June 10, 2022: Breaking and the Q1 2022 Z.1

MARKET NEWS / CREDIT BUBBLE WEEKLY
June 10, 2022: Breaking and the Q1 2022 Z.1
Doug Noland Posted on June 11, 2022

No mincing words; no need for sophisticated prose. The week was ugly. Things look bad. There are elements similar to the year 2000 bursting of the “Dot-com” Bubble. There are parallels to the much more systemic 2008 mortgage finance Bubble collapse. Yet, for me, this week rekindled more distant memories.

Surging global bond yields and acute currency market instability. Inflation fears. Rampant Credit growth and Acute Economic Imbalances. Policy paralysis and geopolitical tensions. Especially late in the week, I found myself reminiscing of days intensely following developments on a Telerate machine, Quotron and the Dow Jones Newswire – on the fixed-income trading desk at Toyota’s U.S. headquarters in Torrance, CA. It was the summer of 1987.

I place the start of today’s swiftly concluding cycle at Greenspan’s post “Black Monday” crash liquidity assurances. I found myself on Friday pondering how many Trillions of additional liquidity the world’s central bankers would be compelled to create these days in the event of a synchronized global crash – in yet another round of desperate measures to thwart financial collapse. Consequences? Could it even work?

Things weren’t supposed to unfold this way. The Fed was clearly going to be cautious, all moves made gingerly and well telegraphed to conspicuously vulnerable markets. Given time, inflation would surely subside. The worst-case scenario would be the Federal Reserve and global central banks raising rates until something began to “Break.” There was time. Rates would remain extraordinarily low for months and even quarters. Nothing too pressing.

Well, complacent markets – and central bankers – grossly misjudged two key aspects of underlying fundamentals. Inflation Dynamics were much more powerful and well-entrenched than appreciated. Similarly, Market Structure fragilities were greatly more acute than recognized. The upshot: things are “Breaking” before central bank tightening cycles even get cracking.

Things are Breaking badly in periphery Europe – with the ECB yet to even nudge the policy rate off negative 50 bps. Greek yields surged another 67 bps this week to 4.38% – with a stunning 10-session spike of 172 bps. Italian yields jumped 36 bps to 3.76% (up 167bps in 10 sessions). Yields were up 34 bps in Spain to 2.78% (131bps) and 32 bps to 2.80% (142bps) in Portugal. Even German bund yields rose 24 bps to 1.52% (96 bps), as French yields jumped 29 bps to 2.10% (107bps).

Eurozone annual CPI reached a record 8.1% in May. Christine Lagarde and the ECB doves had to capitulate. Months of justification, rationalization, obfuscation and blind faith were no longer tenable. Lagarde now faces a challenge Draghi avoided: raising rates. It’s a Herculean Challenge, especially after 11 years without even a wobbly little baby step. Worse yet, rates have been negative for eight years, a period where the ECB balance sheet inflated $5 TN.

A new and notably hostile cycle is taking hold. The ECB was a leading proponent and participant in the great global central banking inflationist experiment. This exercise has failed – these days blowing up in faces in Washington, Tokyo, Frankfurt, and beyond. Inflation has become unhinged, while highly levered speculative market Bubbles are bursting. At this point, is it even feasible to contemplate giving the experiment yet another shot? Einstein’s definition of insanity.

For the first time in years, I’m seeing reference to Greece’s 200% of GDP debt load, as well as Italy’s 150%. Did these countries use the years of unlimited access to ultra-cheap finance to restructure their economies and get their fiscal houses in order? If not, they’re in some deep trouble.

The cycle has turned, and the liquidity spigot is being turned off (first at the periphery). The days – and years – of egregiously loose finance – compliments of the ECB, global central bankers, and the risk-embracing leveraged speculating community – have run their fateful course. It’s always the riskier borrowers at the “periphery,” overwhelmed with cheap finance late in the boom cycle, that are left high and dry – illiquid and insolvent – when speculative finance reverses and Bubbles begin to succumb.

We’ve witnessed this recurring cycle: boom, bust and central bank resuscitation. Repeat. My thesis holds that this is the End of the Line. Resuscitating periphery Bubbles would now require monumental liquidity injections. This liquidity, however, would these days gravitate away from deflating bonds and financial assets – instead disposed to energy, agriculture and other commodity markets – in the process only stoking New Cycle Inflationary Dynamics.

The fates of Greece and Italy, in particular, are now at the whim of a disorderly marketplace. Borrowing costs are rapidly escalating, while already problematic debt ratios will spike higher. A historic Bubble has burst. De-risking, deleveraging and illiquidity have rapidly become systemic issues. Contagion. European bank stocks were hammered 6.0% this week, with Italian banks sinking 9.2%.

Ominously, U.S. banks (BKX) were slammed 7.8% this week. Bank CDS prices reversed sharply higher. JPMorgan CDS jumped eight for the week to 90 bps, the largest weekly gain since March. BofA CDS rose eight (95bps), Citigroup eight (111bps), Morgan Stanley eight (108 bps) and Goldman Sachs four (111bps). Friday’s six bps rise in JPMorgan CDS was the largest increase since March, while Morgan Stanley’s eight bps jump was the biggest since May 2020. Everything points to mounting systemic crisis risk.

The sinking euro and yen helped fuel dollar strength, spurring destabilizing “risk off” deleveraging across EM currencies and securities markets. At the EM periphery, troubled Turkey saw its sovereign CDS spike 115 to a 19-year high 848 bps. EM index CDS surged 38 this week to a three-month high 309 bps, the largest weekly increase since March. CDS prices were up 24 bps in Brazil (260), 23 bps in Mexico (153), and 43 bps in Colombia (256). Yields surged 57 bps in Poland, 52 bps in Cyprus, 50 bps in the Czech Republic, 42 bps in Colombia, and 32 bps in South Africa. Brazilian, Chilean, Turkish and Colombian currencies were down about 4%. The Hungarian forint fell 3.5% and the Polish zloty 2.3%.

Inflation dynamics are complex. There are myriad facets to analyze and contemplate. Yet the key dynamic is rather straightforward: inflation is a monetary phenomenon. To help us better conceptualize how consumer price inflation could possibly reach a 41-year high of 8.6% last month, look no further than this week’s Federal Reserve Q1 2022 Z.1 “flow of funds” Credit report.

Non-Financial Debt (NFD) expanded at a 10.2% rate during the quarter. Excluding 2020’s extraordinary first-half Covid stimulus period, there has been only one quarter (Q2 2003’s 10.7%) of double-digit NFD growth since 1986. Total Household Borrowings expanded at an 8.32% rate, the strongest growth since peak housing boom Q2 2007. Household Mortgage borrowings expanded at an 8.62% rate, the high since Q3 ’06. Non-mortgage Consumer Credit grew at an 8.73% pace – strongest in over two decades (Q4 2001).

In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $6.640 TN, second only to Q2 2020. For perspective, peak growth during the mortgage finance Bubble period was Q2 2007’s SAAR $2.770 TN.

In nominal dollars, NFD expanded $1.659 TN during Q1 to a record $66.744 TN, second only to Q2 2020’s off-the-charts $3.745 TN. For perspective, the previous cycle peak was Q3 2008’s $754 billion. NFD expanded $2.499 for all of 2007 (to $33.359 TN).

Total System Credit (Non-Financial, Financial Sector and Foreign U.S. borrowings) expanded nominal $2.132 TN during the first three months of the year. Annual System Credit growth averaged $2.019 TN during the decade 2010 through 2019.

Treasury Securities increased a nominal $732 billion during the quarter (11.6% annualized) to a record $26.017 TN. This boosted one-year growth to $2.074 TN, or 8.7%. Over the past nine quarters, Treasuries expanded $6.998 TN, or 36.8%. And since 2007, Treasury Securities have ballooned $19.965 TN, or 330%. Treasuries ended Q1 at 107% of GDP, up from 41% to end 2007 and 87% to conclude 2019.

The lack of capital has certainly not constrained the GSE’s (debt backed by the U.S. Treasury). Agency Securities expanded another $228 billion during the quarter to a record $10.927 TN, with one- and two-year growth of $700 billion and $1.158 TN. Combined Treasury and Agency Securities expanded $960 billion during Q1 (to $36.943 TN), with one-year growth of $7.656 TN.

While we ponder the monetary forces fueling our dire inflation predicament, it’s worth examining some 11-quarter data (recall the Fed’s Q3 2019 QE restart). Over 11 quarters, Fed Assets inflated $4.623 TN, or 115%. The Fed’s Treasury and Agency holdings rose $3.536 TN and $1.034 TN. Over this period, total outstanding Treasury Securities surged $8.202 TN (46%), and Agency Securities gained $1.663 TN (18%).

