points from the end of 2018, when the $9.1tn asset manager controlled nearly two out of every five dollars invested in US ETFs, according to… Morningstar Direct.”

January 3 – Bloomberg (James Hirai): “UK long-end bonds are among the hardest hit by the downturn in global debt markets, as investors make room for a slate of gilt sales later this month. The yield on 30-year UK government notes has risen 14 bpss in the first two trading days of the year… Investors are ditching long-end gilts ahead of the UK Debt Management Office’s five scheduled offerings of bonds with maturity of 10 years or longer, including a 30-year issuance via banks.”

Bubble and Mania Watch:

December 31 – Wall Street Journal (Laura Cooper and Ben Dummett): “Private-equity firms usually drive dealmaking on Wall Street. In 2023, they sat it out. High interest rates put many new deals out of reach. Shaky market conditions made it hard for firms to cash out of current investments. And some of their investors have been pulling back. Every aspect of private equity’s core buyout business has been under strain, cutting the normally frenetic pace of deals nearly in half from a year ago… Private-equity deal activity dropped roughly 40% to $846 billion globally in 2023 from $1.44 trillion in 2022, which was already significantly down from the prior year, according to Dealogic.”

January 3 – Bloomberg (Alexandra Semenova): “The US stock market had a great 2023 with the S&P 500 Index gaining 24% and the Nasdaq 100 Index having its best year since 1999, but mom-and-pop investors may have missed out on the excitement. Retail investors fled US equities last year, according Bank of America Corp. client flow data. Meanwhile, hedge funds appear to have been the smart money, plowing cash into stocks as the market continued to soar. In all, BofA clients were net buyers in 2023, funneling $66 billion into US shares, strategists led by Jill Carey Hall said Wednesday in note to clients.”

January 1 – Financial Times (Stephen Gandel): “Billions of dollars of debt will fall due this year on hundreds of big US office buildings that their owners are likely to struggle to refinance at current interest rates. There are $117bn of commercial mortgages tied to offices which either need to be repaid or refinanced in 2024, according to… the Mortgage Bankers Association. Many of those were taken out a decade ago in an era when interest rates were far lower. Since then, commercial mortgage rates have nearly doubled, while the performance of many buildings has sunk, raising the prospect of billions of dollars of losses for investors.”

January 5 – Financial Times (George Hammond): “Fundraising by US venture capital firms hit a six-year low in 2023, an ominous sign for start-ups with dwindling cash reserves and fledging businesses reliant on such backing for survival. The $67bn raised by US VCs in 2023 is the lowest annual total since 2017 and represents a 60 per cent drop from the $173bn raised in 2022, the peak year for fundraising, according to analysis by private markets data provider PitchBook and the National Venture Capital Association. Globally, in 2023 venture investors raised the lowest level of capital since 2015. The sharp decline ratchets up pressure on start-ups, which have endured a funding drought over the past 18 months.”

January 1 – Wall Street Journal (Jan Wolfe): “U.S. antitrust cases against tech giants Google and Meta Platforms are expected to come to a head in 2024, likely producing long-awaited rulings that could shape the legacies of top Biden administration regulators. Silicon Valley and its critics have seen their patience tested on some of these cases. A U.S. antitrust case brought against Alphabet’s Google unit in 2020 went to trial in 2023 and now heads to closing arguments in May. ‘I think 2024 could be a big year for the enforcers,’ said Rebecca Allensworth, a professor at Vanderbilt Law School. ‘But as the U.S. v. Google case illustrates, it’s been slow going.’”

January 1 – Wall Street Journal (Peter Grant): “From 2019 to 2022, a new type of real-estate fund became one of the hottest fundraising juggernauts on Wall Street by giving individual investors the chance to participate in soaring values of apartment buildings, warehouses and other types of commercial property. Last year, those funds, known as nontraded real-estate investment trusts, ran off the rails. As concerns increased about the troubled commercial-property market, fundraising plummeted by the funds’ sponsors, many of them giant investment firms such as Blackstone and Starwood Capital Group. Meanwhile, redemptions soared as shareholders rushed to cash out. Sponsors were hit by so many redemption requests at the same time, they had to implement fund rules limiting the rate with which people could get their money back during such runs.”

