November 19 – Reuters (Francois Murphy and Paul Carrel): “Austria will become the first country in western Europe to reimpose a full COVID-19 lockdown, it said on Friday as neighbouring Germany warned it may follow suit, sending shivers through financial markets worried about the economic fallout. Europe has again become the epicentre of the pandemic, accounting for half of global cases and deaths. A fourth wave of infections has plunged Germany, Europe’s largest economy, into a national emergency, Health Minister Jens Spahn said, warning that vaccinations alone will not cut case numbers.”
As desperately as we want to put Covid behind us, the irrepressible virus refuses to succumb. Germany reported a record 65,000 new infections Thursday. And, according to Bloomberg (Chris Reiter and Tim Loh), infections are now doubling every 12 days – a trajectory that if continued will overwhelm hospitals within weeks. “In Berlin, there were 79 intensive-care beds available for the city’s 3.8 million people on Friday, while in the northern port city of Bremen, there were just five beds for its 680,000 residents.”
Here at home, infections are on the rise again, as we head into colder weather and the holiday season. Friday from CNBC: “The U.S. reported a seven-day average of nearly 95,000 new Covid infections Thursday, up 31% over the past two weeks…” Outbreaks were up about 50% in two weeks in the Midwest and Northeast. My concern is elevated by fear of somewhat waning vaccine efficacy associated with the early vaccination push. I also suspect there will be less enthusiasm for booster shots. Reasons for optimism include natural immunities, Pfizer’s new antiviral pill, and a list of other encouraging treatments.
Meanwhile, I am not optimistic about the impact Europe’s Covid outbreak will have on the unfolding global financial crisis. Once again, Covid brandishes nefarious timing. China-related contagion had already created vulnerability. Now, fledgling global “risk off” has de-risking/deleveraging increasingly impairing liquidity at the “Periphery.”
The euro dropped 1.3% this week to 1.13, the low versus the dollar since July 2020. Euro weakness (stoked by ECB dovishness) comes at a particularly inopportune time for the emerging markets. The dollar, having already gained momentum on the back of heightened EM risk aversion, traded above 96 for the first time in 16 months. Dollar strength is pressuring leveraged EM “carry trades,” a key dynamic in unfolding “Periphery” vs. “Core” Crisis Dynamics.
In general, crisis dynamics unfold initially at the “Periphery” and then begin gravitating toward the “Core.” It’s the weakest players at the fringe that get in trouble first – the highly levered with liquidity constraints and vulnerability to any tightening of financial conditions. Simply stated, if the weak lose access to new borrowings, they quickly confront serious trouble. It’s worth adding that the global “Periphery” had been on the receiving end of massive yield-chasing speculative flows since the start of pandemic stimulus, leaving it acutely vulnerable to a shift to “risk off” de-risking/deleveraging.
November 18 – Bloomberg (Burhan Yuksekkas and Tugce Ozsoy): “The Turkish lira tumbled to a record low after the central bank cut borrowing costs for a third straight month, a move that risks further undermining price stability while eroding what little confidence investors had in the nation’s policy makers. The lira fell as much as 6% to 11.3118 against the dollar, the biggest decline in eight months. Officials cut the one-week repo rate by 100 bps to 15%…, and said they would consider ending the easing cycle next month. It comes as consumer inflation accelerated to almost 20% in October…”
This week’s 11.3% drop pushed Turkish lira year-to-date losses to 34%. Turkish inflation, already above 20%, will surely accelerate. Turkey runs large trade and current account deficits. It carries a significant debt load, too much of it denominated in the U.S. dollar and other foreign currencies. Turkey has $125 billion of foreign-denominated debt due over the next year, about 43% denominated in dollars. Between persistent trade deficits and debt maturities, Turkey faces quite challenging external financing requirements. The country has $87 billion of international reserves, although the central bank (and banking system) has accumulated offsetting currency forward positions. Turkish banks have significant foreign liabilities and derivatives exposures.
Turkish local-currency bond yields jumped 60 bps this week to 19.31%, up about 300 bps in two months. Dollar-denominated yields rose 34 bps this week to 6.94%. Turkey’s sovereign CDS jumped 38 to 446 bps, up from about 300 bps to start the year.
Is it even possible for a crisis to develop with Trillions of liquidity sloshing about the global system? With ongoing QE from the Fed, ECB, BOE, BOJ and others, few have contemplated waning liquidity or the possibility of a liquidity shock. But with Turkey now succumbing to Crisis Dynamics, “risk off” de-risking/deleveraging and contagion have become a clear and present risk.
Brazil’s real declined 2.5% this week, boosting 2021 losses to 7.1%. Brazil’s local-currency bond yields rose 22 bps this week to 11.69%. Brazil’s sovereign CDS gained two to 238 bps, up 60 bps in two months and almost 100 bps from the start of the year. At 10.7%, Brazil’s y-o-y inflation hasn’t been higher since the dark days of 2003. While Brazil’s external financing requirements don’t appear as precarious as Turkey, it has a limited international reserve position, extensive central bank currency derivative positions, and a banking system vulnerable to a surge of “hot money” outflows.
Analysts will cite “idiosyncratic risks.” With a pivotal presidential election Sunday, the Chilean peso dropped another 3.5% this week (down 14.2% y-t-d). Chile CDS jumped 22 this week to 90 bps (highs since May 2020). Despite raising rates to 3.75%, South Africa’s rand fell 2.7% (down 6.6% y-t-d). South African yields jumped 15 bps to 9.97%.
Eastern Europe was this week in “risk off” crosshairs. Hit by Covid and a crisis at its border with Belarus, Poland’s zloty slumped another 2.6% this week (down 10.3% y-t-d). At 6.8%, y-o-y inflation is the highest since 2000. Poland’s local-currency bond yields surged 33 bps this week to 3.23% (after ending Sept. at 2.21%).
Russia’s ruble declined 0.8%, with 10-year yields jumping 18 bps to 8.34% – a two-month rise of 130 bps, as yields surpass the March 2020 spike to reach the highest level since April 2019. Ukrainian CDS surged 39 (two-week gain of 76) to 488 bps, the high since 2019. Hungary’s yields jumped 23 bps to a seven-year high of 4.08%. The Romanian leu declined 1.4%, with yields up five bps to 5.14% – the high since March 2020. The Czech koruna fell 2.1%, and the Bulgarian lev lost 1.4%.
In the “Periphery of the Periphery,” Tunisia CDS surged 98 to 934 bps, Ghana 74 to 1,115 bps, Iraq 52 to 631 bps, and Kenya 32 to 444 bps.
The Shanghai Composite gained 0.6%, posting modest back-to-back weekly gains. It was another wild week for developer stocks and bonds, with prices towards the end of the week supported by indications Beijing would loosen real estate Credit. Basically, things are spiraling out of control, leaving Beijing with no alternative than to attempt to stabilize the situation.
November 15 – Reuters (Liangping Gao and Ryan Woo): “China’s property woes worsened on all fronts last month, as price falls in both new and resale homes amid deeper contractions in construction starts and investment by developers piled pressure on the sector in a rare confluence of declines. The Chinese property market… has slowed sharply since May, with sentiment increasingly shaken by stress in the sector in the wake of a growing liquidity crisis that has engulfed some of the country’s biggest and most indebted developers… Prices of new homes dropped 0.2% on average last month from September…, the first decline since March 2015. In the resale market, prices slumped in all but six of the 70 major cities tracked by the bureau… During the month, homes sales tumbled 22.65% on year to 1.24 trillion yuan…, the fourth straight decline and the lowest this year.”
And from Bloomberg: “Property firms refrained from expenditure, resulting in a widening 5.4% year-on-year contraction in real estate development investments, according to Bloomberg calculations. New starts by developers, a leading indicator of investments, plunged 33% from a year earlier, and their land purchases shrank 24% from September. Projects completed by developers also dwindled 21% from a year prior likely due to hoarding of cash.”
November 15 – Bloomberg (Tom Hancock and Enda Curran): “China’s economy is slowing to the lows seen way back in 1990 — a price President Xi Jinping seems willing to pay to reduce its dependence on the property sector. Beijing’s squeeze on the real estate sector will linger into next year and beyond, a development many hadn’t seen coming that has now prompted banks like Goldman Sachs…, Nomura… and Barclays Plc to cut their growth forecasts in 2022 to below 5%. Bar last year’s pandemic year, that would be the weakest in more than three decades. Analysts at Societe Generale SA even attach a 30% probability of a hard landing in 2022.”
November 19 – Bloomberg: “China’s economy is slowing more than people think and the outlook is for weaker growth going forward as the government is unlikely to step in with significant stimulus, according to Leland Miller, chief executive officer of China Beige Book. ‘The third quarter was particularly brutal’ for China’s economy, Miller said… In addition, ‘we’re going to be looking at much lower growth going forward and it’s going to be because the Party is OK with that.’”
It’s so early in the process. Yet China’s historic apartment Bubble is indeed bursting, with air beginning to seep out of the Chinese Bubble economy. Moreover, it’s all unfolding despite huge ongoing Credit growth and low interest rates.