There’s a reality that can’t be denied: The Fed’s aggressive accommodation of Washington’s historic $9.965 TN 33-month borrowing binge is directly responsible for epic monetary disorder – including historic speculative manias and 40-year-high consumer price inflation.

Total Debt Securities increased $1.071 TN during the quarter to a record $57.211 TN, with one-year growth of $3.486 TN. Over 11 quarters, Debt Securities inflated $11.466 TN, or 25%. At 235%, the Total Debt Securities-to-GDP ratio compares to 201% at the end of 2007, 158% to end the nineties, and 124% to conclude the eighties.

Broker/Dealer Assets surged nominal $192 billion (17.6% annualized) during Q1 to a record $4.573 TN, with one-year growth of $328 billion. Miscellaneous Assets jumped $171 billion and “repo” Assets rose $69 billion during Q1, while Debt Securities contracted by $58 billion. The asset Loans added $16 billion to a record $853 billion, with notable seven-quarter growth of $479 billion, or 128%. The lack of any contraction in Broker/Dealer Loans in the face of unstable markets is not a bullish dynamic.

Bank lending and asset growth slowed, though Q1 is typically a seasonally weak period. At $159 billion, Asset growth was the slowest since Q3 2020. Assets expanded $1.561 TN, or 6.4%, over the past year to a record $25.788 TN. Over 11 quarters, Bank Assets inflated an unprecedented $6.276 TN, or 32.2% – including a $2.176 TN increase in Reserves at the Fed. Over this period, Total Deposits inflated a historic $6.288 TN, or 42%, to $21.269 TN. Monetary Inflation Running Wild.

Bank Mortgage Loan growth slowed, but at $82 billion still accounted for half the quarter’s asset gain. Total system Mortgage Credit expanded $343 billion during Q1, second only to Q4 2021 in the period since 2006. Total Mortgage Credit expanded $1.383 TN over the past year, also the strongest since 2006. Household Mortgages expanded $240 billion during the quarter (7.7% annualized), with one-year growth of $995 billion (8.4%) near 2006 peak levels. Commercial (up 7.6% y-o-y) and Multi-housing (up 7.8% y-o-y) lending slowed somewhat but remained strong.

Rest of World (ROW) holdings of U.S. Financial Assets contracted $1.888 TN to $45.630 TN, the first decline since Q1 2020’s $2.703 TN. Almost half of this drop is explained by the $867 billion fall in Equities holdings. More importantly, ROW holdings of Debt Securities dropped a record nominal $467 billion during Q1. This was led by a $252 billion decline in Corporate bond holdings, surpassing even the $223 billion drop during de-risking/deleveraging Q1 2020. Furthermore, ROW reduced holdings of Treasuries (-$136bn) and Agencies (-$81bn) during Q1, in contrast to expanded holdings of both during 2020’s first quarter.

Household Assets contracted $260 billion during Q1 to $167.917 TN, though one-year growth was still 9.1% ($14.025 TN). With Household Liabilities increasing $284 billion to $18.638 TN, Household Net Worth declined $544 billion to $149, 279 TN. Nevertheless, Household Net Worth was up $12.706 TN (9.3%) over one year and $37.830 TN (33.9%) over three years – in history’s greatest inflation of perceived wealth. Household Net Worth-to-GDP declined to 612% (from 624%). But this compares to 491% at cycle peak Q1 2007, and 445% during peak Q1 2000. Years of asset inflation have fueled a consumer spending boom. The downside of the cycle will see sinking asset prices and tightened Credit conditions significantly restrain household spending.

June 8 – Bloomberg (Abhinav Ramnarayan and Carmen Arroyo): “Some of the riskiest loans given to millennials and Gen Z shoppers for clothes and electronics — and neatly repackaged for investors — are dropping in value. Securitization packages of buy-now-pay-later loans from one provider, Affirm Holdings Inc., are falling in price for investors to buy while becoming more expensive to issue, after rising rates and a cost of living crisis cast a shadow over the sector… Affirm has over 12.7 million customers and extended around $3.9 billion of loans in the first three months of 2022. In the nine months ended March 31, Affirm reported a loss of $520.1 million, outpacing the loss of $312.6 million in the prior year period. Revenue rose 62% to almost $1 billion over that time… Affirm pushed back its latest securitization sale in March, before selling notes maturing in May 2027 at a coupon of 4.3% on the main tranche. It paid 0.88% on the same tranche of a similar deal issued in February 2021…”

June 8 – Bloomberg (Hema Parmar and Miles Weiss): “Hedge funds were tallying gains on their hottest bet in years when Dan Sundheim reached an unusual deal with JPMorgan… to go even further. With the bank’s help in August 2020, Sundheim’s D1 Capital Partners used its stakes in private companies as collateral for borrowing $2 billion that the firm could put toward yet more of those stakes, among other things. Last year that focus on private companies looked brilliant, as D1 updated its valuations and posted a whopping 70% gain in that part of its portfolio. Now, the industry is bracing for a reckoning. Across Wall Street, billionaire investors and their advisers are urgently trying to figure out how much exposure they have to plunging values in Silicon Valley unicorns and other private ventures.”

June 6 – Wall Street Journal (Eliot Brown and Juliet Chung): “Tiger Global Management rode the tech boom like no other investment firm. It was funding more startups than any other U.S. investor when the market peaked last year, and had tens of billions of dollars from pensions, endowments and rich clients riding on some of Silicon Valley’s hottest stocks. With tech values plunging, the New York firm is humbled. The market rout has vaporized years of gains in a matter of months… Fueling Tiger’s rise was a double-barreled business: A stock-picking arm put money mostly into public companies, while its venture-capital funds invested in startups throughout the world. Both bet bigger on tech as the market crested, leaving the firm exposed on both fronts. Tiger said in a note to investors last week that its hedge fund, which managed $23 billion at the end of 2021, was down 52% this year. That is one of the largest-ever losses by a hedge fund. Its other large stock fund—a long-only fund that managed $11 billion at the end of 2021 and doesn’t short stocks—has lost 61.7%.”

U.S. high-yield CDS prices surged 59 this week to 532 bps – the largest weekly increase since June 2020 – to the high since June ‘20. The U.S. has its own “periphery” debt issue. The collapse of the “periphery” telecom junk debt (i.e. Worldcom) Bubble certainly was a major factor in the bursting of the nineties “dot-com” Bubble. But it was too small to be systemic. Periphery mortgage Credit became systemic with the proliferation of subprime mortgages and derivatives.

Today, there’s a massive “periphery” loaded with “subprime” junk bonds, leveraged loans, buy-now-pay-later, auto, credit card, housing, and solar securitizations, franchise loans, private Credit, crypto Credit, DeFi, and on and on. A massive infrastructure has evolved over this long cycle to spur consumption for tens of millions, while financing thousands of uneconomic enterprises. The “periphery” has become systemic like never before. And things have started to Break.

It’s fascinating to listen to some of Wall Street’s preeminent Credit managers posit that economic fundamentals continue to support their Credit strategies. They point to ongoing economic expansion and strong corporate earnings. They seem oblivious to the Cycle Change.

This week looked serious. It was another blow for leveraged finance. More hedge fund blood was spilled, with more pressure to de-risk and deleverage. A momentous cycle change in speculative leverage and financial flows has gained momentum. More corroboration of the bursting “tech” Bubble thesis. And markets now only appear liquid during the occasional bouts of short squeezes, the unwind of hedges, and resulting bear market rallies. And when markets reverse lower, rather quickly systemic fragilities are revealed.

Friday trading had another dynamic worthy of mention. On the release of higher-than-expected May CPI, the dollar quickly rallied, as bond yields jumped higher. Gold initially responded as it typically would in such circumstances, trending lower. But then, as bank and financial shares came under heavy selling pressure (with bank CDS moving sharply higher), gold enjoyed a burst of strong buying – ending the session up almost $24. While the precious metals of late have been caught up in de-risking/deleveraging and speculator liquidations, Friday trading provided an inkling of how a crisis of confidence in financial assets – and finance more generally – could spur safe haven buying in stores of value tested over centuries.

For the Week:

The S&P500 sank 5.1% (down 18.2% y-t-d), and the Dow fell 4.6% (down 13.6%). The Utilities dropped 4.1% (down 2.0%). The Banks sank 7.8% (down 20.3%), and the Broker/Dealers lost 6.9% (down 20.9%). The Transports slumped 7.4% (down 18.9%). The S&P 400 Midcaps fell 4.7% (down 15.4%), and the small cap Russell 2000 stumbled 4.4% (down 19.8%). The Nasdaq100 fell 5.7% (down 27.5%). The Semiconductors sank 7.5% (down 28.2%). The Biotechs dropped 5.3% (down 20.9%). While bullion jumped $20, the HUI gold index slipped 0.2% (up 1.1%).

