July 21, 2023: Time for Resolve

July 21, 2023: Time for Resolve
Doug Noland Posted on July 22, 2023

Markets assume that a 25 bps rate increase at the FOMC’s meeting next Wednesday will wrap up the Fed’s tightening cycle. The rates market is pricing in less than 20% probability of one additional hike in either September or November.

We hear a lot these days about “long and variable lags,” a phrase coined by Milton Friedman: “There is much evidence that monetary changes have their effect only after a considerable lag and over a long period and that the lag is rather variable.”

So much has changed in the sixty years since the publication of Friedman’s “A Program for Monetary Stability.” For starters, there have been momentous changes in the administration of monetary policy. Federal Reserve assets have surged 153-fold, from $54 billion to almost $8.3 TN. Economic structured has evolved, with the structure of today’s financial system would be unrecognizable to Friedman. Irony is not in short supply. The reality is one of six decades of monetary instability, with transcendent Monetary Disorder unleashed by Friedman disciple Ben Bernanke.

I’ve been an analyst long enough to remember when the Fed didn’t even announce policy changes. There were the so-called “Fed Watchers” that would scrupulously analyze subtle shifts in the Fed’s reserve holdings to decipher policy shifts. Monetary policy certainly worked with long and variable lags. Policy easing provided accommodation by adding reserves that would expand banking system lending capacity. Removing reserves would restrain lending capacity, on the margin tightening finance throughout the system.

Depending on the inflationary backdrop, Fed bank reserve adjustments had quite variable impacts on lending and economic activity. A discontented Paul Volcker abruptly shifted focus to managing money growth to rein in excessive lending and inflation. Resulting disinflation – and a historic collapse in bond yields – was a boon to fledgling non-bank financial intermediation as well as financial speculation.

Less than three months on the job, the 1987 stock market crash elicited a defining statement from the Greenspan Federal Reserve: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” The post-crash accommodative backdrop underpinned bank lending, the expansion of non-bank finance, and destabilizing excesses, including Bubbles in the Savings & Loan industry, commercial real estate, M&A, and junk bonds. The “decade of greed.”

The collapse of eighties Bubble excess left the U.S. banking system badly impaired. Greenspan’s aggressive accommodation (3% Fed funds and an artificially steep yield curve) offered a powerful stimulant to the leveraged speculating community and market-based finance more generally.

The move to more transparency was also significant, as the Fed began releasing post-meeting policy statements. Importantly, the mechanism by which Fed policy was transmitted to the economy was rapidly evolving. No longer would subtle changes to bank reserves provide the primary impact, not with scores of hedge fund managers now hanging on Greenspan’s every word. It all proved too seductive. With the banking system hamstrung by problem loan portfolios, “The Maestro” could almost instantaneously trigger billions of additional speculative leverage and attendant loosening with a mere cryptic utterance.

I have argued that the current Fed tightening cycle would be the first actual tightening since 1994. After nurturing unprecedented speculative leverage (bonds and derivatives), a 25 bps baby-step rate increase on February 4, 1994, triggered an almost disastrous bout of de-risking/deleveraging. At 5.77% on February 3rd, 10-year yields spiked to 7.48% by early-May – and were above 8% by November.

Despite today’s more elevated CPI, 10-year Treasury yields sit at only 3.83% – and barely made it above 4% during this “tightening cycle.” And with markets anticipating an imminent end to rate increases, most indicators point to loose conditions. Junk bond spreads ended the week at 15-month lows, with investment-grade spreads at about the same level as February 2022. Both high yield and investment-grade CDS prices are little changed since the Fed began raising rates. The Nasdaq100 has gained 41% y-t-d and has returned 16% since the start of the tightening cycle. Indicative of a highly speculative marketplace, the Goldman Sachs Short Index has gained 35% this year.

Apparently, this tightening cycle is about to wrap up without a meaningful tightening of financial conditions. Everyone is okay with it. Market analysts see new record highs in the offing, while many economists now view a soft-landing as a worst-case scenario. I doubt it’s going to be that easy.

I believe actual tightening is both necessary and inevitable. “Immaculate disinflation” has similar analytical underpinnings as “transitory” inflation and Bernanke’s pre-GFC “global savings glut” thesis.

The world is transitioning to a new cycle, and the inflation dynamics of the previous cycle were aberrational. The good old days of loose conditions and liquidity abundance staying well contained within the confines of financial assets have run their course. New inflationary dynamics are driven by the likes of de-globalization, climate change, and a distressingly unstable geopolitical backdrop.

This week provided a timely reminder of New Cycle Inflation Risks:

July 20 – The Hill (Nick Robertson): “The price of wheat continues to rise in the United States and elsewhere after Russia pulled out of a United Nations-negotiated deal to export grain from Ukraine Monday. Wheat commodity futures have risen about 12% since Russia announced it would suspend the Black Sea Grain Initiative… Russia has also continued to attack Ukrainian port infrastructure and cities with missiles and drones, damaging the ability to export wheat if the deal were to resume. Those strikes have destroyed 60,000 tons of grain…”

Crude prices rose 2.0%, with gasoline futures jumping 5.8%. Rallying 1.5%, the Bloomberg Commodities Index traded to a three-month high. Watch out above when the commodities speculative fervor is rekindled.

A Friday Bloomberg headline: “Ukraine Grain Now Relies on a River Drying in the Drought.” The hostile climate was palpable for most of us this week, with global heat domes and a developing El Niño exacerbating already elevated food price risks.

July 20 – Reuters (Rajendra Jadhav, Mayank Bhardwaj and Shivam Patel): “India… ordered a halt to its largest rice export category in a move that will roughly halve shipments by the world’s largest exporter of the grain, triggering fears of further inflation on global food markets. The government said it was imposing a ban on non-basmati white rice after retail rice prices climbed 3% in a month after late but heavy monsoon rains caused significant damage to crops.”

July 20 – Bloomberg (Josh Eidelson): “More than 650,000 American workers are threatening to go on strike this summer — or have already done so — in an avalanche of union activity not seen in the US in decades. The combined actors and writers strikes in Hollywood are already a once-in-a-generation event. Unions for United Parcel Service Inc. and Detroit’s Big Three automakers are poised to join them in coming weeks if contract negotiations fall through… And while logistics experts and financial analysts expected the Teamsters to reach a deal with UPS, their confidence has dwindled as the July 31 deadline approaches. ‘This will be the biggest moment of striking, really, since the 1970s,’ said labor historian Nelson Lichtenstein, who directs the University of California, Santa Barbara’s Center for the Study of Work, Labor and Democracy.”

It is difficult to believe the Fed can conclude a tightening cycle with the unemployment rate at 3.6%. Labor today enjoys a strong negotiating position. And as strikes result in sizable pay increases, expect only growing enthusiasm to join picket lines. This is not the makings of disinflation and 2% CPI.

July 21 – Bloomberg (Edward Dufner): “‘This excessive data dependence of the Fed is an unwillingness or inability to take a strategic view of the economy,’ [Mohamed] El-Erian said. El-Erian said Powell ultimately will have to settle on a new target rate closer to 3% than the current 2% — a shift that would let the Fed declare victory earlier, and with less risk of damage to the US economy. ‘That may not sound like a big difference, but it is, over time… My big worry… is if the Fed focuses on 2% in a relatively rapid time frame, we will end up in recession… There is no reason for the US economy to fall into recession. The endogenous elements of this economy are strong enough to power through this period. The big risk is that we follow the wrong inflation target and end up tipping this economy into recession.”

Mohamed El-Erian is one of the preeminent macro analysts of this era. I am hard-pressed to think of an individual whose analysis I mull over more closely. And when I disagree with Mr. El-Erian, I’m compelled to find a mirror and warn that gray-haired analyst to be prepared to be wrong. But I’m not wrong on this.

This is precisely the wrong time to go soft on the inflation target. If the Fed went with three, it wouldn’t be long before it would be four and then five percent. And there’s so much more at stake than moderately higher inflation. No one wants a recession, though they serve a fundamental and critical role in business cycles. Yet I’ll assume El-Erian is most concerned about the Fed breaking something – about a financial crisis. It’s a legitimate concern. I’m from the school that believes it’s advisable to take one’s medicine as soon as possible. Postponing market and economic adjustment only ensures more destabilizing adjustments later.