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

December 30 – Reuters (Ben Blanchard and Faith Hung:): “Taiwan’s sovereignty and independence belong to its people, the frontrunner to be its next president said… in an often testy debate with the other two candidates dominated by arguments over China and tensions in the Taiwan Strait. Taiwan’s Jan. 13 presidential and parliamentary elections are happening as China has stepped up military and political pressure to assert its claims of sovereignty over the island… Vice President Lai Ching-te, the ruling Democratic Progressive Party’s (DPP) presidential candidate, reiterated in a pre-election debate televised live that he was open to talks with China, which has repeatedly rebuffed his offers of dialogue as it believes he is a dangerous separatist. ‘On so-called Taiwan independence, Taiwan’s basic position is that Taiwan’s sovereignty and independence belong to its 23 million people not the People’s Republic of China,’ Lai said.”

December 28 – The Hill (Miranda Nazzaro): “Chinese President Xi Jinping… pledged Beijing’s ‘reunification’ with Taiwan in his year-end address, just weeks before the self-governing island holds elections for its president and legislature. ‘The reunification of the motherland is a historical inevitability,’ Xi said… The official English translation… reads, ‘China will surely be reunified.’ ‘And all Chinese on both sides of the Taiwan Strait should be bound by a common sense of purpose and share in the glory of the rejuvenation of the Chinese nation,’ Xi added…”

January 2 – Reuters: “A senior Chinese official… urged Taiwan’s people to make a ‘correct choice’ on the island’s upcoming elections, which he described as being about peace and war, prosperity and decline. China, which claims Taiwan as its own territory, has repeatedly cast the Jan. 13 presidential and parliamentary elections as a choice between war and peace. Top Chinese leaders have generally avoided public comments on the vote. President Xi Jinping said in his New Year’s address on Sunday that China’s ‘reunification’ with Taiwan is inevitable, but did not mention the election.”

January 3 – Reuters (Ben Blanchard): “Three Chinese balloons flew across Taiwan island on Tuesday and near an air base, the Taiwanese defence ministry said, the first time it has reported them crossing the island since reporting a spate of such balloons in the Taiwan Strait starting last month… Taiwan is on high alert for Chinese activities, both military and political, ahead of Jan. 13 presidential and parliamentary elections.”

January 3 – Bloomberg (Cliff Venzon): “The Philippine and US militaries on Wednesday began their second maritime drills in the South China Sea in less than two months amid continuing tensions with China in the disputed waters. ‘The two-day bilateral event will conduct passing exercises, communication checks, cross-deck exercises, joint patrols, Officer of the Watch maneuvers, and fixed-wing flight operations,’ the Armed Forces of the Philippines said…”

Inflation Watch:

January 2 – Bloomberg (Kathryn Anne Edwards): “What is inflation? Officially, it’s the change in average consumer prices over a period — a number that has, in recent months, been easing down toward the US Federal Reserve’s 2% target. But for many people, it’s a way to describe in one word the struggle to make ends meet. On the latter front, the battle against inflation is far from won. Can’t afford to buy a home? Using credit card debt to buy groceries? Paying out of pocket for prescription drugs? All these problems are part of the people’s inflation… It reflects the systemic weaknesses and market failures that have long dogged our economy. The list of markets that fail to deliver affordable and accessible goods and services is long, including child care and prescription drugs, but the surge in prices of the past couple years has brought to the forefront two items crucial to survival: food and shelter.”

December 31 – Wall Street Journal (Austen Hufford): “Low-paid workers might not notice that 22 states are increasing the minimum wage to start the year. The reason: Robust raises in recent years have rendered pay floors largely irrelevant… At the turn of each year, many states lift the minimum wage to adjust for the cost of living… Before the pandemic, that often meant a welcomed raise for low-wage workers, but labor shortages in recent years caused paychecks for many cooks, housekeepers and grocery clerks to rise faster than required by states. Meanwhile, the $7.25 an hour federal minimum wage, followed in 20 states, has been unchanged since 2009. To start 2024, Washington state will raise the nation’s highest minimum to $16.28 an hour, from $15.74 in 2023.”

January 2 – Reuters (Daniel Wiessner): “The coming year will reveal the full impact of a U.S. labor board’s recent rulings that were seen as providing a major boost to union organizing and whether those changes can withstand legal challenges amid a series of high-profile labor campaigns… Business groups and employers are challenging many of those decisions in court, but in the mean time companies should brace themselves for an uptick in organizing emboldened by the NLRB’s burst in pro-union activity, experts said. ‘There’s an all-out assault to get businesses to recognize unions and increase union membership,’ said Ben Brubeck, vice president at construction trade group Associated Builders and Contractors.”