Three-month Treasury bill rates ended the week at 1.28%. Two-year government yields surged 41 bps to 3.065% (up 233bps y-t-d). Five-year T-note yields rose 32 bps to 3.26% (up 200bps). Ten-year Treasury yields jumped 22 bps to 3.16% (up 165bps). Long bond yields rose 11 bps to 3.20% (up 129bps). Benchmark Fannie Mae MBS yields surged 38 bps to 4.46% (up 239bps).

Greek 10-year yields surged 67 bps to 4.38% (up 307bps y-t-d). Ten-year Portuguese yields jumped 32 bps to 2.80% (up 233bps). Italian 10-year yields surged 36 bps to 3.73% (up 259bps). Spain’s 10-year yields spiked 34 bps higher to 2.78% (up 221bps). German bund yields jumped 24 bps to 1.52% (up 169bps). French yields rose 29 bps to 2.10% (up 190bps). The French to German 10-year bond spread widened 5 to 58 bps. U.K. 10-year gilt yields jumped 29 bps to 2.45% (up 148bps). U.K.’s FTSE equities index dropped 2.9% (down 0.9% y-t-d).

Japan’s Nikkei Equities Index increased 0.2% (down 3.4% y-t-d). Japanese 10-year “JGB” yields increased two bps to 0.25% (up 18bps y-t-d). France’s CAC40 sank 4.6% (down 13.5%). The German DAX equities index fell 4.8% (down 13.4%). Spain’s IBEX 35 equities index slumped 3.8% (down 3.7%). Italy’s FTSE MIB index sank 6.7% (down 17.5%). EM equities were under pressure. Brazil’s Bovespa index dropped 5.1% (up 0.6%), and the Mexico’s Bolsa index fell 4.4% (down 9.0%). South Korea’s Kospi index fell 2.8% (down 12.8%). India’s Sensex equities index lost 2.6% (down 6.8%). China’s Shanghai Exchange Index rose 2.8% (down 9.8%). Turkey’s Borsa Istanbul National 100 index slumped 2.2% (up 36.9%). Russia’s MICEX equities index declined 1.0% (down 39.7%).

Investment-grade bond funds saw outflows of $2.895 billion, while junk bond funds recorded inflows of $1.336 billion (from Lipper).

Federal Reserve Credit last week added $1.5bn to $8.881 TN. Over the past 143 weeks, Fed Credit expanded $5.154 TN, or 138%. Fed Credit inflated $6.070 Trillion, or 216%, over the past 500 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week slipped $1.1bn to a two-year low $3.395 TN. “Custody holdings” were down $153bn, or 4.3%, y-o-y.

Total money market fund assets jumped $26.4bn to $4.553 TN. Total money funds were down $53bn, or 1.1%, y-o-y.

Total Commercial Paper jumped $18.3bn to a seven-month high $1.157 TN. CP was down $19bn, or 1.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 20 bps to 5.23% (up 227bps y-o-y). Fifteen-year rates gained six bps to 4.38% (up 215bps). Five-year hybrid ARM rates rose eight bps to 4.12% (up 157bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 20 bps to 5.57% (up 248bps).

Currency Watch:

For the week, the U.S. Dollar Index jumped 2.0% to 104.15 (up 8.9% y-t-d). For the week on the downside, the Brazilian real declined 4.3%, the Norwegian krone 2.8%, the Japanese yen 2.6%, the Swiss franc 2.6%, the Swedish krona 2.6%, the New Zealand dollar 2.1%, the Australian dollar 2.1%, the South Korean won 2.1%, the Mexican peso 2.0%, the South African rand 2.0%, the euro 1.9%, the Canadian dollar 1.4%, the British pound 1.4%, and the Singapore dollar 0.9%. The Chinese (onshore) renminbi declined 0.73% versus the dollar (down 5.26% y-t-d).

Commodities Watch:

June 8 – Financial Times (David Sheppard and Tom Wilson): “The head of Trafigura has warned that the oil market could reach a ‘parabolic state’ this year with prices surging to record highs and triggering a slowdown in economic growth. Jeremy Weir, chief executive of the commodity trader, said that energy markets were in a ‘critical’ state as sanctions on Russia’s oil exports following its invasion of Ukraine had exacerbated already tight supplies created by years of under-investment. ‘We have got a critical situation,’ Weir told the FT Global Boardroom conference… ‘I really think we have a problem for the next six months . . . once it gets to these parabolic states, markets can move and they can spike quite a lot.’”

June 9 – Wall Street Journal (Yusuf Khan): “Wheat output in the European Union is expected to fall this year, according to a closely followed survey, threatening to crimp supply from one of the world’s biggest growers at a time when the war in Ukraine has bottled up exports from that country and from Russia… Strategie Grains, an agriculture consulting firm, is now forecasting a more than 5% fall in French wheat production… It cited dry conditions across Europe in May.”

The Bloomberg Commodities Index gained 1.2% (up 36.6% y-t-d). Spot Gold rose 1.1% to $1,872 (up 2.3%). Silver slipped 0.2% to $21.89 (down 6.1%). WTI crude gained $1.80 to $120.67 (up 60.4%). Gasoline declined 1.9% (up 87%), while Natural Gas rallied 3.8% (up 137%). Copper dropped 4.0% (down 3.8%). Wheat rose 3.0% (up 39%), while Corn slipped 0.9% (up 21%). Bitcoin fell $525, or 1.8%, this week to $29,155 (down 37%).

Market Instability Watch:

June 6 – Financial Times (Eric Platt, Joe Rennison and Kate Duguid): “Traders’ ability to seamlessly buy and sell stocks, bonds and other financial products on Wall Street has deteriorated sharply this year, adding fuel to the big swings on the world’s biggest and deepest capital markets. Liquidity across US markets is now at its worst level since the early days of the pandemic in 2020, according to investors and big US banks… Relatively small deals worth just $50mn could knock the price or prompt a rally in exchange traded funds and index futures contracts that typically trade hands without causing major ripples, said Michael Edwards, deputy chief investment officer of hedge fund Weiss Multi-Strategy Advisers. He added: ‘Liquidity is terrible.’ The fraught conditions have collided with a big shift in the global economy that has caught many portfolio managers off-guard: a growth slowdown, rising interest rates and intense inflation. Unprepared for the turn in sentiment, traders have abruptly repositioned their portfolios.”

June 10 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global investors resumed selling bond funds in the week to June 8… Investors pulled $9.46 billion out of global bond funds in the week, after purchases of $7.2 billion in the previous week-the only weekly inflow since March 30, Refinitiv Lipper data showed.”

June 10 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. bond funds witnessed massive outflows in the week to June 8 after a weekly inflow… According to Refinitiv Lipper…, investors withdrew $7.61 billion out of U.S. bond funds after the purchases of $7.09 billion in the previous week, which was the only weekly inflow since Jan 5.”

June 9 – Bloomberg (Tania Chen): “The yen’s slide may spark turmoil on the scale of the 1997 Asian Financial Crisis if it declines as far as 150 per dollar, veteran economist Jim O’Neill said. A slump of that magnitude may convince China to intervene in the currency market to protect its own flagging economy and it would be perfectly rational for it to do so, he said… ‘If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,’ said O’Neill, who was chief currency economist at Goldman Sachs at the time of the crisis… ‘China would not want this devaluing of currencies to threaten their economy.’”

June 8 – Financial Times (Laura Pitel): “Turkey’s lira continued its slide towards a record low after President Recep Tayyip Erdoğan vowed once again to cut interest rates despite spiralling inflation. The currency fell to 17 against the dollar on Wednesday, extending a steep slide this week that has come after Erdoğan, a life-long opponent of high borrowing costs, launched an impassioned tirade against them. The Turkish president said this week that the country had ‘wasted years’ with the misguided view that prices should be controlled by using higher borrowing costs to suppress consumption. Such policies, he said, benefited only ‘those living a charmed existence and filling their pockets with [the proceeds of] high interest’, including foreign investors.”

Bursting Bubble/Mania Watch:

June 4 – Financial Times (Joe Rennison): “US corporate bonds sold by low-rated companies have slumped in price, signalling lenders’ intensifying worries that scorching inflation and higher interest rates are beginning to hit borrowers most vulnerable to an economic downturn. Bonds assigned a triple C rating or below, the lowest rung on the ratings ladder, have posted a negative return of 2.8% since the end of April… The performance starkly contrasts a 1.3% gain for debt rated double B, the highest quality segment of the junk bond market. The sharp divergence follows a period of relative outperformance for triple C rated debt, with the change reflecting investors’ souring mood over the outlook for the American economy and the health of US companies that are already beginning to buckle.”