So, why haven’t financial conditions tightened? How have markets been able to counter Fed tightening measures? Because the system has avoided de-risking/deleveraging. Leveraged speculation, the marginal source of marketplace and system liquidity, has been undeterred by Fed rate hikes. Risk embracement has persisted, holding risk aversion and associated tightening at bay.

Importantly, leveraged speculators are today more emboldened than ever. Markets have been bailed out so many times that risk perceptions – and market pricing – have become profoundly distorted. There were the unprecedented policy responses to the 2008 crisis. There was Draghi’s “whatever it takes” that took central bankers everywhere by storm. There was Yellen’s super slow-motion slithering start to rate normalization. More important was Powell’s dovish pivot and 2019 return to QE in response to “repo” market instability, despite solid economic growth and booming asset markets.

And the Fed demonstrated in March 2020 that there was basically no ceiling on the size of QE purchases or its composition. No qualms with $5 TN. No issue with buying corporate debt and ETFs. Worries that the scope of leveraged speculation had outgrown the central bank liquidity safety net were allayed.

But then consumer and producer price inflation (finally) took off. There were understandable concerns for the status of the “Fed put.” How could the Fed again resort to QE with inflation running wild?

But then crisis erupted at the heart of the financial system. A systemic bank run and three of the four largest bank failures in history. What if runs expanded to money market funds and ETFs? In a matter of weeks, the Fed and FHLB responded with upwards of $700 billion of additional liquidity. Moreover, these measures were in the wake of the Bank of England’s crisis response and a notable softening of global central bank inflation resolve.

Speculators everywhere received all the confirmation they could have dreamed of that the central bank liquidity backstop was as secure as ever. And it’s not a situation where markets fear crisis dynamics attaining momentum in the shadows undetected by central bankers. Banking fragilities ensure central banks are on guard with immediate and powerful measures to bolster system liquidity.

The March liquidity response triggered a short squeeze and unwind of hedges, as the Federal Reserve reinforced a grossly unlevel market playing field. The resulting surge in liquidity and market prices unleashed FOMO. Bullish derivative bets (i.e., call options trading “in the money”) then stoked reinforcing liquidity excess. Speculative leverage, FOMO flows, and derivative-related trading fueled a major loosening of financial conditions.

There are costs to years/decades of low rates, market interventions and bailouts. Financial conditions are remaining too loose – and will remain dangerously loose until “risk off” and associated deleveraging. And there are two key costs today from loose conditions. First, inflation is becoming only more deeply entrenched, raising the risk of a destabilizing spike in market yields. Second, speculative Bubbles are inflating dangerously at major Credit, economic and geopolitical cycle inflection points.

Mr. El-Erian is misguided. There are multiple reasons for the economy to fall into recession, including decades of flawed policymaking, prolonged Monetary Disorder, egregious speculative and lending excess, and historic financial and economic structural maladjustment. Moreover, the economy and financial markets have become precariously dependent on liquidity emanating from leveraged speculation, creating latent fragilities. The big risk to system stability is that the Fed continues to accommodate runaway speculative Bubbles.

The Fed on Wednesday must show resolve. It’s time for the Chair to ditch “balanced Powell” and demonstrate inflation-fighting resolve. The “skip” was already imprudent speculative Bubble accommodation. This is no time to even hint “mission accomplished.” There’s potentially a lot more work to do. Financial conditions need to tighten. And if recession is part of the cost of safeguarding the system from additional speculative leverage, dangerous Bubble excess, and years of problematic inflation – then so be it.

For the Week:

The S&P500 increased 0.7% (up 18.1% y-t-d), and the Dow jumped 2.1% (up 6.3%). The Utilities rose 2.4% (down 4.0%). The Banks surged 6.6% (down 13.1%), and the Broker/Dealers jumped 5.2% (up 14.1%). The Transports advanced 2.6% (up 21.2%). The S&P 400 Midcaps gained 1.2% (up 11.3%), and the small cap Russell 2000 added 1.5% (up 11.3%). The Nasdaq100 slipped 0.9% (up 41.0%). The Semiconductors declined 1.4% (up 46.1%). The Biotechs increased 1.6% (up 2.5%). While bullion added $7, the HUI gold equities index dipped 1.1% (up 6.2%).

Three-month Treasury bill rates ended the week at 5.245%. Two-year government yields rose seven bps this week to 4.84% (up 41bps y-t-d). Five-year T-note yields gained five bps to 4.09% (up 9bps). Ten-year Treasury yields were unchanged at 3.83% (down 4bps). Long bond yields declined three bps to 3.90% (down 7bps). Benchmark Fannie Mae MBS yields gained four bps to 5.61% (up 22bps).

Greek 10-year yields sank 16 bps to 3.79% (down 78bps y-t-d). Italian yields fell nine bps to 4.08% (down 62bps). Spain’s 10-year yields declined five bps to 3.48% (down 4bps). German bund yields fell four bps to 2.47% (up 2bps). French yields declined four bps to 2.99% (up 1bp). The French to German 10-year bond spread was little changed at 52 bps. U.K. 10-year gilt yields sank 16 bps to 4.28% (up 61bps). U.K.’s FTSE equities index surged 3.1% (up 2.8% y-t-d).

Japan’s Nikkei Equities Index slipped 0.3% (up 23.8% y-t-d). Japanese 10-year “JGB” yields declined three bps to 0.45% (up 3bps y-t-d). France’s CAC40 added 0.8% (up 14.8%). The German DAX equities index increased 0.4% (up 16.2%). Spain’s IBEX 35 equities index gained 1.4% (up 16.3%). Italy’s FTSE MIB index added 0.7% (up 21.7%). EM equities were mixed. Brazil’s Bovespa index rallied 2.1% (up 9.6%), while Mexico’s Bolsa index was little changed (up 10.8%). South Korea’s Kospi index declined 0.7% (up 16.7%). India’s Sensex equities index rose 0.9% (up 9.3%). China’s Shanghai Exchange Index dropped 2.2% (up 2.5%). Turkey’s Borsa Istanbul National 100 index jumped 3.9% (up 21.4%). Russia’s MICEX equities index increased 0.7% (up 35.7%).

Investment-grade bond funds posted inflows of $1.964 billion, and junk bond funds reported positive flows of $2.216 billion (from Lipper).

Federal Reserve Credit declined $10.7bn last week to $8.250 TN. Fed Credit was down $617bn from the June 22nd, 2022, peak. Over the past 201 weeks, Fed Credit expanded $4.523 TN, or 121%. Fed Credit inflated $5.438 TN, or 193%, over the past 558 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.5bn last week to $3.431 TN. “Custody holdings” were up $79bn, or 2.4%, y-o-y.

Total money market fund assets added $4bn to $5.458 TN, with a 19-week gain of $565bn (32% annualized). Total money funds were up $885bn, or 19.3%, y-o-y.

Total Commercial Paper rose $15.0bn to a 19-week high $1.183 TN. CP was up $11bn, or 0.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 30 bps to 6.72% (up 118bps y-o-y). Fifteen-year rates sank 37 bps to 6.07% (up 132bps). Five-year hybrid ARM rates slipped a basis point to 6.59% (up 228bps) – near the high in data back to 2005. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 7.18% (up 158bps).

Currency Watch:

July 19 – Bloomberg (Iris Ouyang): “The yuan jumped after China stepped up its support for the managed currency with a stronger-than-expected reference rate and a change to its capital curbs to lure inflows. The People’s Bank of China set its daily fixing at just under 7.15 per dollar, 680 pips stronger than the average estimate… and the largest bias since November. It also adjusted some rules to allow companies borrow more from overseas, opening up the door for more foreign capital inflows.”

July 19 – Reuters: “China’s major state-owned banks were seen selling dollars to buy yuan in the offshore spot market in early Asian trades on Thursday… Such state bank dollar selling was meant to slow the pace of yuan declines, one of the sources said.”