January 2 – Reuters (Carolyn Cohn): “U.S. property catastrophe reinsurance rates rose by as much as 50% on the key Jan. 1 renewal date, broker Gallagher Re said…, as reinsurers look to recoup losses from natural disasters such as wildfires, storms and hurricanes. Reinsurers provide insurance for insurers and the prices they agree at the beginning of each year set the trend for the cost of insurance for the next 12 months. Earthquakes in Turkey and Syria, wildfires in Hawaii and other natural catastrophes caused an estimated $100 billion in insured losses in 2023, down from 2022 but still well above normal… U.S. property catastrophe reinsurance rates rose by as much as 50% on Jan. 1, 2024 for policies previously hit by natural catastrophes, while such rates doubled in Turkey, Gallagher Re said.”

January 2 – Wall Street Journal (Paul Berger): “Companies that assembled new supply chain strategies in the wake of the Covid-19 pandemic are having to put those plans into practice far faster than they may have thought possible. Global supply chains are entering 2024 roiled by disruptions at two of the world’s crucial trade corridors—the Panama Canal and the Suez Canal—even as geopolitical tensions appear set to take a more prominent role in sourcing and distribution. That could potentially force countries and companies to redraw trade maps that have been built over decades.”

January 4 – Bloomberg (Brendan Murray): “Short-term rates for container shipping between Asia, Europe and the US are climbing on reduced capacity caused by the threats to cargo vessels in the Red Sea. The spot rate for shipping goods in a 40-foot container from Asia to northern Europe now tops $4,000, a 173% jump from just before the diversions started in mid-December,, a cargo booking and payment platform, said… Rates from Asia to North America’s East Coast have risen 55% to $3,900 for a 40-foot container.”

Biden Administration Watch:

January 3 – Wall Street Journal (Michael R. Gordon, Gordon Lubold and Nancy A. Youssef): “The U.S., Britain and key allies issued what officials described as a final warning to the Houthi Yemeni rebel group Wednesday to cease its attacks on international shipping in the Red Sea or bear the consequences. ‘Ongoing Houthi attacks in the Red Sea are illegal, unacceptable, and profoundly destabilizing,’ says the statement issued by more than a dozen nations. ‘The Houthis will bear the responsibility of the consequences should they continue to threaten lives, the global economy, and free flow of commerce in the region’s critical waterways.’ The U.S. military has prepared options to strike the Iran-backed rebel group, U.S. officials say.”

Federal Reserve Watch:

January 3 – Bloomberg (Craig Torres): “Federal Reserve policymakers agreed last month that it would be appropriate to maintain a restrictive stance ‘for some time,’ while acknowledging they were probably at the peak rate and would begin cutting in 2024. ‘Participants viewed the policy rate as likely at or near its peak for this tightening cycle,’ according to the minutes of the Dec. 12-13 Federal Open Market Committee meeting… That said, officials ‘reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.’ The minutes indicated increased optimism among participants about the path of inflation, noting ‘clear progress.’”

January 3 – Bloomberg (Alexandra Harris): “The Federal Reserve is trying to find the right time to start deliberating about how it will extract itself from its balance sheet unwind, a signal that the end might be closer than previously expected. In the minutes of last month’s Federal Open Market Committee meeting, several participants suggested it would be appropriate to begin discussing the technical factors that would determine when the US central bank slows the pace of its balance sheet runoff, a process known as quantitative tightening. Participants remarked the Committee’s plans indicated it would slow and then stop shrinking its balance sheet when reserve balances are ‘somewhat above the level judged consistent with ample reserves.’”

U.S. Bubble Watch:

January 5 – CNBC (Jeff Cox): “The U.S. labor market closed out 2023 in strong shape as the pace of hiring was even more powerful than expected… December’s jobs report showed employers added 216,000 positions for the month while the unemployment rate held at 3.7%. Payroll growth showed a sizeable gain from November’s downwardly revised 173,000. October also was revised lower, to 105,000 from 150,000… The hiring boost came from a gain of 52,000 in government jobs and another 38,000 in health care-related fields such as ambulatory health-care services and hospitals. Leisure and hospitality contributed 40,000 to the total, while social assistance increased by 21,000 and construction added 17,000. Retail trade grew by 17,000… The report showed that inflationary pressures, despite receding elsewhere, are still prevalent in the labor market. Average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%. The average workweek edged lower to 34.3 hours.”