June 8 – Wall Street Journal (Paul Kiernan and Alexander Osipovich): “Brokerages and trading firms pushed back forcefully against Securities and Exchange Commission Chairman Gary Gensler’s proposed changes to U.S. stock-trading rules, saying the market is functioning well for ordinary investors. Mr. Gensler outlined the potential changes… and was greeted with skepticism from an array of financial-industry executives who said the SEC’s far-reaching plans are unnecessary. A top executive with Robinhood Markets Inc. argued that individual investors are winners in the current system, enjoying benefits such as zero-commission trades. In one of the key elements of the SEC’s proposed package of rule changes, Mr. Gensler said he has asked agency staff to consider requiring brokerages to route individual investors’ orders to buy or sell stocks into auctions, as part of an effort to increase competition in the market. ‘There’s a cost to retail, to this current system,’ Mr. Gensler said…”

June 6 – Bloomberg (Kurt Wagner): “From Seattle to Silicon Valley to Austin, a grim new reality is setting in across the tech landscape: a heady, decades-long era of rapid sales gains, boundless jobs growth and ever-soaring stock prices is coming to an end. What’s emerging in its place is an age of diminished expectations marked by job cuts and hiring slowdowns, slashed growth projections and shelved expansion plans. The malaise is damaging employee morale, affecting the industry’s ability to attract talent, and has wide-ranging implications for US economic growth and innovation.”

June 4 – Wall Street Journal (Paul Vigna): “Cryptocurrency investors are still trying to figure out what led to May’s spectacular meltdown of a pair of digital tokens that were worth more than $40 billion earlier in the month. Last week, analytics firm Nansen pointed to lending firm Celsius as one of a handful of users that contributed to the collapse of the luna and terraUSD cryptocurrencies. While Celsius disputes the account, the search for information about the cause of the wreckage highlights the opacity of the world of decentralized finance. In DeFi, it isn’t easy to understand who provides money for loans, where the money flows or how easy it is to trigger currency meltdowns. This is one reason regulators are concerned about the impact of DeFi on investors and the broader financial system.”

June 10 – Wall Street Journal (E.B. Solomont): “Two years ago, Austin real-estate agent Amy Deane, of Moreland Properties, was working with so many wealthy out-of-state buyers that she showed one $15 million house five times in 30 days. Now, she might get one call every other week for showings in that price range. ‘That big buyer pool has slowed down,’ she said. ‘The first movers committed and moved.’ After an epic two-year run—not just in Austin but in major cities around the country—the luxury real-estate market is finally cooling. Real-estate agents in places like New York, Los Angeles, and the Hamptons say the frenzied deal making and record-setting prices that characterized the past few years has eased, thanks to a growing disconnect between what sellers want and what buyers will pay.”

June 7 – Wall Street Journal (Will Parker and Konrad Putzier): “Commercial real estate is showing the first signs of cooling in more than a year… Property sales were $39.4 billion in April, which was down 16% compared with the same month a year ago, according to MSCI Real Assets. The decline followed 13 consecutive months of increases. Property sales tanked sharply during the early months of the pandemic… A rebound began in late 2020, as investors took advantage of low interest rates and started to buy in anticipation of an eventual rebound. Demand for multifamily and industrial properties in particular helped fuel commercial sales through 2021 and into this year.”

June 5 – Financial Times (Steve Johnson): “Passively managed index funds have overtaken actively managed funds’ ownership of the US stock market for the first time… Passive funds accounted for 16% of US stock market capitalisation at the end of 2021, surpassing the 14% held by active funds, according to the Investment Company Institute… The pattern represents a sharp reversal of the picture 10 years ago, when active funds held 20% of Wall Street stocks and passive ones just 8%. Since then, the US has seen a cumulative net flow of more than $2tn from actively managed domestic equity funds to passive ones, primarily ETFs.”

June 7 – Wall Street Journal (Miriam Gottfried): “Private-equity firms have spent decades raking in giant sums from pension funds and other big institutions. Now they are going hat in hand to a different kind of investor: everyday millionaires. Some of the biggest firms, including Blackstone Inc., Blue Owl Capital Inc., Apollo Global Management Inc. and Ares Management Corp., have created a host of new products aimed at people with $1 million to $5 million in investible assets and are hiring armies of staff to market them to private banks and independent financial advisers. Behind the effort is the recognition that institutions, which committed nearly $1.3 trillion to private markets in 2021, according to PitchBook, have all but filled up on them.”

June 7 – Bloomberg (Katie Greifeld): “Cathie Wood’s Ark Investment Management is suffering a steeper drop in assets than almost any other US exchange-traded fund issuer this year. Ark’s lineup holds $15.3 billion across nine ETFs, a 48% decrease from the start of 2022… That’s the biggest collapse in assets among the 25 largest US issuers. Notably, the drawdown in assets is a result of weak performance rather than investors yanking out cash.”

Russia/Ukraine War Watch:

June 8 – Reuters (Pavel Polityuk and Abdelaziz Boumzar): “Ukrainian forces pulled back to the outskirts of the eastern city of Sievierodonetsk on Wednesday in the face of a fierce Russian assault, the regional governor said, another big swing in momentum in one of the bloodiest battles of the war. Russia has concentrated its troops and firepower on the small industrial city in recent weeks to secure the surrounding province on behalf of separatist proxies. Ukraine has vowed to fight there for as long as possible, saying the battle could help shape the war’s course.”

June 7 – Reuters (Pavel Polityuk): “Russian shelling destroyed the warehouses of one of Ukraine’s largest agricultural commodities terminals in the Black Sea port of Mykolaiv over the weekend, authorities and the facility’s owner and authorities said… The attack came at a time Turkey is trying to develop a U.N.-backed plan to start grain exports from Ukraine’s ports, and ahead of meetings… by the foreign ministers of Russian and Turkey to discuss safe shipping.”

June 3 – Newsweek (Jake Thomas): “As Russian forces push for territorial gains in eastern Ukraine, they’re turning to a military capability they’ve largely forgone during the war but is expected to give them an edge: electronic warfare. After earlier failing to topple Ukraine’s government, Russia’s military has focused its offensive on the country’s eastern Donbas region… New reporting shows Russian forces are increasingly intercepting the Ukrainian military’s communications while jamming navigation and guidance systems. ‘They are jamming everything their systems can reach,’ an official with the Aerorozvidka, a Ukrainian agency that develops unmanned aerial vehicles and other military capabilities, told the Associated Press…”

June 9 – Reuters: “Russian President Vladimir Putin paid tribute… to Tsar Peter the Great on the 350th anniversary of his birth, drawing a parallel between what he portrayed as their twin historic quests to win back Russian lands. ‘Peter the Great waged the Great Northern War for 21 years. It would seem that he was at war with Sweden, he took something from them. He did not take anything from them, he returned (what was Russia’s),’ Putin said after a visiting an exhibition dedicated to the tsar.”

Economic War/Iron Curtain Watch:

June 7 – Wall Street Journal (Isabel Coles): “European officials blamed Moscow for a looming global food crisis as Russia’s blockade of Ukrainian ports threatens the country’s grain exports, while fighting rages in the east. Russia’s ambassador to the United Nations, Vasily Nebenzya, walked out of a Security Council meeting… after European Council President Charles Michel accused the Kremlin of weaponizing food supplies, in a heated exchange. European Union foreign-policy chief Josep Borrell also cast doubt on Russia’s claims that it isn’t hindering the export of grain… The Ukrainian military’s southern command said Russia had fired cruise missiles from over the Black Sea toward Mykolaiv on Sunday. Two missiles were shot down, the command said, but others hit port facilities and grain storage silos.”

June 6 – Bloomberg (Giulia Morpurgo, Abhinav Ramnarayan and Irene García Pérez): “Bondholders are in for a tangled mess of financial, political and legal wrangling if sanctions push Russia to a historic default. So far, Moscow has been able to navigate the restrictions to service its international debt, but that’s likely to change after the US closed another avenue to creditors, affecting about $100 million in payments due on May 27. The European Union has also sanctioned Russia’s central depository, which said it would suspend euro-denominated transactions.”

June 8 – Reuters (Tommy Reggiori Wilkes): “Russia’s economy will shrink 15% this year and 3% in 2023 as the hit from Western sanctions, an exodus of companies, a Russian ‘brain-drain’ and collapse in exports wipe out 15 years of economic gains, a global banking industry lobby group said. In its report on the Russian economy…, the Institute of International Finance (IIF) said it did not expect a ceasefire in the war and that it was likely sanctions would be expanded and tightened in the coming months.”