For the week, the U.S. Dollar Index rallied 1.1% to 101.07 (down 2.3% y-t-d). On the upside, the South African rand increased 0.8%, and the Brazilian real added 0.1%. On the downside, the New Zealand dollar declined 3.2%, the Japanese yen 2.1%, the British pound 1.8%, the Australian dollar 1.6%, the Swedish krona 1.4%, the Mexican peso 1.4%, the South Korean won 1.4%, the euro 0.9%, the Singapore dollar 0.7%, the Swiss franc 0.4%, the Norwegian krone 0.3%, and the Canadian dollar 0.1%. The Chinese (onshore) renminbi declined 0.6% versus the dollar (down 4.02%).

Commodities Watch:

July 17 – Wall Street Journal (Mari Novik and Benoît Morenne): “The shale patch is shedding rigs at the fastest pace since the height of the Covid-19 pandemic despite healthy oil prices. Behind the drop in rigs is a tale of the haves and the have-nots. Private companies, which added rigs at a breakneck pace as the pandemic abated, have drilled up many of their best remaining wells, forcing them to decelerate. Meanwhile, their larger, public brethren aren’t tweaking their drilling programs as they sit on larger inventories of premium, undrilled wells. The number of rigs drilling for oil and gas has dropped to about 670 from around 800 at the beginning of the year… The slowdown augurs tepid U.S. crude-production growth for the rest of the year, analysts said.”

The Bloomberg Commodities Index gained 1.5% (down 5.9% y-t-d). Spot Gold added 0.3% to $1,962 (up 7.6%). Silver declined 1.3% to $24.61 (up 2.8%). WTI crude jumped $1.65, or 2.2%, to $77.07 (down 4%). Gasoline surged 6.0% (up 14%), and Natural Gas rallied 6.9% to $2.71 (down 39%). Copper dropped 2.9% (unchanged). Wheat surged 8.7% (down 12%), while Corn sank 12.1% (down 22%). Bitcoin fell $290, or 1.0%, to $29,930 (up 81%).

Global Bank Crisis Watch:

July 20 – Financial Times (Jean Eaglesham): “When Silicon Valley Bank collapsed this spring, it revealed ugly truths about the private sector financial world — including that investors and regulators had become ‘blindsided by risks which ex post seemed too obvious to be missed’, as a hard-hitting new book from NYU Stern business school notes. Most notably, many financiers ignored rising interest rates… while taking crazy bets that later blew up. Why? Excessively loose monetary policy was one culprit. Bad accounting rules were another. But some striking new research highlights two further issues that have hitherto been largely ignored: the role of government agencies such as the Federal Home Loan Bank system and the role of collateral in the financial system. Both deserve far more debate if we want to avoid another SVB-type shock.”

July 14 – Wall Street Journal (Telis Demos): “Americans’ returning appetite for debt is making life a lot easier for the biggest banks right now. The pandemic saw consumers dial back on their borrowing… For a while, that was a drag for lenders, who primarily make money from plastic when people borrow rather than when they spend. Now, just when it is needed, this borrowing is coming back: Fast-rising card borrowing is helping offset the challenges brought by higher interest rates… The country’s biggest bank, JPMorgan…, reported in its second-quarter results on Friday a 44% year-over-year rise in net interest income, which is the core measure of how much it earns from lending. Even excluding its takeover of First Republic in May, that figure grew 38%.”

July 18 – Bloomberg (Katherine Doherty): “Bank of America Corp.’s second-quarter profit soared after its core Wall Street businesses exceeded analysts’ expectations. The firm’s fixed-income and equity traders delivered a surprise gain, covering a slight miss in expected net interest income. Revenue from fixed-income, currencies and commodities trading rose 18% to $2.8 billion in the second quarter…”

July 19 – Bloomberg (Lucia Mutikani): “It’s a tough time to be in the real estate business. That means Goldman Sachs… is feeling some pain, too. The bank isn’t the largest property lender, but it has more than $14 billion of real estate investments. Writedowns of those bets helped drive a $1.15 billion hit in the second quarter.”

UK Crisis Watch:

July 19 – Reuters (William Schomberg and Andy Bruce): “Britain’s high rate of inflation fell by more than expected in June and was its slowest in over a year at 7.9%… Sterling weakened and investors scaled back their bets on future increases in borrowing costs as consumer price inflation growth came in at its lowest since March 2022, although it remained above the rate in other big, rich economies.”

July 18 – Reuters (David Milliken): “England and Wales are on track for the highest quarterly number of company insolvencies since early 2009, as businesses struggle to repay COVID-19 loans against a tough economic backdrop… The Insolvency Service… said 2,163 companies were declared insolvent in June, up 27% on a year earlier although down from May’s 2,553, which was the highest since monthly records began in January 2019.”

Market Instability Watch:

July 14 – Bloomberg (Lu Wang and Bailey Lipschultz): “The long-awaited broadening in the 2023 equity advance is bringing gains to corners of the market even unabashed bulls may view uneasily. Boats seaworthy and otherwise are being lifted by the rising tide in stocks, itself part of a cross-asset ‘everything rally’ that was the biggest in three years this week. Gains spread, with banks and commodity producers ascendant. And there were flimsier propositions: Meme stocks had their best week since January, while unprofitable tech firms jumped 11%. ‘I don’t know the staying power of the ‘junk rally,’ because it’s more sentiment driven — it’s not fundamental driven,’ said Abby Yoder, US equity strategist at JPMorgan… ‘Regardless of whether you’re in the camp of us going into a recession or a camp of a soft landing, the reality is that growth is probably slowing.’”

July 20 – Reuters (Nell Mackenzie): “Global hedge funds exited trades in the past week at their fastest pace since January and at one of the highest rates seen in the last five years, as recession bets have yet to pay off, a Goldman Sachs note… showed… Hedge funds cut losses after failing to match gains in the wider more cheaply held benchmark, MSCI’s broadest world stock index…”

July 17 – Bloomberg (Sri Taylor): “Fear that the market was headed for an economic slump is loosening its grip on corporate debt markets as investors start to put their money back to work, according to Bank of America Corp. July cash levels fell to the lowest in two years, as the share of investment-grade investors reporting above normal cash levels declined to 26% in July from 35% in May…”

July 21 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Investors in Japan’s bond market are bracing for turbulence that has the potential to test the Bank of Japan’s yield target in the lead up to next week’s policy decision. Option-implied volatility of Japan’s 10-year bond futures climbed to the highest since April on Friday…”

July 21 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials see little urgent need to address the side effects of its yield curve control program at this point, though they expect to discuss the issue, according to people familiar with the matter. The central bank looks at the costs and benefits of YCC at every meeting and will reach a final decision at its policy meeting next week after scrutinizing economic data and financial markets up to the last minute…”

July 17 – Bloomberg (Michael Tobin and Jill R. Shah): “Junk borrowers are piling into the leveraged loan and high-yield bond markets to refinance debt, fund acquisitions and boost borrowings in buyouts, a sign that markets are in a risk-on mode as US inflation cools and the odds of a recession drop. Eight new leveraged loan deals and four junk-bond sales launched Monday.”

July 17 – Bloomberg (Kathrin Hille): “While the deeply inverted yield curve has stoked anxiety among investors about the prospect of a recession, Goldman Sachs… has a different message: stop worrying about it. ‘We don’t share the widespread concern about yield curve inversion,’ Jan Hatzius, the bank’s chief economist wrote…, cutting his assessment of the probability of a recession to 20% from 25%, following a lower-than-expected inflation report last week.”

Bubble and Mania Watch:

July 17 – Financial Times (Nicholas Megaw): “Many of the largest US investment funds are being blocked from buying more shares in popular stocks due to diversification rules, as they struggle to keep up with indices that are increasingly dominated by a few massive tech groups. Major asset managers and mutual fund specialists such as Fidelity, BlackRock, JPMorgan Asset Management, American Century and Morgan Stanley Investment Management have run into strict regulatory limits that determine whether a fund can be categorised as ‘diversified’. The trend is a further sign of how a lopsided rally powered by just a handful of big companies is creating unexpected issues for investors and index providers…”

July 18 – Bloomberg (Shuli Ren): “When asked about how tighter regulations affect banks’ business models, JPMorgan… Chief Executive Officer Jamie Dimon commented that it was great news for hedge funds and private equity firms. ‘They’re dancing in the streets,’ he said about his non-bank rivals… These days, when companies want to borrow money or dealmakers need to finance a buyout, they often bypass public markets and investment banks and go straight to private lenders. Already, private credit as an asset class has grown to $1.5 trillion, bigger than high-yield corporate bonds or leveraged loans.”