Beijing will direct its banking system to lend, while state-owned companies will borrow, buy and invest. I’ll assume these measures will for now keep the wheels from falling off – at least work to slow the pace of Bubble deflation. I empathize with the Chinese people, who must suddenly question whether things are as they had thought – and what the future might hold. I would not be surprised to see gloomy sentiment envelop both apartment buyers and shoppers. A population that saw expectations inflate as never before is now susceptible to sliding into a deep funk.
But let’s return to the “Periphery vs. Core” analytical framework. It’s certainly not abnormal for trouble at the “Periphery” to initially bolster a booming “Core.” But it is extraordinary to observe the “Periphery” falter in the face of massive global QE and generally very low bond yields. The perceived bulletproof “Core” is oblivious to this ominous development.
Here in the U.S., stocks are six weeks from wrapping up a historic year. Virtually all assets have enjoyed spectacular price inflation, while manic markets remain all too willing to disregard risk. Attention is focused on Powell or Brainard. Will the Fed adjust its taper schedule at its December meeting? The first rate increase in the second half of 2022 or not until ’23?
Inflation garners considerable attention. Yet so long as the Fed and bond market are okay with it, there’s little to worry about. China problems are old news. Why worry about a Chinese slowdown when our economy is over-heated? Besides, if things somehow turn bad enough – in China or with global contagion – the Federal Reserve will surely slow/curtail tapering and indefinitely postpone rate increases. Inflation will subside, bond yields will drop – and The Forever Bubble Lives On.
Meanwhile, the “Periphery” is in serious trouble. As attention fixates weekly on U.S. stock market record highs, global contagion quietly gathers momentum. “Risk off” de-risking/deleveraging is broadening and strengthening by the week. Importantly, liquidity issues are spreading among “Periphery” markets. Moreover, the manic “Core” draws precious liquidity from the “Periphery,” in the process toppling “Periphery” Bubbles, while fueling precarious “Terminal Phase” “Core” excess.
Speculative blow-offs ensure liquidity shocks. On the upside, speculative leverage – certainly including option and derivatives-related – fuels self-reinforcing liquidity over-abundance. But when manic markets inevitably reverse course, it’s selling and deleveraging that becomes self-reinforcing. Incredible liquidity abundance can rather abruptly shift to fragility, illiquidity and dislocation.
Prior to QE, market analysts used to fret speculative melt-ups. Fretting is appropriate. Unparalleled speculative excess today masks a deteriorating global liquidity backdrop. Global Crisis Dynamics and contagion are advancing, and they will land at a manic “Core” that I cannot imagine in a more unstable and vulnerable state.
It’s worth noting that U.S. investment-grade and high-yield CDS prices rose this week. Corporate Credit spreads jumped to eight-month highs. Bank CDS prices increased, while U.S. banks stocks sank 2.7%. European bank stocks dropped 2.8%, with Italian banks down 3.9%. European CDS prices moved sharply higher. Japanese banks fell 2.0%.
Curiously, after trading to a record 3.25% during Tuesday trading, the five-year Treasury “breakeven” inflation rate reversed sharply lower to end the week at 3.04%. Crude sank 6%, as economically-sensitive commodities showed some vulnerability. And after trading up to 1.65% earlier in the week, safe haven 10-year Treasury yields were back down to 1.52% during Friday trading. Even in “Core” markets, there were hints of Trouble on the Horizon.
For the Week:
The S&P500 added 0.3% (up 25.1% y-t-d), while the Dow fell 1.4% (up 16.3%). The Utilities gained 0.9% (up 7.6%). The Banks dropped 2.7% (up 39.2%), and the Broker/Dealers lost 2.5% (up 29.1%). The Transports slumped 1.4% (up 32.1%). The S&P 400 Midcaps fell 1.1% (up 24.5%), and the small cap Russell 2000 dropped 2.8% (up 18.6%). The Nasdaq100 advanced 2.3% (up 28.6%). The Semiconductors surged 3.1% (up 39.9%). The Biotechs declined 0.2% (down 5.4%). With bullion down $19, the HUI gold index fell 3.8% (down 10.7%).
Three-month Treasury bill rates ended the week at 0.04%. Two-year government yields slipped a basis point to 0.51% (up 39bps y-t-d). Five-year T-note yields were unchanged at 1.22% (up 86bps). Ten-year Treasury yields declined two bps to 1.55% (up 63bps). Long bond yields dipped two bps to 1.91% (up 27bps). Benchmark Fannie Mae MBS yields declined three bps to 2.02% (up 68bps).
Greek 10-year yields declined five bps to 1.15% (up 53bps y-t-d). Ten-year Portuguese yields fell seven bps to 0.30% (up 27bps). Italian 10-year yields dropped nine bps to 0.86% (up 32bps). Spain’s 10-year yields fell eight bps to 0.38% (up 34bps). German bund yields sank eight bps to negative 0.34% (up 23bps). French yields dropped nine bps to 0.01% (up 34bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields declined four bps to 0.88% (up 68bps). U.K.’s FTSE equities index fell 1.7% (up 11.8% y-t-d).
Japan’s Nikkei Equities Index increased 0.5% (up 8.4% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.08% (up 6bps y-t-d). France’s CAC40 increased 0.3% (up 28.1%). The German DAX equities index added 0.4% (up 17.8%). Spain’s IBEX 35 equities index sank 3.6% (up 8.4%). Italy’s FTSE MIB index slumped 1.4% (up 23.0%). EM equities were mostly lower. Brazil’s Bovespa index sank 3.1% (down 13.4%), and Mexico’s Bolsa fell 1.2% (up 15.3%). South Korea’s Kospi index was little changed (up 3.4%). India’s Sensex equities index dropped 1.7% (up 24.9%). China’s Shanghai Exchange gained 0.6% (up 2.5%). Turkey’s Borsa Istanbul National 100 index surged 6.0% (up 17.6%). Russia’s MICEX equities index dropped 2.6% (up 22.1%).
Investment-grade bond funds saw inflows of $1.416 billion, and junk bond funds posted positive flows of $99 million (from Lipper).
Federal Reserve Credit last week surged $67.1bn to a record $8.627 TN. Over the past 114 weeks, Fed Credit expanded $4.900 TN, or 131%. Fed Credit inflated $5.816 Trillion, or 207%, over the past 471 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.1bn to a one-year low $3.468 TN. “Custody holdings” were up $26bn, or 0.8%, y-o-y.
Total money market fund assets added $9.0bn to $4.576 TN. Total money funds increased $246bn y-o-y, or 5.7%.
Total Commercial Paper fell $15.5bn to $1.116 TN. CP was up $133bn, or 13.5%, year-over-year.
Freddie Mac 30-year fixed mortgage rates surged 12 bps to 3.10% (up 38bps y-o-y). Fifteen-year rates jumped 12 bps to 2.39% (up 11bps). Five-year hybrid ARM rates declined four bps to 2.49% (down 36bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 15 bps to 3.20% (up 26bps).
November 16 – Reuters (Saikat Chatterjee and Joice Alves): “The European Central Bank’s latest comments on inflation have lobbed another grenade in the path of the euro. Already down over 7% to the dollar this year, the euro tumbled against every major currency after ECB President Christine Lagarde on Monday effectively quashed money markets’ expectations of a 2022 interest rate rise.”
For the week, the U.S. Dollar Index gained 0.9% to 96.03 (up 6.8% y-t-d). For the week on the upside, the British pound increased 0.3%. For the week on the downside, the Brazilian real declined 2.7%, the South African rand 2.5%, the Norwegian krone 2.5%, the Swedish krona 2.1%, the Mexican peso 1.5%, the euro 1.4%, the Australian dollar 1.3%, the Canadian dollar 0.7%, the Swiss franc 0.7%, the Singapore dollar 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.5% and the Japanese yen 0.1%. The Chinese renminbi slipped 0.12% versus the dollar (up 2.19% y-t-d).
November 17 – Bloomberg (Mark Burton): “For the first time in more than a decade, six of the world’s most vital industrial metals are flashing a rare synchronized warning over tight supply, as logistical turmoil and strong demand spark anxiety among buyers. From aluminum to zinc, spot prices for base metals on the London Metal Exchange are all soaring above futures — a condition known as backwardation — for the first time since 2007. Buyers are paying a premium for access to metal against a backdrop of plunging exchange inventories, supply-chain delays, production hiccups and surging demand for industrial commodities in everything from construction to consumer electronics. In copper and tin, the scale of the backwardations has reached record highs in recent months, exacerbating the sense of panic among industrial users…”
November 15 – Financial Times (Justin Jacobs): “The Bakken oilfield in North Dakota, the birthplace of America’s oil boom a decade ago, is struggling to recover from last year’s market crash even as crude prices have surged back to $80 a barrel. It reflects a broader slowdown in growth from America’s oil patch as companies keep spending low in a bid to redirect the windfall of cash from higher prices back to shareholders. But analysts say the Bakken faces a bleak future after years of intensive drilling. Oil producers in the Bakken are now running into the ‘geological reality” that after a decade of rapid development ‘most of the best wells have been drilled’, said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis. ‘It helps to explain why the industry in the Bakken is sort of flatlined.’”