June 7 – Reuters (Daphne Psaledakis and Marc Jones): “The U.S. Treasury Department has banned U.S. money managers from buying any Russian debt or stocks in secondary markets, on top of its existing ban on new-issue purchases, in its latest sanctions on Moscow over its invasion of Ukraine. Despite Washington’s sweeping sanctions in recent months, Americans were still allowed to trade hundreds of billions of dollars worth of assets already in circulation on secondary markets. The Treasury said in guidance… that the ban extends to all Russian debt and that all Russian firms’ shares are affected, not just those of ones specifically named in sanctions.”

U.S./Russia Watch:

June 9 – Reuters: “Russia warned the West… that cyber attacks against its infrastructure risked leading to direct military confrontation, and that attempts to challenge Moscow in the cyber sphere would be met with targeted countermeasures. The warning comes after Russia’s housing ministry website appeared to be hacked over the weekend, with an internet search for the site leading to a ‘Glory to Ukraine’ sign in Ukrainian.”

June 5 – Reuters (Guy Faulconbridge): “President Vladimir Putin warned the United States… that Russia would strike new targets if the West supplied longer-range missiles to Ukraine for use in high-precision mobile rocket systems. The United States has ruled out sending its own or NATO forces to Ukraine but Washington and its European allies have supplied weapons to Kyiv such as drones, Howitzer heavy artillery, anti-aircraft Stinger and anti-tank Javelin missiles.”

China/Russia/U.S. Watch:

June 6 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “When Joe Biden pledged last month to intervene militarily if China were ever to attack Taiwan, his comment was met with a harsh response from Beijing. ‘If the US continues to go down the wrong path,’ a foreign ministry spokesperson said, ‘the US will have to pay an unbearable price.’ The phrase was widely read as a warning about war. The same day, China and Russia flew a joint nuclear bomber exercise near Japan. The exchange was the latest in a spiral of martial messaging between the US and China. It was also a reflection of the mounting fears in Washington, Taipei and among US allies that Beijing could try to annex Taiwan in the next few years. ‘This is the decade of concern, particularly the period between now and 2027,’ says Phil Davidson, a retired admiral who commanded US forces in the Indo-Pacific until last year. ‘I make that assessment because of the staggering improvements in Chinese military capabilities and capacities, the political timeline for Xi Jinping and the long-range economic challenges in China’s future.’”

June 6 – Financial Times (Eric Platt, Joe Rennison and Kate Duguid): “‘The prospect of a Soviet invasion of Europe is no longer a realistic threat,’ George HW Bush proclaimed in 1991 as he announced a 25% cut in US defence expenditure and Russia’s menace dwindled at the end of the cold war. The then president’s comments signalled the optimistic era of the ‘peace dividend’. Western governments looked forward to funding priorities other than security, such as health and education or lower taxes, in a period of expanding free markets, liberal democracy and economic globalisation. Three decades on, Russia’s assault on Ukraine has thrust defence spending up the agenda again. The US is providing billions of dollars of military assistance to Kyiv. Long complacent about defence, European countries including Germany have pledged to spend more.”

Europe/Russia/China Watch:

June 8 – Bloomberg (Selcan Hacaoglu and Firat Kozok): “Turkey backed Russia’s call for relief from sanctions limiting its exports of fertilizer and farm products but the two nations showed no sign of progress on a deal to unblock shipments of Ukrainian grain that have contributed to global food-supply fears… The Kremlin’s invasion has cut off shipments of grain and other farm products from Ukraine, threatening millions of people… Moscow has denied responsibility for the disruption, blaming Ukraine for refusing to remove mines protecting its harbors from possible Russian attack.”

Inflation Watch:

June 6 – Bloomberg (Gerson Freitas Jr.): “Spot commodity prices surged to a fresh record high as energy and food supplies continue to be roiled by the war in Ukraine, while China rolls back demand-curbing Covid-19 lockdowns. The Bloomberg Commodity Spot Index, which tracks prices for 23 raw materials, rose 1.9% Monday to its highest-ever level. The move was mostly driven by a jump in futures contracts for natural gas and wheat amid renewed supply fears. The gauge has climbed 36% this year, heading for the biggest annual advance in more than a decade.”

June 9 – Bloomberg (Olivia Rockeman, Will Wade and Michael Hirtzer): “Economists like to strip food and energy out of their inflation calculations. They’re too volatile to be meaningful, they say. But for everyday Americans coping with exploding prices, those items are pretty much all they care about right now. For two straight months, the primary consumer expenses — fuel, power, and grocery-store food — have all been rising at double-digit annual rates for the first time since 1981.”

June 6 – CNBC (Lorie Konish): “Social Security beneficiaries saw the biggest cost-of-living adjustment in about 40 years in 2022, when they received a 5.9% boost to their monthly checks. Next year, that annual adjustment may even go as high as 8%, according to early estimates… An 8% COLA would be the highest increase in years, according to Social Security Administration data. The last time the federal agency announced a bigger annual bump was in 1981, when there was an 11.2% increase.”

June 8 – Wall Street Journal (Rachel Wolfe): “Lawn care isn’t only a lot more expensive this season, it’s also harder to find someone to cut your grass. For many landscapers, the three biggest costs to running their business—fuel, labor and equipment—are all surging in price. This means many are now increasing prices for the vast services they offer. The price of lawn-mowing services is up 22.4%, exterior pressure-washing prices rose 20%, and tree trimming increased 9.1% year-over-year as of May, according to… Angi Inc.”

Biden Administration Watch:

June 7 – Wall Street Journal (Andrew Duehren and Yuka Hayashi): “Treasury Secretary Janet Yellen warned that the U.S. is likely facing a prolonged period of elevated inflation, while the World Bank sharply lowered global growth forecasts and flagged a risk of recession in many countries. Ms. Yellen… said that the White House would likely revise upward its U.S. inflation forecast—which already showed prices rising this year at nearly twice the prepandemic rate. ‘I do expect inflation to remain high, although I very much hope that it will be coming down now,’ Ms. Yellen said… In recent months, consumer inflation has trended above 8%. ‘The numbers aren’t locked in, but it’s likely to be higher’ than the initial 4.7% forecast, she said.”

June 8 – Wall Street Journal (Amara Omeokwe and Richard Rubin): “Treasury Secretary Janet Yellen said the Biden administration is considering ways to reconfigure tariffs on imports from China as a means of helping to ease decades-high inflation. Ms. Yellen… said she expected the administration to have additional information on its plans in the coming weeks, although there is no firm timeline. ‘I think some reductions may be warranted,’ Ms. Yellen said of the tariffs, adding it could help to bring down prices. Tariffs were imposed on certain Chinese imports during the Trump administration.”

June 10 – Reuters (Idrees Ali and Chen Lin): “The defence chiefs of China and the United States held face-to-face talks for the first time on Friday, with both sides standing firm on their opposing views over Taiwan’s right to rule itself. U.S. Defense Secretary Lloyd Austin and Chinese Defence Minister General Wei Fenghe met on the sidelines of the Shangri After the meeting, Chinese and U.S. officials highlighted the cordiality of proceedings in a sign it could help open the door to more communication between the two militaries. However, there was no evidence of any breakthrough on settling long-running security disputes.”

Federal Reserve Watch:

June 6 – Bloomberg (Craig Torres): “With half-point interest-rate increases all but certain in June and July, Federal Reserve officials are shifting the focus away from a destination on hikes to something that’s trickier to determine and explain: the broader impact of their policies on the economy. At the start of the hiking cycle, Chair Jerome Powell said the goal was ‘getting rates back up to more neutral levels as quickly as we practicably can.’ In May, however, he walked back from the concept of neutral — a level that neither slows nor speeds up growth — cautioning that the discussion had a ‘sort of false precision.’ ‘You know, you’re going to raise rates, and you’re going to be kind of inquiring how that is affecting the economy through financial conditions,’ he said. Policy makers delivered that message repeatedly last week, in their final comments before the Fed entered its pre-meeting blackout period.”

U.S. Bubble Watch:

June 10 – Bloomberg (Olivia Rockeman): “US inflation accelerated to a fresh 40-year high in May, a sign that price pressures are becoming entrenched in the economy… The consumer price index increased 8.6% from a year earlier in a broad-based advance… The widely followed inflation gauge rose 1% from a month earlier, topping all estimates. Shelter, food and gas were the largest contributors. The so-called core CPI… rose 0.6% from the prior month and 6% from a year ago, also above forecasts. The figures dash any hope that inflation had already peaked and was starting to ebb.”