July 20 – Financial Times (John Sage and Carmen Arroyo): “Private credit firms are extending their reach into the more than $260 billion global asset-based lending business, seizing on a pause by some traditional Wall Street banks to take on more corporate debt. Asset-based loans, or those that companies secure with collateral such as inventory, accounts receivable or equipment, grew in popularity in the past 18 months… Non-bank lending in the market is up almost 43% from four years ago, according to Clark Griffith, chief executive officer of Legacy Corporate Lending.”

July 19 – Bloomberg (Dawn Lim and Dave Merrill): “Blackstone Inc. is on the brink of a milestone that no other private equity firm has reached: running more than $1 trillion. Analysts expect the firm to eclipse that mark when it reports quarterly results Thursday. It’s a far cry from the firm’s debut in 1985 — with $400,000 — marking one of the most dramatic transformations in modern markets.”

July 19 – Financial Times (Kathrin Hille): “The world’s biggest contract chipmaker, Taiwan Semiconductor Manufacturing Company, has warned of a deepening semiconductor slump, as the boom in artificial intelligence fails to offset global economic woes and China’s delayed recovery. TSMC now expects its 2023 revenue to drop by 10%… ‘Three months ago we were probably more optimistic, but now [we are] not. The recovery of the Chinese economy is weaker than we thought, so end-market demand is not as we expected,’ said CC Wei, chief executive. ‘Although we have very good AI end-market demand, it is not enough to offset [that weakness].’”

July 19 – Bloomberg (John Gittelsohn): “About $24.8 billion of US office buildings were in distress at the end of the second quarter, surpassing previous leading commercial real estate laggards — hotels and retail properties. The total value of offices that were financially troubled or already repossessed by lenders shot up about 36% from the first quarter, MSCI Real Assets reported… At the end of June, $22.7 billion of retail properties — including malls — and $13.5 billion of hotels were in distress. The total for all troubled commercial properties was almost $72 billion, up 13% from the first quarter.”

July 18 – Bloomberg (John Gittelsohn): “Barry Sternlicht’s Starwood Capital Group is in default on a $212.5 million mortgage backed by an Atlanta office tower, another sign of mounting distress in US commercial real estate. The mortgage on Tower Place 100… matured on July 9 and Starwood failed to refinance or pay off the debt…”

July 18 – Wall Street Journal (Deborah Acosta): “The collapse of a record Florida land sale leaves a billion-dollar hole of prime waterfront real estate in downtown Miami. In the spring, Genting Malaysia, a Southeast Asia casino operator, cut a deal to sell the 15.5-acre assemblage for $1.2 billion in what would have been the most expensive Florida land sale on record. That deal collapsed in June when the buyer, a group led by Miami developer Terra, was unable to agree on terms and timing with Genting…”

July 19 – Bloomberg (Esha Dey): “Online used-car dealer Carvana Co. has brought windfall gains to its believers this year with a 1,100% rally as investors pile in amid a resurging appetite for riskier stocks. Shares of the company jumped as much as 43%… on Wednesday, after a deal to restructure its debt pile helped allay lingering concerns about its liquidity… Carvana’s 2023 surge follows a 98% 2022 plunge that left shares trading below $5 at the end of December.”

July 19 – Bloomberg (Esha Dey): “Just how frenzied has the rally in Carvana Co. become? In the opening six minutes of trading Wednesday, the online used-car vendor’s stock soared 43% — more than what the red-hot Nasdaq Composite Index has all year. That it would give back some of those gains later in the session — it closed up 40% at $55.80 — means little in the larger scheme of things. The stock has now climbed nearly 1,080% for the year, the biggest gain in the entire Russell 2000 and a sharp reversal from its 98% plunge in 2022.”

July 19 – Bloomberg (Pui Gwen Yeung and Anders Melin): “Microsoft Corp.’s AI-driven rally has pushed its stock to new highs and nudged Chief Executive Officer Satya Nadella’s total windfall from the company past a gilded threshold: $1 billion. Nadella’s boon includes all payouts he has collected from Microsoft that can be parsed from regulatory filings… It’s underpinned by Microsoft shares returning more than 1,000% since his first day in the top job.”

Ukraine War Watch:

July 19 – Reuters (Esha Dey): “Russia warned that from Thursday any ships sailing to Ukraine’s Black Sea ports would be seen as potentially carrying military cargoes, as Kyiv accused Moscow of carrying out ‘hellish’ overnight strikes that damaged grain export infrastructure. Russia attacked the Odesa region for the second consecutive night after quitting… a year-old deal allowing the safe passage of Ukrainian grain through the Black Sea… ‘Russian terrorists absolutely deliberately targeted the infrastructure of the grain deal,’ Ukrainian President Volodymyr Zelenskiy said… ‘Every Russian missile – is a strike not only on Ukraine but on everyone in the world who wants normal and safe life.’”

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

July 17 – Financial Times (Kathrin Hille): “China and Russia are deepening their military co-operation with their largest joint naval and air exercise on Japan’s doorstep. The ‘Northern/Interaction-2023’ exercise, which kicked off in the Sea of Japan on Monday, is technically part of the Chinese military’s regular annual training programme… It is unclear how long the exercises will last. But by holding the exercise in the waters that separate Japan from Russia and the Korean peninsula, Beijing and Moscow are starting to use their increasingly close military partnership to project power against other countries, officials of other governments and analysts said.”

July 20 – Reuters (Ben Blanchard): “It is China’s ‘priority’ to stop Taiwan’s vice president and presidential frontrunner William Lai from visiting the United States next month, the country’s ambassador in Washington said…, as Beijing steps up its warnings against the trip… Chinese ambassador Xie Feng told the Aspen Security Forum that ‘Taiwan is China’s Taiwan’ and that the country wanted a peaceful ‘reunification’, but Taiwanese ‘separatists’ were advancing their agenda, seeking U.S. support. ‘They even do not admit they are Chinese. So this is a very dangerous path they are taking,’ Xie said. Provocative moves by Taiwan ‘separatists’ should be contained, he added. ‘Now the priority for us is to stop Lai Ching-te from visiting the United States, which is like a grey rhino charging at us,’ Xie said…”

July 19 – Bloomberg (Ari Natter): “China represents an increasing threat to the US power grid, lawmakers were told… during a hearing in which they were warned a cyberattack from the nation could plunge military and other sensitive sites into darkness. ‘The Chinese activities are quite alarming,” said Manny Cancel, senior vice president of the North American Electric Reliability Corp., during testimony before a US House subcommittee. ‘Chinese cyber activities are one of the most dynamic cyber threats. China continues to demonstrate increasing sophistication, including new and adaptive techniques to gain access to networks.’”

July 19 – CNBC (Evelyn Cheng): “China’s Commerce Ministry… said non-economic factors were growing and interfering with the country’s foreign trade which was facing an ‘extremely severe’ situation in the second half of this year. ‘Some countries’ forceful push for ‘decoupling,’ ‘severing [supply] chains’ and so-called ‘de-risking’ are human-made obstacles blocking normal commerce,’ Li Xingqian, the head of the ministry’s external trade department, said… China’s exports, a significant contributor to domestic growth, have plunged in recent months as global growth has slowed.”

July 19 – Financial Times (Demetri Sevastopulo): “China’s ambassador to Washington has warned Beijing will retaliate against US national security measures targeted at the country, including a mechanism to screen inbound investment being prepared by the White House. Speaking at the Aspen Security Forum, Xie Feng said China ‘cannot remain silent’ while the US imposes sanctions and export controls that will make it harder for China to secure advanced US technology, including cutting-end chips. ‘The Chinese government cannot simply sit idly by,’ Xie told the security forum… ‘We will not make provocations, but we will not flinch from provocations. So, China definitely will make our response.’”