The Bloomberg Commodities Index declined 0.5% (up 31.1% y-t-d). Spot Gold fell $19 to $1,846 (down 2.8%). Silver dropped 2.8% to $24.62 (down 6.8%). WTI crude sank $4.85 to $75.94 (up 57%). Gasoline fell 4.3% (up 57%), while Natural Gas jumped 5.7% (up 100%). Copper declined 1.1% (up 25%). Wheat added 0.7% (up 30%), while Corn declined 1.4% (up 19%). Bitcoin sank $6,070 or 9.5%, this week to $58,002 (up 100%).
November 18 – Associated Press (Ed White): “A surge in cases in the Upper Midwest has some Michigan schools keeping students at home ahead of Thanksgiving and the military sending medical teams to Minnesota to relieve hospital staffs overwhelmed by COVID-19 patients. The worsening outlook in the Midwest comes as booster shots are being made available to everyone in a growing number of locations… Cold weather states are dominating the fresh wave of cases over the last seven days, including New Hampshire, North Dakota and Wisconsin, according to federal data. But the Southwest had trouble spots, too, with more than 90% of inpatient hospital beds occupied in Arizona.”
Market Mania Watch:
November 12 – Financial Times (Robin Wigglesworth, Katie Martin and George Steer): “A ‘fear of missing out’ has gripped global markets, lifting everything from stocks to cryptocurrencies to record highs and forcing even staunch bears to throw in the towel. US equities are at the epicentre of the worldwide rush into stocks that has almost doubled the MSCI All-World share index since the coronavirus crisis nadir in March 2020 — one of the most powerful runs for global equities in history. Wall Street’s S&P 500 this week sealed its longest streak of hitting record highs since 1964 before pulling back slightly… Meanwhile, highly-speculative digital assets such as bitcoin, ethereum and ‘meme coins’ such as Shiba Inu have shot higher, bringing the crypto market value to about $3tn from less than $500bn at this time last year.”
November 16 – Wall Street Journal (Heather Gillers): “The board of the nation’s largest pension fund voted… to use borrowed money and alternative assets to meet its investment-return target, even after lowering that target just a few months ago. The move by the $495 billion California Public Employees’ Retirement System reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country. Without changes, Calpers said its current asset mix would produce 20-year returns of 6.2%, short of both the 7% target the fund started 2021 with and the 6.8% target implemented over the summer.”
November 16 – Bloomberg (Ksenia Galouchko): “Global fund managers are ending the year with the biggest overweight in U.S. stocks since August 2013 as risk appetite outweighs inflation and tapering woes. According to a Bank of America Corp. survey conducted Nov. 5 to 11, investors are now more constructive on global growth and earnings, and 51% expect lower inflation. Fund managers increased their allocation to U.S. equities by 13 percentage points from the previous month to a 29% overweight… Clients are ‘convinced’ inflation is transitory and expect the Federal Reserve to remain ‘well behind-the-curve,’ BofA strategists led by Michael Hartnett wrote…”
November 18 – Bloomberg (Elena Popina): “Traders getting ready for a pre-Thanksgiving lull will have to deal with wider price swings and higher volumes first. The third Friday of the month, when most stock options expire, is tomorrow. The event… in recent months has triggered a semi-predictable volatility storm. Judging by the total amount of open interest in the contracts due on Friday, the monthly event could be the second-biggest in recent history. The total number of outstanding contracts on equity, index and ETF options expiring stands at 95.5 million, a hair away from 95.6 million in July… That was the most for any month ever…”
November 17 – Reuters (Saqib Iqbal Ahmed): “Traders are piling into options trades on electric-vehicle makers, drawn by sharp swings in the shares of companies like Tesla Inc, Rivian Automotive and Lucid Group. On Wednesday, Tesla, Lucid and Rivian made up three of the six most actively traded options names, rubbing shoulders with the likes of Apple Inc and Advanced Micro Devices. The heavy options volume comes on the heels of big gains for shares of many of these companies. Shares of Rivian, which has just started selling vehicles and has little revenue to report, are up about 80% since its initial public offering last week; Lucid has gained 20% this week.”
November 14 – Bloomberg (Anna Hirtenstein): “Enthusiasm for riskier corners of the market has sent stock indexes and cryptocurrencies to record highs. A powerful driver, investors say, is surging inflation and the effect it has suppressing returns on safe government bonds, a main alternative to stocks. Last week so-called real yields, which take into account the corrosive effects of inflation, hit some of their lowest levels on record. One measure of real yields, 10-year Treasury inflation-protected securities, fell to minus 1.2%… That is the lowest on record…”
November 17 – Bloomberg (Robert Schmidt): “Congress must pass legislation to regulate cryptocurrencies before their rapid growth and popularity pose dangers to investors and the financial system, the chairman of the Joint Economic Committee said. Representative Don Beyer, who is holding a hearing Wednesday on ‘demystifying crypto,’ acknowledged that most lawmakers have a steep learning curve when it comes to digital assets but said it’s vital they provide guidelines for regulators… The pressure to set rules has grown as tens of millions of average Americans have rushed to invest in tokens, making it a roughly $2.6 trillion market.”
November 17 – Reuters (Scott Murdoch): “Greed is outpacing fear in world financial markets as investors respond to the pandemic recovery, Goldman Sachs Chief Executive David Solomon says, adding that such periods of exuberance are usually not long-lived. Solomon told Bloomberg’s New Economy Forum… the global economy was facing a ‘complicated time’ as activity began to strengthen after the sudden shutdown in many parts of the world in 2020 because of coronavirus. The unprecedented levels of stimulus ordered by governments and central banks, he said, had led to exuberance in certain markets. ‘I think markets generally when I step back and I think about my 40 year career, there’s been periods of time when greed has far outpaced fear. We were in one of those periods of time…’”
November 12 – Bloomberg (Benjamin Robertson, Jan-Henrik Foerster, and Lucca De Paoli): “There’s been one common topic hot on the lips of private equity bosses at this week’s major industry gathering in Berlin: eye-watering valuations. Speaker after speaker at the SuperReturn conference lined up to warn masked attendees about the unsustainable prices being paid for assets in the current deal boom, while reassuring investors with their next breath that strong returns would stay intact. Deal multiples, already a talking point before the pandemic, have gone ‘bananas,’ said Allstate Investments… Sarah Farrell. Apollo Global Management Inc. Co-President Scott Kleinman suggested the industry was deluded on valuations when he asked ‘how is this really feasible that a buyout can happen at 25 times Ebitda?’”
November 17 – Bloomberg (Paula Seligson): “Private equity firms are pulling money out of their companies at a breakneck pace, thanks to investors that are pouring money into loan funds to get protection from inflation. Companies this year have borrowed or are planning to borrow more than $88 billion in the U.S. leveraged loan market to fund dividend payments to their private equity owners. That’s the most for a year since Bloomberg began compiling the data in 2013, and 2021 isn’t over. Private equity firms are reaping the benefits, using the intense demand for loans to pile even more borrowings onto the heavily-indebted companies they own.”
November 16 – Bloomberg (Mark Gilbert): “Life is getting even harder for short sellers. Some of the most famous names in the business of seeking to profit by anticipating declines in the value of financial securities are closing their positions. Time will tell if they were right to abandon their bearishness – or whether their capitulation signals a market turn.”
November 16 – Financial Times (Sara Germano): “The Staples Center in Los Angeles, one of the best-known sports and entertainment arenas in the US, is being rebranded as the Crypto.com Arena, the first such name change since the 20,000-seat venue opened its doors in 1999. The Singapore-based cryptocurrency platform has agreed to pay more than $700m for the naming rights to the downtown Los Angeles complex for the next 20 years…”
Market Instability Watch:
November 18 – Financial Times (Gillian Tett): “For almost two years, a frightening question has haunted the US Treasury and Federal Reserve. No, this is not whether the Fed can engineer a smooth exit from quantitative easing; nor whether this is the right moment to switch the governor (and policy). The question I am referring to is whether the US Treasuries market is robust enough to handle the shocks that might arise from those first two problems. For while the US government bond market used to be considered to be the world’s most liquid and deep asset class, in March 2020 that cosy assumption was smashed apart. Most notably, when investors woke up to the economic risks associated with the Covid-19 pandemic, there was such a dramatic sell-off in Treasuries that trading froze up. That, in turn, posed such big systemic threats that it forced the Fed to step in with what John Williams, NY Fed president, has called ‘staggering’ amounts of liquidity support, reaching almost $1tn each day.”
November 15 – Bloomberg (Karl Lester M. Yap and Marcus Wong): “A short-lived reprieve for emerging-market carry trades funded in dollars looks to be over, with an upsurge in U.S. inflation making the outlook increasingly treacherous. A Bloomberg index of these bets has dropped more than 4% in the past two months, the biggest slide since March 2020 for a strategy of borrowing in the greenback and investing in developing-nation currencies.”
November 17 – Financial Times (Kate Duguid and Colby Smith): “US policymakers and other financial experts have escalated calls for reforms to the $22tn market for US Treasury securities to protect it from future shocks after recent episodes of chaotic trading. The world’s most important government bond market was thrown into disarray in March last year when investors spooked by the start of the coronavirus pandemic tried to sell off chunks of their Treasury holdings. Speakers at an annual Treasury market conference… said recent policy improvements did not go far enough to guard against future trouble.”