January 4 – Reuters (Savyata Mishra): “Online spending by U.S. shoppers rose 4.9% during the 2023 holiday season, an Adobe Analytics report showed…, as intense promotions on items such as electronics and apparel, as well as deferred payment options helped fuel consumer appetite. Between Nov. 1 and Dec. 31, Americans spent about $222.1 billion online, a touch above Adobe’s earlier projection of $221.8 billion… In 2022, online spending grew 3.5%.”

January 4 – CNBC (Jeff Cox): “Hiring in the private sector rose at a faster-than-expected pace in December, closing out a strong 2023 for the resilient U.S. jobs market, ADP reported… Private payrolls increased by 164,000 for the month, a substantial rise from the downwardly revised 101,000 in November and better than the 130,000 estimate… A rebound in leisure and hospitality led the way, as the sector added 59,000 positions… Hotels, restaurants, bars and similar establishments were leaders in job creation… The sector also led in wage gains, with annual growth of 6.4%. Construction contributed 24,000 to the total, while the other services category, which includes dry cleaning and other support businesses, added 22,000. Financial activities increased 18,000.”

January 4 – Dow Jones (Jeffry Bartash): “U.S. labor market retains lots of residual strength. The numbers: The number of Americans who applied for unemployment benefits in the final week of 2023 fell to a nearly three-month low of 202,000… New jobless claims declined by 18,000 from a revised 220,000 in the prior week… Economists had forecast new claims… to total 219,000.”

January 3 – Wall Street Journal (Gabriel T. Rubin and Harriet Torry): “Employers finished 2023 with far fewer open positions than at the start of the year… Total job postings as of the end of 2023 declined more than 15% from a year earlier, according to data from job-listing site Indeed through Dec. 29. ‘The pace of descent seems to have leveled off a bit in the second half of the year,’ said Nick Bunker, an economist at the jobs site. Job postings are still up by more than a quarter from their prepandemic levels, Indeed’s data show. But the frenzied hiring and worker shortages that marked an earlier phase of the pandemic recovery are fading, even as unemployment remains low…”

January 3 – Reuters (Dan Burns): “U.S. bankruptcy filings surged by 18% in 2023…, although insolvency case volumes remain well below the level seen before the outbreak of COVID-19. Total bankruptcy filings – encompassing commercial and personal insolvencies – rose to 445,186 last year from 378,390 in 2022, according to… Epiq AACER. Commercial Chapter 11 business reorganization filings shot up by 72% to 6,569 from 3,819 the year before… Consumer filings rose 18% to 419,55 from 356,911 in 2022… Bankruptcy case counts are expected to keep climbing in 2024, though there is still some distance to go to top the 757,816 bankruptcies filed in 2019, the year before the pandemic struck.”

January 3 – Reuters (Nathan Gomes): “General Motors edged past rival Toyota Motor to remain the top-selling automaker in the U.S. in 2023 as easing supply snags and sustained demand drive the industry to its best year since the pandemic. The Detroit automaker shrugged off a hit from a costly auto strike to report U.S. new vehicle sales of about 2.6 million units for 2023, up 14.1% from last year, while Toyota’s annual sales rose 6.6% to about 2.25 million vehicles. Overall, U.S. new vehicle sales last year finished at around 15.5 million units, of which electrified vehicles including hybrids made up nearly 17%… That was the highest since 2019 and surpassed sales of nearly 13.9 million in 2022…”

Fixed Income Watch:

January 2 – Reuters (Shankar Ramakrishnan and Davide Barbuscia): “Top-rated U.S. companies raised over $29 billion in debt on Tuesday, giving the corporate bond market a strong start to the new year… Gross issuance in 2024 is expected to reach $1.3 trillion in 2024 compared with $1.2 trillion in 2023, but net new issuance after maturities, calls, tenders and bond repurchases is expected at only $475 billion, lower than last year’s amount of nearly $500 billion, said the Citi note.”