July 20 – Bloomberg: “China’s imports of key energy commodities from Russia surged to all-time highs last month, highlighting the growing interdependence of the two nations as the war in Ukraine drags on well into its second year… Asia’s largest economy has proved to be a vital outlet for exports of both oil and coal for Moscow as western buyers shun shipments given the conflict.”

De-globalization and Iron Curtain Watch:

July 20 – Reuters (Viktoria Lakezina and Vitalii Hnidyi): “Russia jolted world grain markets with an escalation in the Black Sea, mounting a third straight night of air strikes on Ukrainian ports and issuing a threat against Ukraine-bound vessels to which Kyiv responded in kind. At least 27 civilians were reported hurt in the air strikes on the ports, which set buildings ablaze and damaged China’s consulate in Odesa. The United States said Russia’s warning to ships indicated Moscow might attack vessels at sea following Moscow’s withdrawal… from a U.N.-brokered deal to let Ukraine export grain.”

July 19 – Bloomberg: “Russia named a relative of Chechen leader Ramzan Kadyrov and an ally of President Vladimir Putin to head the seized local operations of France’s Danone SA and Denmark’s Carlsberg A/S. Yakub Zakriev, 32, who’s Chechnya’s agriculture minister, is now listed as general director of Danone Russia… He’s a nephew of Kadyrov, the Chechen ruler who’s a protege of Putin and who has been repeatedly accused of human rights violations in the southern Russian republic. The Federal Property Management Agency also appointed Taimuraz Bolloyev to lead Carlsberg’s Baltika Brewing…”

July 19 – Financial Times (David Sheppard): “It would be easy for western policymakers to conclude that Vladimir Putin’s attempt to weaponise energy supplies ended in failure. Europe avoided blackouts last winter, despite Russia slashing gas supplies that once met 40% of demand. Prices have fallen more than 90% from their peak last August, and European storage facilities are already brimming ahead of the coming winter. But a growing band of energy experts are warning that western countries should not be blasé, as they remain vulnerable to Russian perfidy in energy markets. The worry is that if Putin suspects he is losing the war in Ukraine… then the west must be prepared for further disruption, including attempts to weaponise oil supplies for the first time.”

Inflation Watch:

July 19 – Reuters (Karen Braun): “The end of the Ukraine grain export deal and an unfavorable U.S. weather outlook sent Chicago-traded wheat and corn futures soaring on Wednesday, causing pain for speculators holding short positions. Most-active December corn gained 9.3% in the latest two sessions, the 2023 contract’s biggest-ever two-day jump and most-active corn’s biggest two-day rise since March 1, 2022.”

July 17 – CNBC (Leslie Josephs): “United Airlines and its pilots’ union have agreed to a preliminary labor deal that includes pay increases of as much as 40.2% over four years, ending months of tense negotiations and airport pickets. The deal makes United’s aviators the latest from a major airline to reach an agreement for higher wages amid the post-pandemic travel boom. The preliminary deal… comes months after Delta Air Lines pilots ratified a new contract that included 34% raises over four years… American Airlines and its pilots’ union reached a new labor deal with 40% raises over four years, though it still faces a ratification vote by members.”

Biden Administration Watch:

July 18 – Bloomberg (Eric Martin, Jenny Leonard, Daniel Flatley and Anna Edgerton): “The Biden administration’s plans to restrict investments in China will be narrowly focused on cutting-edge technology, only new investments, and likely won’t go into effect until next year as the policy grinds through Washington’s bureaucracy. Officials are aiming to wrap up a proposal by the end of August for the long-delayed program to screen and possibly prohibit investment in China’s semiconductor, quantum-computing and artificial intelligence sectors…”

July 19 – Financial Times (Stefania Palma): “Two US antitrust agencies have proposed merger guidelines that signal a tougher stance against private equity and the technology sector as the Biden administration seeks to crack down on anti-competitive behaviour across the economy. The 13 draft guidelines released by the US Department of Justice and Federal Trade Commission… address a string of practices, including acquisitions of minority interests that could harm competition and mergers that may squeeze competition for workers and suppress wages.”

July 19 – Bloomberg (Alex Tanzi): “Millions of Americans face a hit of at least $500 a month to their household budgets from the restart of federal student loan payments in September, according to a new study by TransUnion. The credit reporting agency examined the impact on some 27 million student-debt holders who are due to start paying again in September, after a pandemic freeze that lasted more than three years… For about half of the affected student-debt holders, the monthly payment will be above $200 a month, while for about one in five it will be more than $500…”

July 17 – Bloomberg (Ari Natter): “Stroll through the West Hackberry oil facility on the US Gulf Coast and there’s not much to see: some pipelines and other industrial equipment. But buried deep beneath the surface are storage caverns so massive they’re tall enough to house the Empire State Building with plenty of room to spare. These reserve sites are supposed to hold enough backup supply to ensure the US never runs short of oil. Right now, they’re sitting half empty. It only took about six months for the Biden administration to sell off 180 million barrels from the federal stash in the fastest withdrawal on record. But refilling it to capacity will likely take decades, if it happens at all. Experts say that a lack of funding and aging infrastructure will plague the process…”

July 15 – Financial Times (James Politi): “The Pentagon’s annual funding bill is set to become the focus of a political showdown after Republicans inserted ‘anti-woke’ social provisions into the legislation. The bill — known as the National Defense Authorization Act — is normally shielded from the most bitter partisan bickering and often passes with support from both political parties. But on Friday, Republicans in the House of Representatives passed their version of the legislation, worth $886bn, by adding measures designed to curb abortion rights, diversity training and medical care for transgender patients in the military.”

Federal Reserve Watch:

July 20 – Reuters (Hannah Lang): “The U.S. Federal Reserve has launched a long-awaited service which will aim to modernize the country’s payment system by eventually allowing everyday Americans to send and receive funds in seconds, 24 hours a day, seven days a week… The ‘FedNow’ service… will seek to eliminate the several-day lag it commonly takes cash transfers to settle, bringing the U.S. in line with countries including the United Kingdom, India, Brazil, as well as the European Union, where similar services have existed for years.”

July 20 – Bloomberg (Rich Miller): “The Federal Reserve’s widely expected increase in interest rates next week may prove to be the last in its current credit-tightening campaign, former Chair Ben Bernanke said. ‘It looks very clear that the Fed will raise another 25 bps at its next meeting,’ he said… on a webinar organized by Fidelity Investments. ‘It’s possible this increase in July might be the last one.’ Investors seem to agree.”

U.S. Bubble Watch:

July 20 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, touching the lowest level in two months amid ongoing labor market tightness… Initial claims for state unemployment benefits dropped 9,000 to a seasonally adjusted 228,000 for the week ended July 15, the lowest level since mid-May.”’

July 17 – Wall Street Journal (Amara Omeokwe and Megan Tagami): “Americans’ growing paychecks surpassed inflation for the first time in two years, providing some financial relief to workers, while complicating the Federal Reserve’s efforts to tame price increases. Inflation-adjusted average hourly wages rose 1.2% in June from a year earlier… That marked the second straight month of seasonally adjusted gains after two years when workers’ historically elevated raises were erased by price increases.”

July 18 – Bloomberg (Lucia Mutikani): “U.S. retail sales rose less than expected in June as receipts at service stations and building material stores declined, but consumers boosted or maintained spending elsewhere, which likely kept the economy on a solid growth path in the second quarter… Retail sales increased 0.2% last month. Data for May was revised higher to show sales gaining 0.5% instead of 0.3%… Retail sales are mostly goods and are not adjusted for inflation. They rose 1.5% year-on-year in June.”