November 17 – Bloomberg (Matthew Boesler): “The Federal Reserve’s asset purchases at the onset of the pandemic, ‘along with prompt fiscal measures enacted by Congress and emergency steps taken by the Federal Reserve and other government agencies, ultimately proved successful at restoring functioning in the Treasury and other financial markets,’ New York Fed President John Williams says. ‘Together, these measures averted what could have been a severe financial crisis that would have had devastating effects on the economy. But they are also a stark reminder that these markets are not nearly as resilient as they should be,’ Williams says… in remarks… for a Treasury market conference hosted by the New York Fed…”
November 16 – Associated Press (Christopher Rugaber and Anne D’Innocenzio): “Many Americans have taken a darker view of the economy as inflation has worsened. Yet so far, they appear no less willing to spend freely at retailers… Buoyed by solid hiring, healthy pay gains and substantial savings stemming in part from government stimulus checks and other relief, Americans ramped up their spending at retail stores and online shops last month. Some of the increase reflected the impact of higher prices… Retail and food service sales have surged 16.3% compared with a year ago… From September to October, retail sales jumped 1.7%… After adjusting for inflation, Quinlan estimates that retail sales in November and December will be 10% higher than a year earlier, which would be the biggest such gain in seven years.”
November 16 – CNBC (Diana Olick): “Rents for single-family homes increased 10.2% nationally in September year over year, up from a 2.6% rise in September of last year, according to… CoreLogic. Improved job growth and sky-high prices in the for-sale housing market added to already strong demand for single-family rentals fueled by the coronavirus pandemic.”
November 17 – Bloomberg (Alfred Cang): “Food prices will likely stay elevated in 2022 as disruptions to the global supply chain are set to persist, according to the head of Cargill Inc., who highlighted labor shortages as one of the biggest risks facing the industry. Whether it’s meat processors, truckers, warehouse operators or port staff, the global food system is seeing more competition for workers. Plants are not running at full capacity, constraining food supplies and creating the potential for further price gains, said David MacLennan, chief executive officer… ‘I thought inflation in ags and food was transitory. I feel less so now because of continued shortages in labor markets,’ MacLennan said…”
November 15 – Wall Street Journal (Jacob Bunge and Matt Grossman): “Tyson Foods Inc. reported a jump in sales after sharply raising prices for its beef, chicken and pork, citing growing costs the company said were likely to persist. The… meat giant lifted prices across all of its major divisions as executives said Tyson’s cost of cattle jumped by one-fifth year over year in the quarter ended Oct. 2. Tyson’s logistics expenses climbed about 30%, they said, while the company also has paid more for ingredients and packaging materials. ‘I can’t think of a single thing that has either stayed the same or gone down,’ said Donnie King, Tyson’s chief executive…”
November 18 – Reuters (P.j. Huffstutter and Tom Polansek): “Michigan dairy farmer Doug Chapin has been unable to buy bottles of veterinary penicillin for his cows for more than a month. In Minnesota, pig farmer Randy Spronk reformulated feed rations due to a shortage of the widely used ingredient lysine, an amino acid that helps livestock grow. Supply-chain disruptions are hitting America’s meat producers and sending them scrambling for alternatives as they seek to care for farm animals and keep down costs.”
November 17 – Los Angeles Times (Hayley Smith): “Brian Sproule squinted against the sun… as he examined the price board at a Chevron station in downtown Los Angeles, where a regular gallon of gas was $6.05. Sproule, 37, is a mobile notary who spends much of his time in his car. He said he’s used to spending about $40 to fill his tank, but by the time he capped off his Hyundai Elantra, the meter displayed a whopping $71.59. ‘This is absurd,’ he said, shaking his head. Gas prices in California are soaring to record levels as the holiday season approaches, combining with supply chain problems that have left some goods in short supply and mounting inflation to create a distinctly unfestive strain on many people’s wallets.”
November 15 – Bloomberg (Will Wade): “U.S. coal prices surged to the highest in more than 12 years as a global power crisis drives up demand for the dirtiest fossil fuel. Prices for coal from Central Appalachia climbed more than $10 last week to $89.75 a ton…”
Biden Administration Watch:
November 19 – Reuters (David Morgan, Richard Cowan and Moira Warburton): “President Joe Biden’s $1.75 trillion bill to bolster the social safety net and fight climate change passed the U.S. House of Representatives on Friday and headed to the Senate, where divided moderates and liberals still need to reach agreement. The House passed the measure in a 220-213 vote, which was postponed for hours by an angry overnight opposition speech from the chamber’s top Republican. Elated Democrats gathered on the House floor to cheer the vote with waves of applause, while disgruntled Republicans called for order.”
November 14 – Reuters (Doina Chiacu): “U.S. President Joe Biden’s economic advisers defended his policies on Sunday amid rising inflation that they said was a global issue related to the COVID-19 pandemic, not a result of the administration’s programs.”
November 15 – CNBC (Jacob Pramuk): “President Joe Biden signed the more than $1 trillion bipartisan infrastructure bill into law…, checking off the first piece of his party’s sprawling economic agenda. The package will put $550 billion in new funds into transportation, broadband and utilities. Biden’s signature follows years of failed efforts in Washington to overhaul physical infrastructure, improvements that advocates have said will boost the economy and create jobs. The legislation will put $110 billion into roads, bridges and other major projects. It will invest $66 billion in freight and passenger rail, including potential upgrades to Amtrak. It will direct $39 billion into public transit systems.”
November 16 – Bloomberg (Christopher Condon and Laura Litvan): “Treasury Secretary Janet Yellen said she’ll be updating Congress ‘within the next day or two’ on how long lawmakers have to raise or suspend the debt limit before the government runs out of cash. ‘We may be able to get past Dec. 3, we may have the resources to do that, but not a great deal of time after that,’ Yellen said…”
Federal Reserve Watch:
November 15 – Bloomberg (Rich Miller): “The Federal Reserve will probably have to raise its target for the federal funds rate to 3% or above to try to keep inflation in check, two former Fed Reserve Bank presidents said. Ex-New York Fed leader William Dudley and former Richmond Fed President Jeffrey Lacker made the comments in separate interviews… They will probably start after June or a little bit later, and go to a higher rate than people think,’ Dudley said. ‘I certainly expect the peak to be well above the 1.75% price point’ implied in the Treasury securities market. Responding to a follow-up question, Dudley said the peak will be ‘probably 3% to 4%.’ But he added, ‘The crystal ball is cloudy as you get further out.’ In a subsequent interview, Lacker basically agreed with Dudley’s assessment. ‘It seems to be plausible we get to 3.5% or 4% and in addition that we push the economy into a recession,’ said Lacker…”
November 14 – Wall Street Journal (James Mackintosh): “Every time the Federal Reserve comes up with an excuse for raging inflation and why it won’t last, the data knock it back down. Inflation hasn’t turned out to be temporary and has accelerated, reaching the highest in a single month since January 1990. It is high even when measured against pre-pandemic prices, so this isn’t merely catch-up for the deflation of last spring. It is no longer merely about a narrow set of Covid-disrupted supply chains, or demand for used cars and other popular items. Even the get-out-of-jail-free card of FAIT, the Fed’s year-old policy of flexible average inflation targeting, is wearing thin. The only explanation remaining is that inflation will still be transitory–not as temporary as hoped, but that it will go away on its own. Investors still buy the story, but the risk is rising that the Fed has to act much more aggressively.”
November 15 – CNBC (Sam Meredith): “The Federal Reserve is losing credibility over its long-standing view that inflation is transitory, according to Mohamed El-Erian, chief economic advisor at Allianz. ‘I think the Fed is losing credibility,’ El-Erian said… ‘I’ve argued that it is really important to reestablish a credible voice on inflation and this has massive institutional, political and social implications.’”
November 16 – Reuters (Howard Schneider): “The U.S. Federal Reserve should ‘tack in a more hawkish direction’ over its next couple of meetings to prepare in case inflation does not begin to ease, St. Louis Federal Reserve bank president James Bullard said… ‘If inflation happens to go away we are in great shape for that. If inflation doesn’t go away as quickly as many are currently anticipating it is going to be up to the (Federal Open Market Committee) to keep inflation under control,’ Bullard said…”
November 16 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said the central bank should speed up its reduction of monetary stimulus in response to a surge in U.S. inflation. ‘I think it behooves the committee to go in a more hawkish direction in the next couple of meetings so we are managing the risk of inflation appropriately,’ Bullard… said… ‘We could move faster — we kept optionality on this that we could speed up the taper if it is appropriate,’ said Bullard… ‘Another consideration I would put on the table, and have put on the table, is we can allow runoff of the balance sheet at the end of the taper instead of waiting on that decision for a while… I think that would be a way to have a somewhat more hawkish policy than otherwise.’”