January 2 – Financial Times (Harriet Clarfelt and Nicholas Megaw): “US companies have been piling into the market for convertible bonds as they search for ways to keep their interest costs down, in a rare flurry of activity in otherwise subdued corporate fundraising markets. Issuance of convertible debt climbed by 77% last year to $48bn…, making it one of the only areas of capital markets to return to pre-pandemic averages after 2022’s market downturn. Experts say the boom in convertibles, a type of bond that can be swapped for shares if a company’s stock price hits a pre-agreed level, is likely to continue this year as companies refinance a wave of maturing debt.”

China Watch:

January 1 – Bloomberg: “Chinese President Xi Jinping pledged to strengthen economic momentum and job creation, acknowledging some companies and citizens had endured a difficult 2023 in a rare admission of domestic headwinds facing the country. While China’s most-powerful leader since Mao Zedong used his annual new year address to trumpet his nation’s achievements, he also conceded some ‘enterprises had a tough time’ and ‘people had difficulty finding jobs and meeting basic needs.’ ‘We will consolidate and strengthen the momentum of economic recovery, and work to achieve steady and long-term economic development,’ Xi said in the televised message… China’s much-anticipated post-pandemic economic boom failed to materialize in 2023.”

December 31 – Bloomberg: “The slide in China’s home sales accelerated in December, underscoring the challenges to arrest the country’s property slump. The value of new home sales among the 100 biggest real estate companies fell 34.6% from a year earlier to 451.3 billion yuan ($64bn), compared with a 29.6% decline in November, according to… China Real Estate Information Corp… That puts major developers’ full-year sales 16.5% lower than 2022, worse than the institution’s earlier estimate of a 15% drop. December’s sales were up 15.7% compared with the previous month.”

January 2 – Reuters (Clare Jim): “China’s property market continued to consolidate in 2023 with state-affiliated firms dominating the home sales and land acquisition market…, as more private firms got embroiled in the sector’s deepening debt crisis. The top six home sellers last year were all state-owned or state-backed developers, with Poly Developments, China Vanke, and China Overseas Land & Investment topping the league table… China’s largest private developer Country Garden, which defaulted on its $11 billion dollar bonds in October, slipped to No.7 from No.1 in 2022, as its sales dropped 53% to 220 billion yuan ($30.9bn).”

January 4 – Reuters (Ellen Zhang and Ryan Woo): “China’s services activity expanded at the fastest pace in five months thanks to a solid rise in new business, a private-sector survey showed… The data, offering a snapshot of business sentiment, was in contrast to an official survey on Sunday which showed a sub-index of services activity shrank again at the end of 2023, raising calls for more stimulus measures in the new year. The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 52.9 in December from November’s 51.5… posting the highest reading since July.”

December 30 – Bloomberg: “China’s factory activity shrank in December to the lowest level in six months, fueling expectations the government may have to act soon to add impetus to the economy. The official manufacturing purchasing managers index declined to 49… That was weaker than the median forecast of 49.6…”

January 1 – Reuters (Ellen Zhang and Ryan Woo): “China’s factory activity expanded at a quicker pace in December due to stronger gains in output and new orders, but business confidence for 2024 remained subdued, a private-sector survey showed… The Caixin/S&P Global manufacturing PMI rose to 50.8 at the end of 2023 from 50.7 in November, marking the fastest expansion in seven months and surpassing analysts’ forecasts of 50.4.”

January 2 – Bloomberg: “The People’s Bank of China injected nearly $50 billion worth of low-cost funds into policy-oriented banks last month, suggesting the central bank may be ramping up financing for housing and infrastructure projects to support the economy. The outstanding amount of the PBOC’s Pledged Supplemental Lending program to policy banks climbed to 3.25 trillion yuan ($456bn)… The net injection of 350 billion yuan was the largest increase via the tool since November 2022. The PSL program is seen as an important tool in Beijing’s arsenal, which the government can use to shore up the property sector and stabilize growth this year.”

December 30 – Financial Times (Sun Yu): “Chinese authorities have struggled to disperse $740bn in cheap loans to businesses, as banks raise concerns about credit risk and companies are loath to take on more debt in a slowing economy. The targeted lending programme has been a critical part of Beijing’s stimulus effort since the coronavirus pandemic and as authorities have tried to kick-start a sagging economy this year. But commercial banks have found it difficult to identify eligible borrowers in the industries prioritised by the government. Official data shows half of the 14 People’s Bank of China loan programmes… have deployed less than 50% of their quota since they began in 2020. The remaining programmes, or ‘structural monetary policy instruments’, have disbursed between 62 and 87% of their lending quotas.”