June 10 – Yahoo Finance (Emily McCormick): “Consumer sentiment sank to its worst level on record in early June as the rising cost of food, gas, and other essentials weighed on American consumers. The University of Michigan’s closely watched Surveys of Consumers consumer sentiment index slumped to 50.2 in the preliminary June survey, marking the lowest level recorded by the survey, which dates back to the mid-’70s… The University of Michigan’s data showed consumers anticipate inflation will rise 5.4% over the next year, matching March and April’s readings and marking the highest levels since 1981.”

June 3 – Wall Street Journal (Chip Cutter, Nick Timiraos and Sam Goldfarb): “Over the past week, business leaders have laid out in the starkest terms yet that a period of universal strength in the U.S. economy has given way to a muddled outlook in which a labor shortage, soaring stock markets and a healthy consumer are no longer givens. Technology companies from Facebook parent Meta Platforms Inc. to Uber Technologies Inc. have sharply slowed hiring in recent weeks… Retailers such as Walmart Inc. and Target Corp., whose profits soared in the pandemic, have reported that higher costs have begun to eat into earnings and that some shoppers are beginning to curtail spending.”

June 8 – MarketWatch (Joy Wiltermuth): “The double whammy of surging mortgage rates and skyrocketing home prices has led to ‘collapsed’ housing affordability in America, according to Chris Flanagan’s team at Bank of America… The situation has gotten so bad that it now compares to the ‘historically low affordability readings’ in the fourth quarter of 1987 and the first quarter of 2005, according to the B. of A. team. Notably, those years coincide with the ‘Black Monday’ stock market crash of 1987, when the Dow Jones Industrial Average tumbled about 22.6% in a single trading session, and the start of the subprime mortgage crisis as home prices roared higher from 2000 to 2005, and hit a multiyear high in 2006.”

June 6 – CNBC (Diana Olick): “Homeowners are in the money, and it just keeps coming. Two years of rapidly rising home prices have pushed the nation’s collective home equity to new highs. The amount of money mortgage holders could pull out of their homes while still keeping a 20% equity cushion rose by an unprecedented $1.2 trillion in the first quarter of this year, according to… Black Knight, a mortgage software and analytics firm. That is the largest quarterly increase since the company began tracking the figure in 2005. Mortgage holders’ so-called tappable equity was up 34%, or by $2.8 trillion, in April compared with a year ago. Total tappable equity stood at $11 trillion, or two times the previous peak in 2006. That works out to an average of about $207,000 per homeowner.”

June 8 – CNBC (Diana Olick): “Mortgage rates are back on the upswing, after a brief decline in May, and the housing market is still suffering from a lack of listings. As a result, mortgage demand continues to drop. Total mortgage application volume fell 6.5% last week compared with the previous week… Demand hit the lowest level in 22 years… Applications for a mortgage to purchase a home fell 7% for the week and were 21% lower than the same week one year ago. ‘The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months. These worsening affordability challenges have been particularly hard on prospective first-time buyers,’ Kan said.”

June 7 – Reuters (Aishwarya Venugopal and Uday Sampath Kumar): “Target Corp… cut its quarterly profit margin forecast issued just weeks earlier, and said it would have to offer deeper discounts to clear inventory as decades-high inflation takes a toll on demand. The surprise outlook revision sent shares of Target down… and weighed on the retail sector and broader markets. The retailer said it would mark down prices in the second quarter, cancel orders with suppliers, strengthen parts of its supply chain and prioritize categories such as food and household essentials.”

June 8 – Wall Street Journal (Theo Francis): “The chief executives of electric-vehicle startups Lucid Group Inc. and Rivian Automotive Inc. each received pay packages last year valued at over $400 million, as both companies raced to public markets and increased production in the growing EV market. Equity accounted for the bulk of the nearly $566 million in compensation for Lucid CEO Peter Rawlinson and $422 million for Rivian chief RJ Scaringe… The equity awards reflect a broader trend across the biggest U.S. companies, where the median compensation for CEOs set a sixth-straight annual record last year. More companies are also giving CEOs a significantly larger-than-usual upfront grant of stock options or restricted stock—with strings attached.”

Economic Disruption Watch:

June 6 – Yahoo Finance (Brian Sozzi): “Shortages of semiconductors, car parts, and other key items that flow through supply chains are likely to remain for the foreseeable future, Citi warned… ‘Bottom line, we find that supply chain pressures have proved to be more persistent, and apparently deep rooted, than we had expected even a few months ago,’ strategists led by… Nathan Sheets wrote… ‘And the Russia-Ukraine conflict seems to be further amplifying the stresses. Given these realities, any hopes of near-term improvement in supply chain conditions have been shattered. The challenges in the months ahead look to be as acute as at any time over the past two years.’ Inflation, labor shortages, and increased household savings are some of the ongoing headwinds facing supply chains, according to Citi…”

Fixed-Income Bubble Watch:

June 9 – Wall Street Journal (Laura Cooper): “The debt-fueled buyout boom is running out of steam, as attractive financing for LBOs gets harder to come by. After enjoying low-cost debt for years, private-equity firms are finding it more expensive to secure funding in the leveraged-loan market, the source of most of the capital they use to fund takeovers. The average yield to maturity on loans backing new leveraged buyouts has increased from roughly 5% last year to 5.7% so far this year, according to Leveraged Commentary & Data. Plans by the Federal Reserve to continue raising interest rates threaten to make the debt more expensive still. As a result, some private-equity firms are choosing not to make bids for companies they were considering or are looking to do deals using more equity… Some banks, meanwhile, have chosen to drop out of financing packages for fear they will be unable to unload the loans to investors.”

China Watch:

June 6 – Reuters (Stella Qiu and Ryan Woo): “China’s services activity contracted for a third straight month in May, pointing to a slow recovery ahead despite the easing of some COVID lockdowns in Shanghai and neighbouring cities, a private business survey showed… The Caixin services purchasing managers’ index (PMI) rose to 41.4 in May from 36.2 in April, edging up slightly as authorities began to roll back some of the strict restrictions that have paralysed the financial city of Shanghai and roiled global supply chains… The Caixin survey showed new business, including new export orders, fell for the fourth straight month in May as restrictions on mobility kept customers at home and disrupted operations. That led services firms to reduce their payrolls at a sharper rate…”

June 9 – Bloomberg: “China’s exports rebounded in May as Covid-related bottlenecks on production and logistics clear up, but a slowdown looms this year as global consumer demand for goods cools, weakening trade’s ability to act as a driver for economic growth. Exports in dollar terms grew 16.9% in May from a year earlier…, accelerating from April’s 3.9% increase and climbing well above an 8% gain projected by economists. Imports rose 4.1% after staying unchanged in the previous month.”

June 7 – Bloomberg: “After two years of record exports, Chinese manufacturers are turning downbeat as consumers in their biggest markets curb spending and Covid lockdowns drive customers to competitors in the region. With most of the world now living with the coronavirus and travel and other leisure activities resuming, consumers are cutting back on spending on Chinese-made laptops, phones and other work-from-home goods that propelled the nation’s exports… On top of that, soaring inflation in the US and Europe means households are tightening their belts… After surging 30% in 2021, exports are likely to grow just 1.6% this year, according to Nomura Holdings Inc. Exports accounted for more than a third of China’s growth last year and 20% in 2020, the bank estimates.”

June 6 – Bloomberg (Tom Hancock): “Cheers greeted China President Xi Jinping as he toured Beijing’s Renmin University of China in April, telling students and teachers: ‘We must continue to promote the modernization of Marxism.’ Social science research, he said, should have ‘Chinese characteristics’ and contribute to ‘China’s independent knowledge system.’ It was a notable contrast to 11 years earlier, when Hu Jintao, Xi’s predecessor, visited the same campus, ‘listening carefully’ to discussions on macroeconomics. That was in China’s boom years. The economy was growing faster than 10% a year, and private entrepreneurs in sectors such as real estate and technology operated with more autonomy than ever. Corruption and pollution were rampant. Karl Marx wasn’t mentioned.”

June 9 – Bloomberg: “Chinese President Xi Jinping called on his government to adhere ‘unwaveringly’ to its Covid Zero policy, while at the same time striking a balance with the needs of the economy. Xi urged all regions and departments to be resolute in overcoming economic difficulties as they co-ordinate China’s response to the virus and strive to maintain social stability… The remarks are noteworthy for their emphasis on ensuring stability, amid growing anxiety over China’s strict approach to eradicating Covid-19, which has curtailed economic activity and included a bruising two-month lockdown of Shanghai, its biggest city and financial hub.”