November 15 – Bloomberg (Matthew Boesler): “The Federal Reserve shouldn’t overreact to inflationary pressures that are likely to prove temporary, Federal Reserve Bank of Minneapolis President Neel Kashkari said. ‘We shouldn’t overreact to what is likely going to be a temporary factor,’ Kashkari said… in a Bloomberg Television interview with Kathleen Hays. ‘If we overreact by saying, ‘Let’s just change the path of monetary policy to try to deal with a one-time effect,’ that could lead to a worse long-term outcome for the economy.’”
November 17 – Reuters (Ann Saphir): “Chicago Federal Reserve President Charles Evans… reiterated that it will take until the middle of next year to complete the Fed’s wind-down of its bond-buying program even as the central bank checks to see if high inflation recedes as he expects. ‘We learned back in 2013 that tapering these asset purchases was preferable for financial market functioning; that if we did a sudden stop on our purchases that wasn’t well received,’ Evans said… ‘It’s going to take us until the middle of next year to complete that; we are going to be mindful of inflation; we’re going to be looking to see how much additional accommodation is boosting inflation; if indeed that is the case, we’ll be thinking about when the right time to start raising rates will be.’”
U.S. Bubble Watch:
November 12 – Wall Street Journal (Justin Lahart): “Businesses were supposed to be having an easier time hiring workers by now. So much for that. The Labor Department’s monthly job opening and turnover report… showed the labor market is unambiguously tight. There were 10.4 million job openings at the end of September, amounting to 1.4 jobs for each unemployed person seeking work. That was the highest the ratio has been in the 21-year history of the report. Another measure of tightness, the number of job openings to the number of people hired during the month, remained near a record high. Finally, people quit a record 4.4 million jobs in September… Most signs point to hiring difficulties only getting more intense.”
November 16 – Associated Press (Tom Krisher and Paul Wiseman): “Take a step back from the picked-over store shelves, the stalled container ships and the empty auto showrooms, and you’ll find a root cause of the shortages of just about everything. Even as the pandemic has dragged on, U.S. households flush with cash from stimulus checks, booming stock markets and enlarged home equity have felt like spending freely again — a lot. And since consumer demand drives much of the U.S. and global economies, high demand has brought goods shortages to the U.S. and much of the world. Add the fact that companies are ordering — and hoarding — more goods and parts than they need so they don’t run out, and you end up with an almost unquenchable demand that is magnifying the supply shortages.”
November 18 – Associated Press (Paul Wiseman): “The number of Americans applying for unemployment benefits fell for the seventh straight week to a pandemic low of 268,000.”
November 15 – Bloomberg (Vince Golle): “New York state manufacturing expanded in November by more than forecast as orders growth and employment accelerated, while an index of selling prices increased to the highest in data back to 2001.”
November 16 – Bloomberg (Olivia Rockeman): “Production at U.S. factories rose in October by more than forecast, bouncing back from the effects of Hurricane Ida and suggesting manufacturers are having a better time addressing materials shortages.”
November 17 – CNBC (Diana Olick): “Rising mortgage interest rates continue to take their toll on demand, especially in the refinance market… As a result, refinance demand fell 5% for the week and was 31% lower than the same week one year ago… Mortgage applications to purchase a home… rose 2% for the week but were 6% lower than the same week one year ago. Buyers appear to be coming back to the market after a brief lull.”
November 16 – Reuters (Lisa Baertlein): “The number of container ships waiting to enter the busiest U.S. seaport complex hit a new record of 84 on Tuesday, as growing piles of empty containers crowd docks at the Southern California facility that has been racing to remove lingering imports. The conundrum illustrates the challenge faced by a U.S. government task force charged with tackling supply chain snarls that are contributing to product shortages and inflation… There are now roughly 65,000 empty containers on the Port of Los Angeles docks, up about 18% from just a couple of weeks ago…”
November 14 – New York Times (Ana Swanson): “It’s just 60 miles from El Dorado Dairy in Ontario, Calif., to the nation’s largest container port in Los Angeles. But the farm is having little luck getting its products onto a ship headed for the foreign markets that are crucial to its business. The farm is part of one of the nation’s largest cooperatives, California Dairies Inc., which manufactures milk powder for factories in Southeast Asia and Mexico… The company typically ships 50 million pounds of its milk powder and butter out of ports each month. But roughly 60% of the company’s bookings on outbound vessels have been canceled or deferred in recent months, resulting in about $45 million in missed revenue per month. ‘This is not just a problem, it’s not just an inconvenience, it’s catastrophic,’ said Brad Anderson, the chief executive of California Dairies.”
November 16 – Associated Press (Matt Ott): “Construction of new homes in the U.S. fell 0.7% in October, but a big jump in the number of permits last month points to anticipation by builders that supply chain problems that have dogged them for much of the year will soon ease… But in a positive sign of future activity, applications for building permits jumped 4% from September to 1.65 million and is up 3.4% from October of last year…”
November 16 – CNBC (Diana Olick): “Higher prices and longer wait times do not appear to be turning buyers away from the nation’s homebuilders. With demand still surging, homebuilder confidence in the market for single-family homes rose more than expected in November, to the highest level since last May. Confidence rose 3 points to 83 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). Anything above 50 is considered positive… Of the index’s three components, current sales conditions rose 3 points to 89. Buyer traffic also increased 3 points to 68… While buyers are plentiful, most of the components that go into building a home are not.”
November 15 – Bloomberg (Patrick Clark): “Real estate investors acquired a record 18% of U.S. homes sold in the third quarter of 2021, wagering $64 billion that home prices and rents will continue to surge. Investors bought more than 90,000 homes in the three months through September, up 10% from the prior quarter and 80% from a year earlier, according to… Redfin Corp. Low interest rates and a persistent shortage of affordable properties have pushed investors to stomach higher prices as they bank on rent growth and price appreciation. The record surge of capital into the housing market comes as soaring home prices have made it harder for many families to buy a house.”
November 18 – Washington Post (Michele Lerner): “Even as the U.S. housing market appears to be returning to a more normal, pre-pandemic pace and fewer bidding wars, it continues to be tight. The main reason: a severe lack of homes to buy. Earlier this year, Realtor.com estimated the gap between the number of homes needed and the number of homes available at 5.24 million. That estimate in June represented an increase of 1.4 million above the estimated 3.84 million gap in 2019, primarily because residential construction hasn’t kept up with household formations.”
November 15 – Bloomberg (Michael Hirtzer): “High crop prices are trickling down to agriculture real estate, which have risen by the most in nearly a decade. Farmland values jumped 18% from a year ago during the third quarter of 2021 in the Seventh Federal Reserve District, a five-state region including all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin, according to the Chicago Fed.”
November 16 – CNBC (Hannah Miao): “Wall Street is set to see the biggest bonus increases since the Great Recession after a busy and profitable 2021, according to… pay consultancy Johnson Associates. Booming deal activity, a hot IPO market and climbing equities mean bankers and traders are in line for outsized performance-based compensation… Overall bonuses for investment banking underwriters are forecast to jump 30% to 35% from the year prior. For investment banking advisors and equities traders, that year-over-year rise is estimated at 20% to 25%. Johnson Associates also predicts bonuses for private equity, asset management and hedge fund roles will see double-digit increases.”
November 16 – Dow Jones (E.B. Solomont): “A penthouse at 421 Broome Street in Soho has sold for $49 million — 14 months after trading for just over $35 million… ‘Nothing was changed in the apartment,’ said Tal Alexander, of Douglas Elliman, who brokered the off-market transaction.”
Fixed-Income Bubble Watch:
November 16 – Wall Street Journal (Andrew Ackerman): “The federal government is about to back mortgages of nearly $1 million for the first time. The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022, a reflection of the rapid appreciation in home prices… The increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country, but the higher limits are also likely to elevate debate about how big of a mortgage is too big to be backed by the government. ‘Housing prices are expensive,’ said Steve Walsh, president of Scout Mortgage…, adding that some of his clients are unable to qualify for loans for modest-sized homes under the current limits. ‘I don’t believe these people are looking for a castle, just a three-bedroom house with a backyard,’ Mr. Walsh said.”
November 15 – Bloomberg (Caleb Mutua): “With inflation fears rising and interest rates looking increasingly likely to be hiked soon, investment-grade corporate bonds are at high risk of getting hit in the coming months, according to Morgan Stanley.”
November 15 – Bloomberg (Edward Bolingbroke): “The erosion of liquidity in the U.S. Treasury market is causing headaches in the futures market, where the quarterly process of swapping expiring contracts for new ones is under way and set to ramp up over the next week. What is normally a pedestrian event, the ‘calendar roll’ — in this case the switch out of December-expiring futures for Treasury notes and bonds into March-expiring ones — has potential to cause casualties because of volatility in the underlying securities.”
November 17 – Bloomberg (Eliza Ronalds-Hannon and John Gittelsohn): “Distressed debt funds are out of favor in a world where central banks have all but eliminated distress, at least for now. So what is a distressed fund manager to do? Rebrand. Oaktree Capital Management Tuesday unveiled a $16 billion credit fund, a record size for the distressed-debt firm, dedicated to ‘global opportunities.’ Starwood last month closed a record $10 billion distressed fund that seeks ‘opportunistic real estate’ investments.”