July 17 – Bloomberg (Alexandre Tanzi): “Americans are increasingly likely to get turned down when they apply for credit, according to a new Federal Reserve survey… The rejection rate for loan applicants jumped to 21.8% in the 12 months through June, the highest level in five years… Overall credit applications declined to the lowest level since October 2020. In the previous survey, published in February before the collapse of Silicon Valley Bank and other US lenders, the rejection rate was 17.3%. The increase since then has been broad-based across age groups…”

July 19 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding fell in June, but permits for future construction rose to a 12-month high as a severe shortage of previously owned houses for sale supports new construction. The decline in housing starts… partially retraced an abnormally large 18.7% surge in May, which had pushed groundbreaking on single-family housing projects to an 11-month high. Builders’ efforts to ramp up construction are, however, being frustrated by shortages of materials like electrical transformer equipment as well as higher borrowing costs… ‘The level of single-family starts remains robust, and we believe ongoing near-term strength is likely given the continued upward trend in permits,’ said Mark Palim, deputy chief economist at Fannie Mae… Single-family housing starts… dropped 7.0% to a seasonally adjusted annual rate of 935,000 units last month. Data for May was revised higher… to a rate of 1.005 million units, the highest level since June 2022…”

July 20 – CNBC (Diana Olick): “Sales of pre-owned homes dropped 3.3% in June compared with May, running at a seasonally adjusted annualized rate of 4.16 million units… Compared with June of last year, sales were 18.9% lower. That is the slowest sales pace for June since 2009. The continued weakness in the housing market is not for lack of demand. It’s all about a critical shortage of supply. There were just 1.08 million homes for sale at the end of June, 13.6% less than June of 2022. At the current sales pace, that represents a 3.1-month supply. A six-month supply is considered balanced… ‘There are simply not enough homes for sale,’ said Lawrence Yun, chief economist for the Realtors. “The market can easily absorb a doubling of inventory.”

July 18 – Bloomberg (Lara Sanli): “The US home turnover rate in the first half of 2023 has fallen to the lowest in at least a decade as high mortgage rates compel owners to stay put, Redfin Corp. said. About 14 out of every 1,000 US homes changed hands during this period, down from 19 in the same period during 2019… California, and specifically the San Francisco Bay Area, had the least housing availability out of any state… The brokerage said only 6 out of 1,000 San Jose homes changed hands this year. From 2019 to 2023, California turnover dropped 30% in the metros of Oakland, San Diego, Los Angeles, Sacramento and Anaheim.”

July 18 – CNBC (Diana Olick): “Builder sentiment in the market for single-family homes rose 1 point in July to 56, according to the National Association of Home Builders/Wells Fargo Housing Market Index. It marks the seventh straight month of gains and the highest level since June 2022… Builders say low supply in the resale market is driving demand for new construction, but higher mortgage rates and supply-side challenges continue to put pressure on the market… Of the NAHB index’s three components, current sales conditions in July rose 1 point to 62; buyer traffic increased 3 points to 40, the highest reading since June of last year; and sales expectations in the next six months fell 2 points to 60.”

July 15 – Bloomberg (Claire Ballentine and Paulina Cachero): “A couple in Austin is using the money to fix up a rental house they own and help pay for their three young kids to attend Montessori school. A cop in Florida is playing the stock market. Others just like knowing there’s cash available if an emergency expense pops up. Welcome to the 2023 Heloc boom. Americans are increasingly tapping their greatest source of wealth, getting home equity lines of credit to borrow against the value of their properties, which skyrocketed in the pandemic real estate rally. Helocs have become more popular as mortgage rates surged from record lows, making cash-out refinancing unattractive to most homeowners.”

Fixed Income Watch:

July 18 – Bloomberg (Jeremy Hill and Lucca De Paoli): “Richard Cooper’s phone is something of an early alarm bell for the global economy. Lately, it’s been ringing a lot. A partner at Cleary Gottlieb, a top law firm for corporate bankruptcies, he’s advised businesses worldwide for decades on what to do when they’re drowning in debt. He did it through the global financial crisis, the oil bust in 2016 and Covid-19. And he’s doing it again now, in a year when big corporate bankruptcies are piling up at the second-fastest pace since 2008, eclipsed only by the early days of the pandemic. ‘It feels different than prior cycles,’ Cooper said. ‘You’re going to see a lot of defaults.’ His perch has given him a preview of the more than $500 billion storm of corporate-debt distress that’s already starting to make landfall across the globe…”

July 18 – Reuters (Chiara Elisei and Dhara Ranasinghe): “The spectre of rising corporate debt defaults exacerbating a global economic slowdown has for months been largely brushed aside by resilient credit markets. Now, long-feared corporate debt woes are starting to hit home, while more companies are being downgraded to a junk credit rating – facing higher borrowing costs as a result… ‘You have a lot of complacency in the market, if you think that statistics show that we have had already as many defaults globally in the first five months of 2023 as in the whole 2022,’ said Julius Baer’s head of fixed income research Markus Allenspach… ‘But there are still inflows into high yields (bonds),’ he said. S&P Global expects default rates for U.S. and European sub-investment grade companies to rise to 4.25% and 3.6% respectively by March 2024, from 2.5% and 2.8% this March.”

July 20 – Bloomberg (Joe Mysak): “A growing number of municipal project finance bonds are struggling to find buyers. Almost $1 billion in junk and unrated bond issues, mostly to fund projects, have piled up on the sales calendar in recent months, placed on day-to-day status as investors balk at buying speculative deals.”

China Watch:

July 17 – Bloomberg: “China’s economic recovery lost momentum in the second quarter, putting Beijing’s growth target for the year at risk and adding to concerns about a slowdown in the world economy. Gross domestic product grew at a slower-than-expected pace of 6.3% in the second quarter compared with a year earlier, when dozens of Chinese cities were in lockdown, but just less than 1% from the first quarter.”

July 21 – Reuters (Qiaoyi Li, Liz Lee, Brenda Goh and Jason Xue): “Chinese authorities announced measures on Friday intended to help boost sales of automobiles and electronics with the goal of shoring up a sluggish economy, but the steps failed to impress investors who have been clamouring for stronger stimulus. Regions will be encouraged to increase annual car purchase quotas and efforts will be made to support sales of second-hand vehicles…”

July 19 – Bloomberg: “Chinese authorities are considering easing home buying restrictions in the nation’s biggest cities, potentially removing a hurdle that has curbed demand in Beijing and Shanghai for years, according to people familiar with the matter. Regulators are weighing scrapping rules that disqualify people who’ve ever had a mortgage – even if fully repaid – from being considered a first-time homebuyer in major cities…”

July 16 – Bloomberg: “Chinese banks’ profits may take a hit as policymakers urge lenders to lower the refinancing costs on $5.4 trillion of home loans, adding further pressure on the sector to help revive the nation’s flagging economy. People’s Bank of China official Zou Lan said… the central bank has encouraged lenders to renegotiate mortgage contracts or extend new loans, a move seen as negative for banks’ margin and earnings… Zou’s comments may ‘open the door for mortgage refinancing’ and ‘eventually lower lending rate for existing mortgage book in China,’ JPMorgan analysts… wrote…”

July 15 – Bloomberg (Lorretta Chen): “The $9 trillion of Chinese local government bonds that helped drag the rest of the world out of the 2008 financial crisis are a growing risk this time around. The bonds funded an economic boom in China more than a decade ago, as local authorities borrowed heavily to invest in everything from roads to subways. But one of China’s biggest state-run investors advised asset managers overseeing its money to sell some of the debt…, intensifying pressure on the securities. It’s left authorities with the tricky balancing act of defusing a huge risk to the country’s lenders without triggering defaults and destabilizing the financial system.”

July 16 – Reuters (Liangping Gao and Ryan Woo): “China’s property sales between June and May showed the largest monthly drop this year…, and investment in property also slumped…, reinforcing the case for more stimulus to bolster a waning economic recovery. Property sales by floor area declined 28.1% year-on-year, extending a 19.7% fall in May… For June, property investment totaled to 1.2849 trillion yuan, falling 20.6% from a year earlier after a 21.5% drop in May… For January-June, property sales by floor area were down 5.3% year-on-year compared with a 0.9% fall in the first five months.”