January 4 – Bloomberg (Ellen Zhang and Ryan Woo): “China’s government spending will rise this year, the nation’s Minister of Finance said, as authorities look for ways to bolster domestic demand and help the world’s second-largest economy regain momentum. ‘We will make sure the overall size of fiscal spending increases to play a better role stimulating domestic demand,’ Finance Minister Lan Fo’an said..”

January 2 – Reuters: “Some of China’s top banks have sharpened scrutiny of smaller peers’ asset quality and have tightened standards for interbank lending, three sources said, in an effort to curb credit risk as a deepening property debt crisis ripples through the economy. Two of China’s biggest state-owned banks and a leading joint-stock bank have stepped up reviews of smaller lenders over the past couple of months to identify those with poor asset quality and have a high risk of default, the sources said… The move comes amid growing worries about the health of the smaller banks in the world’s second-largest economy, as a deepening property sector crisis and ballooning local government debt make them the weak link in the financial system.”

January 4 – Financial Times (Cheng Leng and Andy Lin): “Chinese provinces pumped a record Rmb218.3bn ($31bn) of capital into fragile regional banks last year using special-purpose bonds, in a sign of concern at the risks within one of the world’s most important financial systems. Sales of bonds that are used to boost the capital buffers of regional lenders more than tripled in 2023 from the previous year… The acceleration of funds being channelled to regional banks underlines Chinese authorities’ concern over their systemic importance at a time when the economy has slowed. Regional lenders including urban and rural commercial banks ‘hold 25% of China’s banking system assets’, said Yulia Wan, analyst with Moody’s.., who added that risks to banks were set to rise over the next 12 months from exposure to sectors including manufacturing, retail, property, construction and local government financing. The risks are ‘substantial for some regional banks, trust companies and asset managers’, she said.”

January 3 – Bloomberg: “China’s local government financing vehicles need to pay back a record amount of maturing local bonds this year, testing the limits of a central government program to help them refinance their debt and avoid default. The nation’s LGFVs — the companies that borrow on behalf of provinces and cities to finance mainly infrastructure projects, such as roads and ports — have 4.65 trillion yuan ($651bn) worth of bonds due over the next 12 months… That’s the highest amount on record, and is roughly 13% more than what came due last year. ‘Containing the credit contagion and the systemic financial risk from the LGFV sector remain top priorities for the central government this year,’ said Zerlina Zeng, senior credit at Creditsights Inc.”

January 4 – Bloomberg: “Four Chinese bad-debt managers were downgraded by Fitch Ratings Inc. on concern over their financial situation and expectations of reduced government support. The issuer default ratings of China Cinda Asset Management Co. and China Orient Asset Management Co. were lowered to A-from A… China Huarong Asset Management Co. and China Great Wall Asset Management Co. were cut to BBB from BBB+… The firms’ ability to buy non-performing assets has been hampered by their financial underperformance, capital constraints, as well as the government’s inconsistent support, the statement said.”

January 4 – Bloomberg: “Wages offered to Chinese workers in major cities declined by the most on record, underscoring persisting deflationary pressures and sluggish consumer confidence in the world’s second-largest economy. Average salaries offered by companies to new hires in 38 key Chinese cities fell 1.3% to 10,420 yuan ($1,458) in the fourth quarter of 2023 from a year ago. That was the worst drop since at least 2016…”

January 4 – Bloomberg: “China banks are scaling back travel perks by telling staff not to fly business class and to book cheaper hotel rooms, part of moves to rein in spending at lenders already under pressure to embrace more frugal operations from President Xi Jinping’s ‘common prosperity’ push. Firms including Industrial Bank Co. told bankers late last month that local branch executives and domestic division heads should book the cheapest seats possible on trains and avoid business class on local and international flights…”

January 4 – Bloomberg (Bingyan Wang): “China reiterated the need to step up positive propaganda to boost economy in a meeting chaired by Cai Qi, Xi’s chief of staff, with the propaganda officials from different levels… Cai vowed to strengthen positive propaganda and the guidance of public opinion. Li Shulei, head of the Publicity Department, stressed the importance of preventing and defusing the ideological risks.”