June 9 – Financial Times (Ajay Rajadhyaksha): “Having seemingly successfully beaten back Covid — cases were below 100 last week, in a country of 1.4bn — China announced that it was open for business again. Can it last? Already, the signs are ominous. Shanghai officials this week increased testing capacity and unveiled new lockdown measures, because they found just seven new Covid infections outside of government-mandated quarantine sites. Beijing officials have stated that the threshold for unwinding curbs is zero new community cases for seven consecutive days.”

June 7 – Reuters (Kevin Yao and Sophie Yu): “China’s sputtering economy has a lot riding on its consumers, who are just now emerging from lockdowns in Shanghai and other big cities. But those hopes are running up against the likes of Wu Lei, a soccer coach in Beijing who has put off buying a new mobile phone. ‘I’ve lost the lion’s share of my income since Beijing called a stop to after-school sports clubs in April,’ said Wu… ‘We have no spare money even in normal months, so now we feel really under financial pressure,’ he said. China is moving to spur spending that was depressed by COVID curbs in some of its biggest cities, but piecemeal measures such as vouchers, subsidies for car buyers and digital yuan payments have been modest compared with other big global economies. Policymakers have instead stuck to their preferred approach to stimulus, which focuses on businesses and infrastructure.”

June 7 – Reuters (Clare Jim, Xie Yu and Liangping Gao): “After two years of hunting, Volar Yip has put his dream of buying a new home in China’s southeastern city of Foshan on ice, anxious about making a major financial commitment… The 32-year-old owns a media studio and many of his clients… are now cutting advertising budgets. ‘The more I read the news, the more concerned I got,’ Yip told Reuters. ‘All this news about China — the economy, property market and pandemic. Not much was positive.’ His decision to hold back on a house purchase… comes even as banks cut mortgage rates. The growing caution among young buyers in China’s battered property market, which accounts for a quarter of gross domestic product, presents a major challenge for policymakers in Beijing now scrambling to revive housing activity.”

June 6 – Bloomberg (Alfred Cang and Jack Farchy): “Traders are rushing to check that the metal they hold in Chinese warehouses really exists, as allegations of irregular financing trigger a widespread loss of confidence in the world’s largest aluminum market. Global commodities powerhouses Glencore Plc and Trafigura Group are among traders checking their aluminum inventories after several domestic trading firms claimed last week they were duped into providing loans against artificially inflated stockpiles… At least three metals warehouses in China have also suspended operations while they account for their inventories.”

June 6 – Bloomberg: “The opaque world of funding commodities trading in China is again under the spotlight. This time, metals markets are fixated on an incident in the southern province of Guangdong, in which several traders claim they were duped into providing credit against fictitious quantities of aluminum. More than 500 million yuan ($75 million) may have been loaned, backed by stockpiles of the metal stored in a warehouse in the city of Foshan that turned out to be worth significantly less than that. The amounts being talked about are relatively small… But what’s spooked traders is the similarity to a much bigger scandal eight years ago in the northern port city of Qingdao that caused a crisis of confidence in China’s metals markets.”

June 8 – Financial Times (Cheng Leng): “Thousands of desperate depositors in China have been fighting for almost two months to recover their savings after a bank run that has raised concerns over the financial health of the country’s smaller lenders. Authorities blamed fraudulent management practices for the crisis, which was sparked by the sudden suspension of cash withdrawals at four lenders in Henan, one of China’s most populous provinces, on April 18. But analysts said an economic slowdown sparked by President Xi Jinping’s zero-Covid policy is also worsening the problems at China’s smaller banks. The withdrawal problems at Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank of Kaifeng have prompted rare street protests by angry depositors, many of whom said their life savings were at stake.”

Central Banker Watch:

June 9 – Financial Times (Martin Arnold): “The European Central Bank has paved the way for a series of rate rises, starting with a quarter-percentage point move in July and raising the prospect of a bigger half-point shift in September. The ECB said… its governing council ‘intends to raise the key ECB interest rates by 25 bps at its July monetary policy meeting’. It added that, if the inflation outlook persists or deteriorates, ‘a larger increment will be appropriate at the September meeting’. Markets viewed the possibility of a bigger increase in September as a hawkish surprise, and eurozone government bonds weakened following the announcement.”

June 9 – Reuters (Balazs Koranyi): “The European Central Bank raised its inflation projections once again… but cut its growth outlook as the conflict in Ukraine continues to weigh on confidence, consumption and investment. The ECB now sees inflation over its 2% target throughout its projection horizon, accepting that rapid price growth is not nearly as temporary as it had forecast for the past year. The ECB failed to predict the recent inflation surge and its projections have been raised sharply quarter after quarter, leading to criticism of the bank’s forecasting methods and a large internal study on how they got the outlook so wrong.”

June 9 – Bloomberg (Erik Hertzberg): “Bank of Canada Governor Tiff Macklem said rising interest rates aren’t expected to derail the nation’s economy and may even produce a ‘healthy’ slowdown in the housing market. Macklem, speaking… after the release of the central bank’s annual report on financial stability, argued home-price gains during the pandemic were unsustainable and produced vulnerabilities among new buyers who were forced to take on extremely high levels of debt.”

June 8 – Associated Press: “India’s central bank… raised its key interest rate to 4.9% from 4.4%, the second such hike in the last three weeks to contain inflation. Reserve Bank of India Governor Shaktikanta Das said the decision was aimed at curbing price increases and mitigating the impact of geopolitical tensions… ‘Upside risks to inflation … materialized earlier than expected,’ Das said. Wednesday’s increase follows a 40 bps rise in May.”

Global Bubble and Instability Watch:

June 7 – Reuters (Andrea Shalal): “The World Bank… slashed its global growth forecast by nearly a third to 2.9% for 2022, warning that Russia’s invasion of Ukraine has compounded the damage from the COVID-19 pandemic, and many countries now faced recession. The war in Ukraine had magnified the slowdown in the global economy, which was now entering what could become ‘a protracted period of feeble growth and elevated inflation,’ the World Bank said in its Global Economic Prospects report, warning that the outlook could still grow worse.”

June 7 – New York Times (Patricia Cohen): “For large and small nations around the globe, the prospect of averting a recession is fading. That grim prognosis came… from the World Bank, which warned that the grinding war in Ukraine, supply chain chokeholds, Covid-related lockdowns in China, and dizzying rises in energy and food prices are exacting a growing toll on economies all along the income ladder. This suite of problems is ‘hammering growth,’ David Malpass, the bank’s president, said in a statement. ‘For many countries, recession will be hard to avoid.’”

June 4 – Bloomberg (Michael Heath): “Australian consumer prices have accelerated from the 5.1% recorded in the first three months, Treasurer Jim Chalmers said, intensifying pressure on households and suggesting further interest-rate increases ahead. ‘It’s now really clear that the inflation challenge that Australians are facing is worse,’ Chalmers told News Corp… he’ll likely raise the forecast in next month’s economic statement to parliament. ‘People should anticipate that it will be higher than it is now. Significantly higher.’”

June 8 – Bloomberg (Julia Fioretti): “Follow-on share sales in Asia have plunged to their lowest level since the global financial crisis as volatile markets and depressed equities have kept both companies and shareholders on the sidelines. Just $31 billion has been raised by stock offerings in listed companies in Asia this year, the least for any similar period since 2008…”

Europe Watch:

June 6 – Financial Times (George Parker, Sebastian Payne and Jim Pickard): “Boris Johnson on Monday night survived a bruising confidence vote, but his victory by 211 to 148 in a ballot of Tory MPs left him badly damaged and exposed the scale of the division and animosity in his party. The result means that 41% of Johnson’s MPs wanted to oust the prime minister. The revolt was more serious than Downing Street had expected and leaves his authority badly damaged. Johnson told MPs his victory would end months of speculation about his future and he would now be able to focus fully on policy delivery, holding out the prospect of future tax cuts.”

EM Bubble Watch:

June 10 – Reuters (Karin Strohecker): “Turkey’s lira has lost nearly a quarter of its value this year as soaring inflation and the central bank’s reluctance to raise interest rates stoke fears of another currency crisis. No stranger to booms and busts as well as sharp swings in its currency, Turkey has long been considered among the riskier emerging markets, running large current-account deficits and relying on external financing to fuel unorthodox pro-growth policies.”

June 8 – Reuters (Marc Jones): “There is a rising risk that Turkey brings in additional capital controls if the pressure on its currency and financial markets continues to intensify, credit rating firm S&P Global said… Turkey’s lira has slumped 22% this year, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year. One of S&P’s top sovereign analysts, Maxim Rybnikov, said… S&P’s move in April to cut Turkey’s local currency rating had also reflected the concerns of additional capital controls.”