July 19 – Bloomberg (Dorothy Ma): “China’s high-yield dollar bonds suffered their sharpest three-day selloff this year, with a fresh default from a state-backed developer underscoring how a liquidity crisis is worsening even for those with funding access. Greenland Holding Group Co., which is partially owned by local government entities, has defaulted on a 6.75% dollar bond it guaranteed… That comes as state-backed Sino-Ocean Group Holding Ltd. proposed repaying a local note over one year. The slide in the junk bonds on Wednesday leaves an index tracking the notes set for its worst three-day decline since November…”

July 18 – Bloomberg (Wei Zhou): “Mounting signs of financial stress at Chinese developers are again roiling the nation’s dollar-bond market and adding to concerns about the health of the world’s second-largest economy. Shui On Land Ltd. became the market’s latest worry on Tuesday, with its notes plunging by record amounts of more than 10 cents as the firm seeks to identify bondholders — a step that sometimes foreshadows payment delays. State-backed peer Sino-Ocean Group Holding Ltd. halted trading in a local note that matures in two weeks, flagging ‘significant’ uncertainty in repaying that security. The moves came just a day after a key unit of Dalian Wanda Group Co. warned creditors of a funding shortfall…”

July 16 – Bloomberg: “China’s property investment contracted at a steeper pace in the first half of the year… Investment in property development fell 7.9% in the first six months of 2023, compared with a 7.2% decline in January-May… China’s real estate market has struggled recently after a brief first-quarter rebound. Home sales tumbled in June, snapping a four-month rebound. Housing prices dropped in the month for the first time this year.”

July 18 – Associated Press: “China Evergrande… has reported its debts rose further to about $340 billion by the end of last year. In a notice to the Hong Kong Stock Exchange, Evergrande said it had losses totaling about $81 billion in 2021-2022 and that its revenues plunged by about half in 2021.”

July 17 – Bloomberg (Jackie Cai): “One of China’s most closely watched property firms warned of a funding shortfall just days before a key dollar-bond payment, fueling fresh investor concerns about credit risk in the world’s second-largest economy as growth sputters. A key unit of Dalian Wanda Group Co. — among the few Chinese real estate conglomerates to stay afloat even as peers succumbed to an industrywide debt crisis in recent years — told some creditors Monday it’s still raising funds for a $400 million note that matures July 23…”

July 18 – Reuters (Clare Jim): “China Evergrande Group’s huge liabilities and diminishing cash disclosed in its long-overdue reports for the past two years raises questions about the viability of its restructuring plan and operations… A comment from Evergrande’s auditor that it did not express an opinion on the reports due to material uncertainties over the embattled property developer’s ability to continue as a going concern has further stoked worries, they added.”

July 19 – Bloomberg (Pearl Liu and Dorothy Ma): “Nothing symbolizes the demise of China Evergrande Group like the Hong Kong tower that it bought for a record $1.6 billion. Once a jewel in the developer’s crown, creditors are still trying to sell the building almost a year after seizing it. Refurbishments and a name change to steer clear of the disgraced defaulter have failed to convince buyers at a time when Hong Kong’s office market is going through its worst downturn in years.”

July 16 – Bloomberg (Jill Disis and Phila Siu): “China’s youth unemployment rate hit a record in June — marking a third consecutive month above 20% — and the government warned the situation may get even worse as new graduates start looking for work. The jobless rate for people aged between 16 and 24 was 21.3% last month… That’s the highest on record in data that goes back to 2018…”

July 19 – Financial Times (Ryan McMorrow and Joe Leahy): “China’s billionaires have stepped out of the shadows to praise the Communist party’s efforts to restore private sector confidence as Beijing attempts to recharge the economy’s faltering… recovery. The country’s typically low-profile titans of industry — many of whom have been hit by regulatory crackdowns in recent years — put out a series of editorials and statements… declaring their support for an action plan by the party to bolster private companies. The apparently orchestrated expression of confidence from the tycoons comes as the world’s second-largest economy is struggling with sagging private sector business and consumer confidence.”

Central Banker Watch:

July 17 – Bloomberg (Haslinda Amin and Alexander Weber): “The European Central Bank must raise interest rates again this month and will base its decision at the following meeting on data, Governing Council Joachim Nagel said. ‘We have to hike next time and I expect another 25 bps hike for the July meeting,’ the Bundesbank president said… ‘For the September meeting, we will see what the data will tell us.’ Speaking to Bloomberg…, Nagel described underlying inflation as ‘very sticky.’ ‘For more or less all the developed countries, core is not coming down like it came down maybe in past cycles,’ he said, again referring to inflation as a ‘greedy beast.’”

Global Bubble Watch:

July 18 – Bloomberg: “Indian Finance Minister Nirmala Sitharaman said that Group of 20 members continue to be split over Russia’s invasion of Ukraine and have no deal as yet on the principles of future debt-relief deals. Still, the host of two days of G-20 meetings of finance ministers and central bank governors hailed the enthusiasm and energy in talks held in Gandhinagar, India.”

July 18 – Bloomberg: “Finance chiefs from an assembly of the world’s biggest advanced and emerging economies failed to reach a consensus over a framework that could be applied to restructuring the debt of distressed poorer nations. Representatives of Group of 20 nations had ‘very intense discussions on global debt vulnerabilities’ during a two-day confab in Gandhinagar, India, according to Indian Finance Minister Nirmala Sitharaman. She said in a press conference wrapping up the negotiations… that the debt issue remains a ‘priority’ area for the G-20 this year, with leaders scheduled to gather at a September summit.”
July 19 – Bloomberg (Selina Xu): “Australia is the top overseas destination for Chinese property hunters in the first half of this year, according to real estate firm Juwai IQI’s latest ranking. Chinese appetite for property Down Under topped their interest in other popular markets like Canada, the UK and the US… A sustained exodus over the next few years will likely continue to drive Chinese property investments abroad. About 712,000 people from the country will migrate to the US, Canada and Australia from 2023 to 2025, the report estimated.”

July 18 – Reuters (Ismail Shakil and Steve Scherer): “Canada’s annual inflation rate dropped more than expected to a 27-month low of 2.8% in June led by lower energy prices…, though food and shelter cost increases persisted despite 10 interest rate hikes in less than 18 months.”

Europe Watch:

July 19 – Bloomberg (Zoe Schneeweiss and Sonja Wind): “Euro-area underlying inflation, the key measure of price gains for the European Central Bank, accelerated more than initially reported in June, cementing the interest-rate increase widely expected next week. Core consumer prices, stripping out volatile elements like food and energy, rose 5.5% from a year earlier… That compares with a preliminary estimate of 5.4% and a reading of 5.3% in May.”

July 19 – Wall Street Journal (Margherita Stancati): “For decades after the death of dictator Francisco Franco, Spain was viewed as largely immune to the appeal of the far right. That is no longer so. After years in opposition, the far-right Vox party has emerged as a likely kingmaker in Spain’s coming parliamentary elections. Across Western Europe, stridently nationalist parties considered fringe just a few years ago are moving to the center stage, promising to banish crime, restore traditional values, increase welfare and disempower what they describe as out-of-touch elites. The groups are gaining popularity over the failure of governments to address the economic woes of the working class and solve a slow-burn refugee crisis.”

July 19 – Reuters (Crispian Balmer and Ryan Woo): “Italy put 23 cities on red alert as it reckoned with another day of scorching temperatures on Wednesday, with no sign of relief from the wave of extreme heat, wildfires and flooding that has wreaked havoc from the United States to China. The heat wave has hit southern Europe during the peak summer tourist season, breaking records – including in Rome – and bringing warnings about an increased risk of deaths. Wildfires burned for a third day west of the Greek capital, Athens, and firefighters raced to keep flames away from coastal refineries.”

July 20 – Reuters (Tom Sims and John O’Donnell): “The German property industry will ask the government for multi-billion euro support at a meeting with Chancellor Olaf Scholz, people familiar… said, as gloom engulfs the nation’s real-estate sector in its worst crisis in decades. The meeting of politicians, ministries and industry at the chancellery is scheduled for Sept. 25 and will discuss a housing shortage in Europe’s most populous country, a property crisis exacerbated by a collapse in prices.”

Japan Watch:

July 20 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japan’s consumer prices advanced at a faster clip in June in another indication of lingering stickiness in inflation ahead of next week’s Bank of Japan meeting… Prices excluding those for fresh food gained 3.3% from a year ago, accelerating a tad from the rise in May as energy prices were less of a drag on inflation… A deeper measure of the inflation trend that also excludes energy decelerated to 4.2% after reaching the highest in more than 40 years in the previous month.”