January 4 – Bloomberg (Shawna Kwan): “The Hong Kong government is not selling any residential or commercial land plots in the first quarter of the year, as weak market sentiment dampens developer demand. ‘In recent months, we have witnessed that the market is not too keen in tendering for residential sites,’ Secretary for Development Bernadette Linn said… There were failed tenders and the recent successful tender had only one bid, she added.”

Global Bubble Watch:

January 1 – Reuters (Renju Jose): “Australian home prices rose last year, a significant turnaround from the 5% dip seen in 2022, but interest rate hikes and persistent cost of living pressures have somewhat slowed the pace of growth through the final months of the year. Figures from property consultant CoreLogic… showed prices nationally jumped 8.1% in 2023, but well below the 24.5% surge recorded in 2021. Prices in December nudged higher by 0.4%, the smallest monthly gain since February.”

Europe Watch:

January 5 – Reuters (Balazs Koranyi): “Euro zone inflation jumped as expected last month, supporting the European Central Bank’s case to keep interest rates at record highs for some time, even as markets continued to bet on a rapid fall in borrowing costs. Inflation across the 20-nation bloc jumped to 2.9% in December from 2.4% in November, just shy of expectations for a 3.0% reading, mostly on technical factors, such as the end of some government subsidies and low energy prices getting knocked from base figures.”

January 4 – Reuters (Maria Martinez): “Inflation rose in six economically important German states in December…, suggesting a bumpy road ahead for German inflation. The inflation rate in North Rhine-Westphalia, Germany’s most populous state, rose to 3.5% in December from 3.0% in the previous month. In Bavaria, the inflation rate rose to 3.4% in December from 2.8% in November, while rising to 4.5% in Brandenburg…”

Japan Watch:

January 5 – Bloomberg (Toru Fujioka): “More Bank of Japan watchers joined those pushing back their predictions for the end of negative rates in the wake of the New Year’s Day earthquake and recent remarks by Governor Kazuo Ueda. BNP Paribas SA, Deutsche Securities and Mitsubishi UFJ Morgan Stanley Securities pushed back their forecasts, joining Morgan Stanley MUFG Securities in saying the bank is unlikely to scrap the negative rate at its Jan. 22-23 meeting.”

EM Watch:

January 2 – Bloomberg (Srinivasan Sivabalan and Vinícius Andrade): “Emerging-market assets started the new year on a weaker note, weighed down by concerns over China’s economic stagnation. An MSCI Inc.’s gauge for developing-nation stocks fell for the first time in seven trading sessions on Tuesday, while the currency index slumped the most since February. Credit default swaps protecting against payment risks among 22 sovereign issuers widened for a third day, the longest streak since late November. Chinese stocks recorded their worst start to a year since 2019 and the yuan slid after weak manufacturing and home-sales data signaled the growth deceleration in the world’s second-biggest economy is far from over.”

January 4 – Bloomberg (Heejin Kim and Finbarr Flynn): “A Korean builder whose plan to restructure debt prompted a rating agency to warn of spillover risk slid on Thursday, fueling concerns in a nation on alert for crises in project finance. Taeyoung Engineering & Construction… dropped as much as 18% in the stock market. Its 2024 won note also declined, after the firm’s top creditor pushed back on its request to restructure its debts… Officials in Korea are bracing for trouble in the credit market, already rocked by the default of a developer in 2022.”

January 4 – Bloomberg (Divya Patil): “Reliance Industries Ltd., State Bank of India and HDFC Bank Ltd. are among India’s top companies driving a sales bonanza in long-dated bonds, locking in relatively lower borrowing costs to fund capital expenditure and lending plans. Firms issued 1.25 trillion rupees ($15bn) of local-currency notes due in at least 10 years in the three months ended December, the highest-ever for any quarter…”

Leveraged Speculation Watch:

January 3 – Bloomberg (Nishant Kumar and Liza Tetley): “Ken Griffin’s Citadel posted a 15.3% return in its main Wellington hedge fund last year…, beating some of its peers as money managers grappled with a challenging 2023. Izzy Englander’s $61 billion firm Millennium Management gained about 10%…, improving from low single-digit returns in the early part of the year. Eisler Capital… gained 9.8%… Unlike in 2022 when many of the industry’s biggest firms boasted strong double-digit gains, multi-strategy funds rose just 4.9% last year through November on average, according to PivotalPath.”