November 17 – Bloomberg: “Chinese President Xi Jinping baked his common prosperity drive into one of the most important documents in the Communist Party’s history, giving permanence to a spate of crackdowns that put equality over economic growth. ‘With unswerving resolve, we will pursue common prosperity for all,’ the landmark historical resolution published by Chinese state media… said. It affirmed that the pace of gross domestic product could no longer be ‘the sole yardstick of success for development,’ adding that ‘shared growth is the ultimate goal…’ China’s future as a global economic power should be ‘guided’ by Marxist values, the document said. That elevation of the socialist values of Mao’s era, while moderating Deng’s emphasis on growth, laid the ground for crackdowns on wealth, debt, monopolies and unfair labor practices to remain priorities for years — and possibly decades — to come.”
November 17 – Wall Street Journal (Chun Han Wong and Keith Zhai): “China’s Communist Party has issued a rare new accounting of its history that seals Xi Jinping’s place in the pantheon of the country’s greatest leaders. The document’s repercussions go beyond just rewriting the past: It sets up Mr. Xi to wield lasting influence over the country’s future as he seeks a precedent-breaking third term next year. Mr. Xi is just the third Chinese leader, after Mao Zedong and Deng Xiaoping, to produce a resolution on the party’s history. While Mao’s resolution in 1945 and Deng’s in 1981 both excoriated dissenting views of the party’s past, Mr. Xi’s refrains from any overt political attacks on his predecessors. Instead, as Oxford University historian Rana Mitter explains, it seeks to portray the party’s century-long history as a ‘continuous trajectory of revolutionary change’—one that Mr. Xi is uniquely suited to inherit and perpetuate.”
November 16 – Reuters (Gabriel Crossley and Kevin Yao): “China’s ruling Communist Party slammed the ‘money worship’, ‘extreme individualism’ and corruption that emerged in the four decades since the country opened up, calling for stronger party leadership and moral discipline in a key resolution… The document strengthens President Xi Jinping’s dominance of the party ahead of what is likely to be a precedent-breaking third term to begin next year, while enshrining his vision of China’s historical trajectory.”
November 19 – Bloomberg: “China faces ‘many challenges’ in keeping the economy’s development stable with new downward pressures emerging, Premier Li Keqiang said. Authorities should strive to keep the economy operating within a reasonable range and ensure the overall employment situation is stable, Li said at a seminar with scholars and businessmen Friday, according to a report in state media Xinhua. He said ‘cross-cyclical’ adjustments were needed to support growth.”
November 17 – Bloomberg (Foster Wong): “China will keep macroeconomic performance steady and refrain from flooding the economy with ‘massive stimulus measures,’ Premier Li Keqiang said in a speech during a World Economic Forum virtual event…”
November 18 – Bloomberg: “China’s central bank will focus on keeping monetary policy stable, with support targeted toward small businesses and environmentally-friendly projects, Governor Yi Gang said. ‘As the pandemic is gradually contained and economic activities resume, we have phased out some temporary supportive measures, but our support to small and medium enterprises and green finance will continue,’ Yi said…”
November 17 – Bloomberg: “China plans to let property companies resume issuance of asset-backed securities, ending a three-month market freeze as authorities move to insulate higher-rated developers from an industrywide funding crunch. Financial regulators recently told Chinese exchanges that ‘high quality’ developers can apply to issue new ABS to repay outstanding debt…”
November 15 – Bloomberg: “China’s home slump deepened in October as declines in prices, sales and property investments widened, adding pressure on authorities to stabilize the market. New-home prices in 70 cities slid 0.25% last month from September, when they fell for the first time in six years, National Bureau of Statistics figures showed… Residential sales dropped 24% from a year earlier, the most since last year, striking a blow for developers during what is traditionally a busy season…”
November 18 – Reuters (Clare Jim): “S&P Global Ratings said… a default is still ‘highly likely’ for China Evergrande Group despite its recent bond coupon payments because it has a bigger test in March and April next year, facing a total of $3.5 billion maturities in dollar bonds. ‘The firm has lost the capacity to sell new homes, which means its main business model is effectively defunct. This makes full repayment of its debts unlikely,’ S&P Global said…”
November 17 – Reuters (Gabriel Crossley): “China’s property sector, a major driver of economic growth, has weakened sharply this year as Beijing cracks down on speculators and indebted developers in a broad push to ease financial risks, with prices of new homes down for the first time in six years. In the near term, many analysts expect authorities will try to stabilise the sector, which accounts for a quarter of gross domestic product… China’s property sector is heavily reliant on credit. As of the end of the second quarter, Chinese developers owed 33.5 trillion yuan ($5 trillion), or a third of the country’s GDP, according to Nomura.”
November 16 – Reuters (Samuel Shen and Vidya Ranganathan): “China Huarong Asset Management has been granted approval to raise 70 billion yuan ($11bn) of financial bonds in the interbank market, as it continues to improve its credit profile and re-focus on its main bad loan business. The bonds will be used to purchase, dispose non-performing assets and for other main businesses such as bond-to-equity swaps, the China Banking and Insurance Regulatory Commission (CBIRC) said…”
November 17 – Bloomberg: “China Huarong Asset Management Co. plans to raise as much as 42 billion yuan ($6.6bn) by selling shares to a group of state-backed investors and said it will divest more assets as it unveiled long-waited details on a rescue package to keep the troubled bad-debt manager afloat.”
November 17 – Bloomberg: “Investor focus is on Chinese developer Yango Group Co., as it scrambles this week to win bondholder approval to delay upcoming payments and avoid default… Its 5.3% dollar note due 2022 has plunged from around par in September to around 26 cents on the dollar. While Yango’s borrowings are less than those of peer Kaisa Group Holdings Ltd., its $2.2 billion of dollar bonds are trading in distressed territory…”
November 18 – Bloomberg (Sofia Horta e Costa): “The scramble for cash by Chinese property companies is intensifying as the industry looks for ways to alleviate a historic liquidity squeeze. Firms announced plans to raise $2.4 billion in just the past 24 hours, taking the total over the last week to at least $4.2 billion… ‘Many developers are doing everything they can to avert default,’ said Abhishek Rawat, portfolio manager at Hong Kong Asset Management Ltd…”
November 15 – Bloomberg: “Chinese state-owned developers are about to test investor demand for yuan bonds with a flood of issuance. China Merchants Shekou Industrial Zone Holdings Co., Poly Developments & Holdings Group Co. and Bright Real Estate Group Co. received approval to sell a combined 8.6 billion yuan ($1.3bn) of local bonds on the interbank market this week. If successful, that would make November the strongest for issuance in eight months.”
November 13 – Financial Times (Sun Yu): “State-owned developers are rushing to the rescue of cash-strapped local governments in China by stepping to the fore at land auctions previously dominated by private sector groups. Over the past three months state developers have bought three-quarters of residential land sold at auctions in 22 big cities by value… They had previously purchased only about 45% of land plots sold at auctions, which is the biggest source of income for local governments.”
November 17 – Bloomberg: “China’s property market crunch is making it difficult for local governments to cut an estimated $6 trillion of hidden debt even as Beijing shows more determination in cracking down on the problem. Beijing, Shanghai and Guangdong province are planning trials to eliminate the off-balance sheet borrowing that local authorities use to raise funds for spending. Although there were no details, it’s likely the pilot programs could eventually be rolled out to more of the 31 other regions in the country. The central government is getting more serious about tackling financial risks associated with the debt, which it labeled a ‘national security’ issue earlier this year.”
November 19 – Reuters (Liangping Gao and Ryan Woo): “The Chinese government’s revenue from land sales slumped for a fourth month in October compared with year-ago levels, as cash-strapped developers moved cautiously on land buying after tighter regulatory curbs on new borrowing. The value of government land sales in October declined 13.14% from a year earlier to 573.7 billion yuan ($89.90bn), after suffering a drop of 11.15% in September… Poor demand among developers at urban land auctions risks squeezing regional finances, pressuring local governments to scramble for other income to fund investment and support the economy, including the issuance of more bonds that increase their debt obligations, say some analysts.”
November 16 – Reuters (Samuel Shen and Vidya Ranganathan): “Chinese investors are abandoning an age-old attachment to property investment products and seeking returns in equities and other corners of the capital markets, as the authorities crack down on the debt-fuelled property sector. The flow of cash into property investment products issued by trust companies has slumped since September… That in turn is shutting one of the remaining funding channels for property developers who are already suffering from strict lending curbs onshore and record borrowing costs in the offshore bond market. ‘Previous investment logic has collapsed,’ said Shanghai businessman Desmond Pan, who is considering shifting millions of yuan in property trust products into Bridgewater’s China fund called All Weather Enhanced Strategy.”
November 19 – CNN (Erin Burnett, Rhea Mogul, Helen Regan and Nectar Gan): “China is facing pressure from the United Nations over Chinese tennis star Peng Shuai’s whereabouts as the organization called for an investigation into her allegations of sexual assault. Peng, who is one of China’s most recognizable sports stars, has not been seen in public since she accused former Vice Premier Zhang Gaoli of coercing her into sex at his home, according to screenshots of a since-deleted social media post dated November 2… The head of the Women’s Tennis Association (WTA) Steve Simon has said he is willing to lose hundreds of millions of dollars worth of business in China if Peng is not fully accounted for and her allegations are not properly investigated.”