Japan Watch:

June 8 – Financial Times (Kana Inagaki): “The governor of the Bank of Japan has been forced to retract his claim that consumers had become more ‘tolerant’ of price rises after a public backlash over soaring food and energy costs. The rare apology issued by Haruhiko Kuroda underscored the political sensitivity of price increases ahead of July elections to the upper house of Japan’s parliament that are likely to be largely fought over the rising cost of living. ‘My expression that households are becoming more tolerant of price rises was utterly inappropriate, so I will retract it,’ Kuroda said in parliament…”

June 6 – Bloomberg (Yuko Takeo and Emi Urabe): “Senior Japanese government officials said they were closely watching currency markets with a sense of urgency Tuesday as they returned to a heightened state of alert following a renewed slide in the yen to fresh two-decade lows. ‘It’s important that exchange rates remain stable, and reflect economic fundamentals,’ said Finance Minister Shunichi Suzuki… after the yen breached the 132 mark against the dollar… ‘The government is watching foreign exchange market moves and their impact on the Japanese economy with a sense of urgency.’”

Leveraged Speculation Watch:

June 9 – Bloomberg (Katherine Burton): “Lee Ainslie and Steve Mandel’s hedge funds tumbled by roughly a third this year, joining other Tiger Cubs stung by the slide in technology stocks. Ainslie’s main hedge fund at Maverick Capital dropped 32.5% through May… Mandel’s Lone Pine slid about 30% in the period…”

June 4 – Bloomberg (Hema Parmar): “D1 Capital Partners, the hedge fund firm that wagers on public and private companies, has tumbled 22.5% this year through May… For the year, D1’s public market portfolio fell 44%, while its book of closely-held companies dropped 8%, the people said.”

June 8 – Reuters (Carolina Mandl): “Hedge funds posted negative performance in May, accentuating their losses this year to almost 3%, as investors positioned for a potential recession, a report by… HFR showed… The fund weighted composite index went down 0.58% in May, amid volatility in equities, bonds and commodities, HFR said, with all funds categories in the negative territory. Still, 40% of the hedge funds compiled posted gains. Equity hedge funds posted a loss of 8% in the first five months of the year, the worst performance among hedge fund categories monitored by HFR.”

June 6 – Reuters (Selena Li and Eric Onstad): “U.S. hedge fund Elliott Associates is suing the London Metal Exchange (LME) for $456 million for cancelling nickel trades after chaotic trading in March that forced the exchange to suspend its nickel market, the LME said… The legal action piles more pressure on the exchange, which is being probed by regulators and is struggling to restore trust and volumes in its nickel market.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 6 – Wall Street Journal (Janet Adamy): “Americans are deeply pessimistic about the U.S. economy and view the nation as sharply divided over its most important values, according to a new Wall Street Journal-NORC Poll… The survey found Americans in a sour mood and registering some of the highest levels of economic dissatisfaction in years. The pessimism extended beyond the current economy to include doubts about the nation’s political system, its role as a global leader and its ability to help most people achieve the American dream. Some 83% of respondents described the state of the economy as poor or not so good. More than one-third, or 35%, said they aren’t satisfied at all with their financial situation. That was the highest level of dissatisfaction since NORC began asking the question every few years starting in 1972…”

June 6 – Associated Press (Frances D’Emilio): “Two U.N. food agencies issued stark warnings… about multiple, looming food crises on the planet, driven by climate ‘shocks’ like drought and worsened by the impacts of the COVID-19 pandemic and the war in Ukraine… The glum assessment came in a report by two… food agencies: the World Food Program (WFP) and the Food and Agriculture Organization (FAO). WFP Executive Director David Beasley said besides hurting ‘the poorest of the poor’ the global food crises threaten to overwhelm millions of families who are just getting by. ‘Conditions now are much worse than during the Arab Spring in 2011 and 2007-2008 food price crisis, when 48 countries were rocked by political unrest, riots and protests,’ Beasley said… He cited as ‘just the tip of the iceberg’ food crises now in Indonesia, Pakistan, Peru and Sri Lanka.”

June 7 – Reuters (Jennifer Rigby): “Growing food shortages may represent the same health threat to the world as the COVID-19 pandemic, a leading global health figure has warned. Rising food and energy prices, in part sparked by the war in Ukraine, could kill millions both directly and indirectly, Peter Sands, the executive director of the Global Fund to Fight AIDS, Tuberculosis and Malaria, told Reuters… ‘Food shortages work in two ways. One is you have the tragedy of people actually starving to death. But second is you have the fact that often much larger numbers of people are poorly nourished, and that makes them more vulnerable to existing diseases,’ he said.”

June 3 – UPI (Adam Schrader): “Crews with a Southern California water district have started installing devices to limit water flow at homes that use too much water. The Las Virgenes Municipal Water District, which serves communities in western Los Angeles County including Calabasas and Agoura Hills, has installed four water flow restrictors since Wednesday, KABC reported.”

Covid Watch:

June 7 – Reuters: “The BA.4 and BA.5 sub-variants of Omicron are estimated to make up nearly 5% and 8% of the coronavirus variants in the United States as of June 4, the U.S. Centers for Disease Control and Prevention (CDC) said… The two sublineages, which were added to the World Health Organization’s monitoring list in March and designated as variants of concern by the European Centre for Disease Prevention and Control (ECDC), were present in all U.S. regions.”

Geopolitical Watch:

June 5 – Bloomberg (Sophie Jackman and Sangmi Cha): “North Korea fired eight short-range ballistic missiles Sunday, pushing it to a record number of launches in a single year under Kim Jong Un, who appears ready to further ratchet up tensions with his first test of a nuclear device since 2017… ‘While our military has reinforced surveillance and vigilance to prepare for any additional launches, we are maintaining a full readiness posture in close cooperation with the US,’ South Korea’s Joint Chiefs of Staff said…”

June 7 – Reuters (Joori Roh and Soo-Hyang Choi): “South Korea and the United States staged a joint air power demonstration… during a visit by U.S. Deputy Secretary of State Wendy Sherman, who said there would be a strong and clear response if North Korea were to conduct a nuclear test. The demonstration, which involved 20 warplanes including F-35A stealth fighter jets, came a day after the allies fired eight surface-to-surface missiles off South Korea’s east coast in response to a barrage of short-range ballistic missiles launched by North Korea on Sunday.”

June 9 – Reuters (Francois Murphy): “Iran on Thursday dealt a near-fatal blow to chances of reviving the 2015 Iran nuclear deal as it began removing essentially all the International Atomic Energy Agency monitoring equipment installed under the deal, IAEA chief Rafael Grossi said. Iran had warned of retaliation if the IAEA’s 35-nation Board of Governors passed a resolution drafted by the United States, France, Britain and Germany criticising Tehran for its continued failure to explain uranium traces found at undeclared sites. The resolution was passed by a crushing majority late on Wednesday.”

June 8 – Reuters (Francois Murphy): “Iran has begun further expanding its underground uranium enrichment and said… it would switch off two of the U.N. nuclear watchdog’s cameras, as the watchdog’s 35-nation board overwhelmingly passed a resolution criticising Tehran. Only Russia and China opposed the resolution submitted by the United States, Germany, France and Britain saying the Board of Governors ‘expresses profound concern’ that uranium traces found at three undeclared sites remain unexplained due to insufficient cooperation by Iran. It also calls on Tehran to engage with the watchdog ‘without delay’.”

June 7 – Reuters: “Old problems in China-Japan relations are intertwined with new ones, and the challenges cannot be ignored if the countries wish to have a ‘healthy’ relationship, China’s top diplomat said… A foreign ministry statement said Yang Jiechi, who spoke with Japanese national security chief Takeo Akiba on the phone, said both nations should ‘grasp the right direction, uphold win-win cooperation, focus on the long term, enhance security and build mutual trust’… Relations between both nations have grown tense, with Japan scrambling jets after Chinese and Russian warplanes neared its airspace last month as Tokyo hosted leaders of the Quad grouping, and longtime concerns over a Chinese invasion of Taiwan.”

June 8 – Wall Street Journal (Niharika Mandhana, Sun Narin and Chun Han Wong): “China will help Cambodia expand and upgrade a naval base in the Southeast Asian country, officials from both sides said, heightening concerns U.S. officials have expressed for years that Beijing plans to establish a naval outpost there. The comments came at a ceremony… marking the start of new China-funded construction at Ream Naval Base that was attended by senior Cambodian military and defense officials as well as China’s ambassador to Cambodia.”

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