January 4 – Bloomberg (Sonali Basak): “Cliff Asness’s AQR Capital Management posted another year of double-digit returns at its longest-running multistrategy fund, as value wagers helped fuel those gains. The quant giant’s Absolute Return strategy jumped 18.5% in 2023 following a record 43.5% the previous year…”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 1 – Wall Street Journal (Richard Vanderford): “In 2024, the U.S. election season will enter full swing against a backdrop of political polarization. With tensions high—and partisans frequently taking their grievances to the streets—some business leaders and advisers are looking warily at the risks. Many U.S. cities last year saw large demonstrations on contentious topics, from abortion to climate change to the conflict in Gaza… U.S. business leaders right now rank escalating political polarization generally as their second most important emerging risk worry after generative artificial intelligence, according to a report published recently by Gartner…”

December 28 – Associated Press (Mike Schneider): “The world population grew by 75 million people over the past year and on New Year’s Day it will stand at more than 8 billion people, according… the U.S. Census Bureau… The worldwide growth rate in the past year was just under 1%. At the start of 2024, 4.3 births and two deaths are expected worldwide every second… The growth rate for the United States in the past year was 0.53%, about half the worldwide figure. The U.S. added 1.7 million people and will have a population on New Year’s Day of 335.8 million people.”

January 2 – Bloomberg (Peter Millard and Michael D McDonald): “The vestiges of an ancient forest tell the story of just how bad things are at the drought-stricken Panama Canal. A few hundred feet from the massive ships hauling goods across the globe, gaunt tree stumps rise above the waterline. They’re all that remains of a woodland flooded more than a century ago to create the canal. It’s not unusual to see them at the height of the dry season — but now, in the immediate aftermath of what’s usually the rainy period, they should be fully submerged. They’re a visible reminder of how parched conditions have crippled a waterway that handles $270 billion a year in global trade. And there are no easy solutions. The Panama Canal Authority is weighing potential fixes that include an artificial lake to pump water into the canal and cloud seeding to boost rainfall, but both options would take years to implement, if they’re even feasible.”

Geopolitical Watch:

January 5 – Reuters (Ju-min Park and Soo-Hyang Choi): “North Korea fired more than 200 artillery rounds on Friday near a disputed maritime border with South Korea in another escalation of tension between the rivals and prompting the South to take ‘corresponding’ action with live fire drills. North Korea later said it conducted firing drills as a ‘natural response’ to military actions by South Korea’s “military gangsters” in recent days. It also threatened an ‘unprecedented strong response’ if Seoul continued to make provocative moves.”

January 3 – Reuters (Jack Kim): “South Korean and U.S. troops have conducted joint combat firing drills near the border with North Korea involving heavy weapons, as Pyongyang lambasted the allies for dangerous moves pushing the region to the brink of ‘an inferno of nuclear war.’ The exercise by a South Korean Army mechanised infantry brigade and U.S. Army armoured Stryker brigade was to test and enhance combat readiness simulating enemy aggression, South Korea said…”

December 31 – Reuters (Jack Kim): “North Korean leader Kim Jong Un told the country’s military commanders the most powerful means must be mobilized to destroy the United States and South Korea if they choose military confrontation… Kim said the danger of an armed confrontation on the Korean peninsula is fast becoming a reality because of hostile maneuvers by the enemies including the United States, requiring the country to ‘sharpen the treasured sword’ to protect itself.”

January 4 – Reuters (Jeff Mason, Steve Holland and Doina Chiacu): “North Korea recently provided Russia with ballistic missiles and launchers for use in Moscow’s war against Ukraine, some of which Russia has fired into Ukraine… National security spokesperson John Kirby told reporters the United States will raise the development with the United Nations Security Council. Kirby called North Korea’s arms transfer to Russia a ‘significant and concerning escalation’ and said the United States would impose additional sanctions against those facilitating the arms deals.”

Stay Ahead of the Market
Receive posts right to your in box.
June 7, 2024: Summer of Discontent and Instability
May 31, 2024: Thesis Corroboration
May 24, 2024: Speculative Bubble Hype
May 17, 2024: Zhang Zhan
May 10, 2024: Citadel Securities vs. Jane Street
May 3, 2024: Instability
April 26, 2026: Opposite Day
April 19, 2024: World-Wide De-Risking/Deleveraging
Double your ounces without investing another dollar!