Central Banker Watch:
November 15 – Reuters (Alexander Weber): “European Central Bank President Christine Lagarde doubled down on her assessment that euro-area inflation will ease as economies rebound, falling back below the 2% target in the medium term. ‘As the recovery continues and supply bottlenecks unwind, we can expect the price pressure on goods and services to normalize,’ Lagarde told European Parliament lawmakers…”
November 17 – Financial Times (Martin Arnold): “Increased ‘exuberance’ in housing markets, junk bonds and crypto assets have created vulnerabilities that will be exposed if higher than expected inflation leads to a sharp rise in interest rates, the European Central Bank has warned. This year’s rebound in the eurozone economy from the coronavirus pandemic has reduced short-term risks to the financial system, but it has also led to a build-up of longer term risks, the ECB said… in its twice-yearly financial stability review.”
November 17 – Bloomberg (Jana Randow): “Increasingly stretched prices in property and financial markets, risk-taking by non-banks and elevated borrowing pose a threat to euro-area stability, the European Central Bank warned. While the economic recovery from the coronavirus crisis means near-term risks have dissipated, vulnerabilities are accumulating with potentially grave consequences down the line… ‘Concerns particularly relate to pockets of exuberance in credit, asset and housing markets, as well as higher debt levels in the corporate and public sectors as a legacy of the pandemic,’ it said… in its Financial Stability Review, echoing former Federal Reserve Chairman Alan Greenspan’s description of the dot-com bubble in the 1990s.”
November 15 – Reuters (Balazs Koranyi and Francesco Canepa): “Tightening monetary policy now to rein in inflation could choke off the euro zone’s recovery, European Central Bank President Christine Lagarde said…, pushing back on calls and market bets for tighter policy. With inflation already twice its 2% target and likely rising further later this year, the ECB is coming under increased pressure to abandon its ultra easy monetary policy and tackle price growth that is eroding households’ purchasing power… ‘At a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening of financing conditions is not desirable, and would represent an unwarranted headwind for the recovery,’ Lagarde told a hearing of the European Parliament’s committee on economic affairs.”
November 15 – Reuters (Andy Bruce and David Milliken): “Bank of England Governor Andrew Bailey said he was very uneasy about the inflation outlook and that his vote to keep interest rates on hold earlier this month, which shocked financial markets, had been a very close call… ‘I’m very uneasy about the inflation situation,’ he told the House of Commons Treasury Committee… ‘I want to be very clear on that. It is not of course where we wanted to be, to have inflation above target.’ ‘On the decision itself, however, it was a very close call in my view,’ Bailey added.”
November 17 – Reuters (William Schomberg): “The Bank of England faces another decision next month on whether to become the first of the world’s major central banks to raise interest rates since the coronavirus pandemic struck the global economy… The BoE’s Monetary Policy Committee is due to announce its next policy decisions on Dec. 16 and Feb. 3.”
November 15 – Bloomberg (Philip Aldrick): “Bank of England Governor Andrew Bailey hit back at critics who accused him of misleading markets before this month’s interest rate decision, saying the fault lay with traders. Investors took his ‘conditional’ statements on the direction of interest rates at a G-30 conference on Oct. 17 and turned them into ‘unconditional views of the world,’ Bailey told lawmakers…”
November 15 – Bloomberg (Swati Pandey): “Australia’s central bank chief Philip Lowe opened the door to an interest-rate increase before 2024 as policy makers acknowledged quicker consumer-price gains last quarter had altered the inflation picture. Lowe said… a rate hike in 2024 was ‘still plausible,’ while adding that a quicker return to the bank’s inflation target could make the case for an earlier lift in the cash rate. That’s a step back from previous guidance that conditions for a rate rise will not be met before 2024.”
Global Bubble Watch:
November 14 – Bloomberg (Rich Miller): “Global wealth tripled over the last two decades, with China leading the way and overtaking the U.S. for the top spot worldwide. That’s one of the takeaways from a new report by… McKinsey & Co. that examines the national balance sheets of ten countries representing more than 60% of world income. ‘We are now wealthier than we have ever been,’ Jan Mischke, a partner at the McKinsey Global Institute…, said… Net worth worldwide rose to $514 trillion in 2020, from $156 trillion in 2000… China accounted for almost one-third of the increase. Its wealth skyrocketed to $120 trillion from a mere $7 trillion in 2000… The U.S., held back by more muted increases in property prices, saw its net worth more than double over the period, to $90 trillion.”
November 17 – Yahoo Finance (Jessy Bains): “The Consumer Price Index (CPI) rose 4.7% on a year-over-year basis in October, which was in line with expectations. Statistics Canada says this follows a 4.4% increase in September and is the largest gain since February 2003. Prices rose in all eight major components. Transportation prices were up 10%…”
November 17 – Reuters (Andy Bruce and William Schomberg): “British inflation has hit a 10-year high as household energy bills rocket, bolstering expectations the Bank of England will raise interest rates in December just weeks after it rocked markets by keeping borrowing costs on hold. Consumer prices rose by 4.2% in annual terms in October, leaping from a 3.1% increase in September… ‘Today’s inflation data will reinforce the Bank of England’s resolve to act,’ Yael Selfin, chief economist at KPMG UK, said.”
November 18 – Bloomberg (Jiyeun Lee): “Factory-gate prices in South Korea rose at the fastest pace since 2008 last month, fueling inflation concerns and adding to reasons for the central bank to raise interest rates next week. Producer price inflation from a year earlier picked up to 8.9% from a revised 7.6% in September, the Bank of Korea said Friday. The gains were led by a 85.6% jump in prices of coal and oil related products.”
November 17 – Bloomberg (Firat Kozok and Cagan Koc): “Turkish President Recep Tayyip Erdogan vowed… to continue fighting for lower interest rates, sending a clear signal to investors a day before the central bank sets its policy. The lira weakened… ‘I cannot be on the same path with those who defend interest,’ Erdogan said in speech at parliament… ‘We will lift the interest rate burden from citizens,’ he said, repeating his unorthodox mantra that high borrowing costs are the cause of inflation rather than a brake on price gains.”
November 17 – Reuters (Orhan Coskun and Nevzat Devranoglu): “Turkey’s state energy company BOTAS is expected to turn to the central bank to help meet its growing need for hard currency and to support the lira as gas prices and demand climb during the peak consumption winter months, two officials told Reuters. The Turkish officials said the government intends BOTAS to tap the central bank’s foreign reserves to help limit any further depreciation in Turkey’s currency…”
November 16 – Financial Times (Michael Pooler): “For Vania Barbosa it is getting harder to afford the basics. The 40-year-old single mother from the outskirts of Brasília used to buy a kilo of minced beef or knuckle weekly, but has now switched to cheaper cuts just once a month. ‘Each week you go for groceries there are different prices,’ the restaurant worker said. ‘Sometimes I have to take out a piece of fruit, a mango, or remove the box of soap and not do the laundry until the following week.’ Her hardships reflect a malaise that is hitting the pockets of many people in Latin America’s most populous nation, after soaring costs for everything from petrol to meat pushed the rate of inflation into the double-digits for the first time in more than five years.”
November 16 – Bloomberg (Rahul Satija): “Fitch Ratings retained its negative outlook on India’s sovereign rating that’s barely above junk grade, reflecting concern the country will find it challenging to cut its high public debt. That’s in contrast with Moody’s… and S&P Global Ratings, which both have a stable outlook on India’s sovereign score. Fitch highlighted that the country’s general government debt at 89.6% of gross domestic product in the financial year ended March 31 is the highest of similar rated emerging-market sovereigns, in a note…”
November 15 – Financial Times (Martin Arnold): “The chief executive of Germany’s biggest bank has called on central bankers to tighten monetary policy to provide ‘countermeasures’ against surging inflation, which he warned was producing risky side effects and would last longer than policymakers expected. Deutsche Bank’s chief executive Christian Sewing said: ‘The supposed cure-all of the past years — low interest rates with seemingly stable prices — has lost its effect, now we are struggling with the side effects. Monetary policy must counteract this — and sooner rather than later… The consequences of this ultra-loose monetary policy will become increasingly difficult to fix the longer central banks fail to take countermeasures….’ ‘The ultra-loose spending policies of many governments are only made possible by an equally generous monetary policy that drastically intervenes in pricing on the bond market.’”
November 15 – Reuters (Daniel Leussink and Tetsushi Kajimoto): “Japan’s economy contracted much faster than expected in the third quarter as global supply disruptions hit exports and business spending while new COVID-19 cases soured the consumer mood… The economy shrank an annualised 3.0% in July-September after a revised 1.5% gain in the second quarter…, much worse than a median market forecast of a 0.8% contraction.”
November 19 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan unveiled a record $490 billion spending package on Friday to cushion the economic blow from the COVID-19 pandemic, bucking a global trend towards withdrawing crisis-mode stimulus measures and adding strains to its already tattered finances. Spending has ballooned due to an array of payouts including those criticised for being unrelated to the pandemic, such as cash handouts to households with youth aged 18 or below, and will likely lead to additional bond issuance this year.”