July 20 – Bloomberg (Erica Yokoyama and Emi Urabe): “The Bank of Japan is unlikely to make changes to its yield curve control program at next week’s policy meeting, judging from Governor Kazuo Ueda’s recent dovish tone, according to a former top official… ‘Given Ueda’s comments in India, it’s unlikely that the bank will modify the instrument at the upcoming meeting,’ said Mitsuhiro Furusawa, a former vice minister of finance for international affairs. ‘In the past I thought July is possible, but the way he’s speaking, if he moves next week, it’ll be a major surprise.’”

July 17 – Bloomberg (Shoko Oda, Yasufumi Saito and Aaron Clark): “Temperatures in central Tokyo have soared to nearly 9C (16F) above the seasonal average, as the extreme heat blanketing the world continues to smash historical norms. Over the weekend, Japan’s government issued a fresh round of heatstroke warnings, encouraging people to avoid going outside and to check on at-risk neighbors.”

Emerging Market Watch:

July 17 – Bloomberg (Beril Akman): “Turkey’s central government budget swung to a deficit that was the widest on record, after elections won by President Recep Tayyip Erdogan with the help of costly giveaways that risk contributing to one of the biggest fiscal shortfalls in years. The deficit in June reached 219.6 billion liras ($8.4bn), compared with a 118.9 billion-lira surplus the previous month…”

July 20 – Bloomberg (Maria Elena Vizcaino): “Troubled governments that devalue their currencies tend to benefit from the decision, underscoring the tool’s usefulness in the face of crisis, according to the Institute of International Finance. There’s been a pivot toward economic growth in countries just three years after authorities opt for major currency devaluations, economists Robin Brooks and Jonathan Fortun found in an analysis of the 51 largest and most-persistent episodes since 1990… ‘As asymmetric shocks – from climate change to heightened geopolitical risk multiply – we think the policy consensus needs to shift back to seeing exchange rate devaluations as part of the solution and not a problem to be avoided,’ Brooks and Fortun wrote…”

Leveraged Speculation Watch:

July 19 – Financial Times (Ivan Levingston, Costas Mourselas and Ortenca Aliaj): “Hedge funds that bet on the outcome of mergers and acquisitions have suffered losses this year as big deals hit regulatory roadblocks and the pipeline for transactions dries up. So-called merger arbitrage traders, who buy stakes in companies that are being acquired in expectation that shares will successfully be sold for a higher price, have lost 2% on average in 2023, according to… Hedge Fund Research. This return leaves the sector among the worst-performing hedge fund strategies.”

July 14 – Financial Times (Nicholas Megaw and Madison Darbyshire): “Computer-driven investment firms are increasingly trading over-the-counter US stocks, attempting to bring modern algorithmic strategies to a realm traditionally seen as one of the riskiest corners of equity investing. So-called quant hedge funds and proprietary traders are being drawn towards this corner of the market by a combination of improved liquidity and the increasing difficulty they face making money in the large-cap markets… ‘It’s sort of at the sweet spot of what an investor like us thinks we can do,’ said Seth Weingram, senior vice-president at Acadian Asset Management… ‘It’s the least efficient part of the equity universe, and we are really interested in less efficient market segments.’”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 20 – New York Times (Keith Bradsher): “China has an answer to the heat waves now affecting much of the Northern Hemisphere: burn more coal to maintain a stable electricity supply for air-conditioning. Even before this year, China was emitting almost a third of all energy-related greenhouse gases — more than the United States, Europe and Japan combined. China burns more coal every year than the rest of the world combined. Last month, China generated 14% more electricity from coal, its dominant fuel source, than it did in June 2022. China’s ability to ramp up coal use in recent weeks is the result of a huge national campaign over the past two years to expand coal mines and build more coal-fired power plants.”

July 20 – Reuters (Brendan O’Brien and Daniel Trotta): “A third of Americans faced severe weather on Thursday as a prolonged heat wave persisted in the South and Southwest, damaging thunderstorms hit the Central United States, and another round of heavy downpours threatened to trigger more flooding in rain-soaked parts of the East Coast. Some 110 million Americans are affected by an oppressive heat wave that has blanketed a huge swath of the country stretching from Southern California to Miami for most of the month.”

July 20 – Wall Street Journal (Jean Eaglesham): “A wave of severe storms that brought hail and high winds to places such as Texas and a string of states in the central U.S. in recent months is wreaking havoc on insurers’ profits. Auto- and home-insurers, already struggling with rising repair and replacement costs, are expected to keep boosting premiums to offset the big upturn in weather-related losses. Bellwether insurer Travelers… said ‘numerous severe wind and hail storms in multiple states’ sent it into the red in the three months through June. The company reported a near-doubling of catastrophe losses to $1.5 billion for the second quarter… The bad weather is piling pressure on property-casualty insurers as they try to chart a path back to profitability by pushing through big premium increases…”

July 17 – Reuters (Liliana Salgado): “Asia, Europe and the United States baked under extreme heat on Monday as global temperatures soared toward alarming highs and U.S. leaders sought to reignite climate diplomacy with China. The United States was scorched by record-setting heat in the West and South, lashed with flood-triggering rain in the Northeast, and choked by wildfire smoke in the Midwest. A heat dome parked over the western United States pushed the temperature in California’s Death Valley desert to 128 Fahrenheit (53 Celsius) on Sunday, among the highest temperatures recorded on Earth in the past 90 years.”

July 20 – New York Times (Lisa Friedman, Chris Buckley and Keith Bradsher): “John Kerry, President Biden’s climate envoy, emerges from talks in Beijing without a new agreement. But just talking is progress, he said. Chinese leaders rebuffed attempts by John Kerry… Mr. Kerry emerged… from the lengthy negotiations in Beijing with no new agreements. In fact, the Chinese president, Xi Jinping, insisted in a speech that China would pursue its goals to phase out carbon dioxide pollution at its own pace and in its own way.”

July 18 – Bloomberg (Evelyn Yu): “President Xi Jinping said China will decide on its own path to reduce carbon emissions instead of following other nations. China’s resolve to achieve the dual-carbon goal, a twin initiative in reaching a carbon peak by 2030 and carbon neutrality by 2060, is unwavering, CCTV reported… ‘But the path, method, pace and intensity to achieve this goal should and must be determined by ourselves, and will never be influenced by others,’ he said.”

Geopolitical Watch:

July 18 – Reuters (Hyonhee Shin and Josh Smith): “For the first time since the 1980s a U.S. nuclear-armed ballistic missile submarine (SSBN) visited South Korea…, as the allies launched talks to coordinate their responses in the event of a nuclear war with North Korea. White House Indo-Pacific coordinator Kurt Campbell confirmed the rare visit, which had been expected after it was announced in a joint declaration during a summit between South Korean President Yoon Suk Yeol and U.S. President Joe Biden… in April.”

July 18 – Reuters (Rami Ayyub, Kiyoshi Takenaka, Nobuhiro Kubo, Josh Smith and Hyonhee): “North Korea fired two ballistic missiles eastwards early on Wednesday, the Japanese and South Korean militaries said, just hours after a U.S. ballistic missile submarine arrived in a South Korean port for the first time in four decades. The USS Kentucky, an Ohio class nuclear-armed ballistic missile submarine (SSBN), made port in the southeastern city of Busan. Its arrival coincided with the start of talks among the allies to coordinate responses in the event of a nuclear war with North Korea.”

July 21 – Wall Street Journal (Dion Nissenbaum): “The U.S. military said it was sending additional warships and Marines to the Middle East in an effort to deter Iran from seizing more ships in the region. Defense Secretary Lloyd Austin ordered the new forces to the region…, after the U.S. Navy thwarted separate attempts earlier this month by Iran to seize two oil tankers in international waters in the Gulf of Oman. A U.S. military official said the move didn’t come in response to a specific new threat, but to the Iranian actions. Middle East allies have been pressing the U.S. to do more to confront Iran…”

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