Social, Political, Environmental, Cybersecurity Instability Watch:
November 13 – Bloomberg (Akshat Rathi, Jess Shankleman and John Ainger): “Negotiators from almost 200 countries clinched a deal that seeks to keep the most ambitious goal of the Paris Agreement alive, breaking new ground in the fight against climate change but punting the hardest decisions into the future. After two weeks of often fraught United Nations COP26 talks, delegates agreed to reduce the use of coal, end ‘inefficient’ fossil-fuel subsidies and boost their climate targets sooner. The Glasgow Climate Pact puts the world, barely, on a path to limit the rise in global temperatures to 1.5 degrees Celsius from pre-industrial times…”
November 17 – Reuters (Jesse Winter): “The death toll in Canada from massive floods and landslides that devastated parts of British Columbia is set to rise, with the province declaring a state of emergency… Authorities have so far confirmed one death after torrential rains and mudslides destroyed roads and left several mountain towns isolated. At least three people are missing. Provincial Premier John Horgan described the calamity as a once-in-500-year event.”
November 17 – Bloomberg (Alex Tanzi): “The U.S. reached the grim milestone of 100,000 drug overdose deaths annually, a sign that the opioid crisis deepened at the height of the Covid-19 pandemic. An estimated 100,306 Americans died from an overdose in the 12 months ended in April…, according to… the Centers for Disease Control and Prevention’s National Center for Health Statistics. The toll is up 29% from the previous year.”
November 18 – Reuters (Tim Mclaughlin): “The Texas electric grid could suffer a massive shortfall in generating capacity in a winter deep freeze, potentially triggering outages similar to those in February, according to a report on Thursday by an electric reliability authority. The assessment by the North American Electric Reliability Corp (NERC), a nonprofit regulatory authority, comes as Texas lawmakers and regulators continue to investigate ways to bolster the grid to avert a repeat of last winter’s blackouts, which left 4.5 million customers without power in a deep freeze that killed more than 200 people.”
November 17 – Bloomberg (Archana Chaudhary and Bibhudatta Pradhan): “India has directed six coal-fired power plants located around Delhi to shut down until the end of this month as part of measures to clean some of the world’s dirtiest air, as a cloud of smog has enveloped the city and its suburbs for nearly two weeks. The federal Environment Ministry… also barred the entry of all trucks except those carrying essential items into the National Capital Region of Delhi and encouraged citizens to work from home to curb pollution.”
Leveraged Speculation Watch:
November 16 – Bloomberg (Sridhar Natarajan and Katherine Burton): “It’s a move that’s almost unthinkable even for Wall Street’s most maverick investors, for fear of landing in regulatory crosshairs. But buried in the billions Bill Hwang wagered and lost, the man behind Archegos Capital Management used derivatives to secretly build a more-than 20% stake in a U.S. regional bank, right under the noses of financial watchdogs… That sent the stock on a wild surge, and when Archegos collapsed, a dramatic plunge.”
November 16 – Reuters (Andrea Shalal, Michael Martina and Yew Lun Tian): “U.S. President Joe Biden pressed his Chinese counterpart on human rights in a video call lasting more than three hours, while Xi Jinping warned that China would respond to provocations on Taiwan, according to official accounts of the exchange. The closely scrutinized conversation between the leaders of the world’s biggest economies was described by both sides as frank and direct as the two sides tried to lower the temperature and avoid conflict. The talks… appeared to yield no immediate outcomes, but gave the two leaders opportunity to nudge their relations away from icy confrontation, even as they stuck to entrenched positions. They discussed North Korea, Afghanistan, Iran, global energy markets, trade and competition, climate, military issues, the pandemic and other areas where they frequently disagree.”
November 16 – Bloomberg (Jenny Leonard, Jennifer Epstein and Josh Wingrove): “President Joe Biden reignited confusion about his administration’s approach toward Taiwan hours after a lengthy virtual summit with Chinese leader Xi Jinping, providing an early test of whether the countries can move past the issue after a generally positive meeting. Speaking to reporters…, Biden said Taiwan ‘makes its own decisions,’ and that the self-governing island is ‘independent.’ Hours later, Biden waded back into the issue, saying ‘we are not encouraging independence’ and emphasizing again that historic U.S. policy toward the island democracy remains in place.”
November 15 – Financial Times (Sam Fleming and Valentina Pop): “Russia will face ‘serious consequences’ if it threatens Ukraine’s territorial integrity, Paris and Berlin have warned, as ministers held meetings to discuss the threat posed by a build-up of troops on the country’s border. In a joint statement, Heiko Maas and Jean-Yves Le Drian, the foreign ministers of Germany and France, pledged ‘unwavering support for the independence, sovereignty and territorial integrity of Ukraine’ after meeting their counterpart from Kyiv. Their words came after Jens Stoltenberg, Nato’s secretary-general, called on Moscow to ease tensions with Ukraine and be transparent about its military activities…”
November 18 – Reuters (Tom Balmforth and Vladimir Soldatkin): “President Vladimir Putin said… the West was taking Russia’s warnings not to cross its ‘red lines’ too lightly and that Moscow needed serious security guarantees from the West. In a wide-ranging foreign policy speech, the Kremlin leader also described relations with the United States as ‘unsatisfactory’ but said Russia remained open to dialogue with Washington… Putin complained that Western strategic bombers carrying ‘very serious weapons’ were flying within 12.5 miles of Russia’s borders.”
November 17 – CNBC (Holly Ellyatt): “President Vladimir Putin is being watched closely by experts and officials who fear Russia might be planning a military escalation with its neighbor Ukraine. Tens of thousands of Russian troops have reportedly gathered at the border with Ukraine, and experts fear Russia could be about to stage a repeat of its 2014 invasion and annexation of the Ukrainian peninsula of Crimea… ‘We all should be very worried, to be honest, I do share this assessment,’ Michal Baranowski, director and senior fellow at the German Marshall Fund’s Warsaw Office, told CNBC…”
November 13 – Financial Times (Demetri Sevastopulo): “Australia’s defence minister has said it was ‘inconceivable’ that his nation would not support the US in a campaign to defend Taiwan from China, amid rising concerns about Beijing’s increasingly assertive military activity. In an interview with The Australian newspaper, Peter Dutton said that Chinese leaders had been ‘very clear about their intent to go into Taiwan’ and that Canberra had to improve its ability to deter Beijing and be ready to join the US military if it took action. ‘It would be inconceivable that we wouldn’t support the US in an action if the US chose to take that action,’ Dutton said.”
November 14 – Financial Times (Demetri Sevastopulo): “On July 27, China became the first nation to fly a hypersonic glide vehicle — a manoeuvrable craft that travels at more than five times the speed of sound — around the earth. The vehicle was propelled by a rocket that can fly over the South Pole, evading US missile defences which are focused on the North Pole — and giving the Chinese another way to hit targets in America. This test was the latest in a series of revelations about China’s growing nuclear capabilities that have set off multiple alarm bells in Washington.”
November 17 – Bloomberg (Enda Curran): “The world is headed for a ‘very dangerous place’ if Washington and Beijing are unable to stabilize their relationship, former U.S. Treasury Secretary Hank Paulson said… on the second day of the Bloomberg New Economy Forum… The blunt warning comes just days after President Joe Biden and his Chinese counterpart Xi Jinping held their first virtual summit, signaling a tentative effort to put a floor under ties between the two countries.”
November 13 – Financial Times (James Shotter, Nastassia Astrasheuskaya and Max Seddon): “Belarus’s authoritarian leader Alexander Lukashenko said that he wanted Russia’s Iskander missile system stationed in his country, amid mounting tensions over the migrant crisis on the Belarusian-Polish border. The EU has accused Lukashenko’s regime of orchestrating the crisis by funnelling thousands of migrants from the Middle East to Belarus’s borders with the EU and encouraging them to enter the bloc illegally. The EU is preparing to respond with a new round of sanctions on Minsk.”
November 16 – Reuters (Pawel Florkiewicz and Joanna Plucinska): “Polish security forces turned water cannon on migrants who threw rocks across the Belarusian border, where thousands have gathered in a chaotic attempt to reach the European Union… The crisis has led the EU to prepare further sanctions against Belarus, which it accuses of attempting to destabilise the bloc by pushing migrants across the border illegally.”
November 17 – Financial Times (Katrina Manson and Max Seddon): “First came the unexplained space objects over New Zealand. Then came the debris over Costa Rica and Texas. By Wednesday, California-based LeoLabs, which uses radars to track objects in space to prevent collisions, had identified a total of 243 new pieces of debris orbiting the Earth — all from an anti-satellite missile test that Russia had launched two days earlier, to widespread condemnation. ‘They basically set off a bomb in the middle of the new space race,’ said Daniel Ceperley, LeoLabs chief executive and co-founder, of the Russian test’s impact on the burgeoning commercial space sector, which is situated in the same low-earth orbit as the new debris. ‘The primary altitudes that most of these satellites are using are right where this new debris has been created,’ he added.”