September 29, 2023: Remembering LTCM

September 29, 2023: Remembering LTCM
Doug Noland Posted on September 30, 2023

The 25-year anniversary of the Russia/LTCM collapse offers a timely reminder of the perils of leveraged speculation. A series of Wall Street Journal articles touched on key issues.

“Naturally things are completely different today. Back in 1998 there was a massive auto worker strike, Russia was a financial pariah, America’s unemployment rate was at a historic low, tech stocks were the only game in town, the Federal Reserve had raised rates for the first time in years the previous March, House Republicans wanted to impeach the president and the New York Yankees were in first place. Today, by contrast, the Yanks couldn’t win to save their lives. In all seriousness, though, there is a fair bit of late 1990s style irrational exuberance present today.” (Heard on the Street, September 22, 2023)

The first of the Journal’s three-part series underscored a critical issue: “Even 25 years later, the effects are with us. If there was a time when the ‘Fed put’ was born, it was during the LTCM crisis… The Fed’s first rate cut in 1998 came on Sept. 29, just six days after the Federal Reserve Bank of New York helped arrange a $3.5 billion bailout of LTCM by a consortium of financial firms. Judging from economic reports from the time, the cut didn’t make much sense.”

Yet a critical facet of the “Fed put” significantly predates September/October 1998. I’ve seen no mention of the critical roles played by Mexico’s “Tequila crisis” and the collapse of the Asian Tiger Bubbles. The 1994/95 peso crisis and yield spike (tesobonos collapse) unfolded in the wake of Fed tightening and problematic U.S. bond market deleveraging, revealing how years of monetary stimulus had promoted leveraged speculation throughout the emerging markets. Importantly, the $50 billion U.S. bailout package (in concert with IMF assistance) for Mexico was instrumental in stoking 1996 Asian Tiger Bubble “Terminal Phase Excess.”

The following year, Bubbles burst in South Korea and Indonesia (along with Malaysia, Philippines, and Thailand) with catastrophic consequences. The IMF led a group of global institutions in formulating bailout packages of over $100 billion.

If not for the Mexican and Asian bailouts, I seriously doubt there would have been such enthusiasm for leveraging Russian, Italian and other bonds. The LTCM Nobel laureates would have been humbled before accumulating $1 TN notional of derivative contracts within a highly levered $7 billion hedge fund. In general, the bailouts, along with the activist Greenspan Fed’s keen market focus, were instrumental in rapid hedge fund industry expansion and the surge in global leveraged speculation.

Another critical aspect of the analysis is missing from conventional accounts: The LTCM bailout pushed the nineties “tech” Bubble into “Terminal Phase Excess.” From its October 9th, 1998, low of 1,492, the Nasdaq Composite surged 155% to the March 10, 2020, record high of 5,133 (a high that stood for 15 years). The Nasdaq Composite rose a manic 86% in 1999.

And as the Fed gathered the heads of the Wall Street firms in a room to negotiate the LTCM bailout, the GSE’s were hard at work orchestrating a market liquidity bailout. GSE assets expanded an unprecedented $136 billion during Q4 1998 – more than doubling the previous Q4 1994 (Mexican crisis) record of $60 billion. For year 1998, GSE assets expanded an unprecedented $305 billion, or 28%, to a record $1.406 TN. The LTCM crisis unleashed reckless Fannie and Freddie expansions and market operations. GSE assets would expand another $317 billion in 1999, $242 billion in 2000, $345 billion in 2001, $242 billion 2002, and $245 billion in 2003.

If not for the LTCM bailout and resulting terminal tech Bubble excess, there would have been less desperation for Fed easing and the accommodation of mortgage finance excesses. Household mortgage debt was already expanding at a 9% rate in 1998. Mortgage Credit Bubble inflation then saw growth increase to 10.8% in 2001, 13.3% in 2002, 12.8% in 2003, 14.2% in 2004, 13.9% in 2005, and 11.5% in 2006.

And if not for the mortgage finance Bubble, surely there would not have been the $26 TN, or almost 200%, surge in Treasury and Agency Securities since 2007.

There are today eerie parallels to the period leading up to the Russia/LTCM crisis. After all the 1994-1997 global instability, the global leveraged speculating community should have been cautious. They had instead been emboldened by the Fed, “the committee to save the world” (Greenspan, Rubin and Summers), the GSEs, the IMF, and the global central bank community. Pandemic policy measures (and the March bailout) again emboldened.

“The West will never allow the Russian ruble to collapse” was part of the bullish narrative, as the S&P500 (and bank stocks!) surged to record highs in July 1998. No one recognized the interconnectedness of the Russian bond market and currency derivatives to global debt markets. Not many years later, it was “Washington will never allow a housing bust.” There is today even more confidence that Beijing has all the financial resources and ingenuity to ensure renminbi stability. And it’s always such cavalier attitudes that ensure the accumulation of precarious speculative leverage, risky lending, and other financial excesses.

De-risking/deleveraging gained important momentum this week. The global yield spike ran unabated, with notable pain for the European periphery. At Thursday’s highs, Italian 10-year yields traded to 4.95%, up 35 bps w-t-d to the high back to the 2012 European bond crisis. Greek yields were up 33 bps w-t-d (4.52%) at Thursday’s highs, with Portuguese (3.75%) and Spanish (4.08%) yields 25 bps higher. The spread between German and Italian 10-year yields widened nine this week to 194 bps, the widest level since the March banking crisis period.

Emerging markets remain under de-risking pressure. The Colombian peso declined 2.19%, the Brazilian real 1.93%, the Russian ruble 1.82%, the Mexican peso 1.27%, and the Polish zloty 1.15%. For September, the Polish zloty dropped 5.68%, the Hungarian forint 4.60%, the Chilean peso 4.40%, the Czech koruna 3.93%, and the Thai Baht 3.88%.

EM bonds remain under significant pressure. Local currency yields surged 145 bps this week in Turkey (25.91%), 27 bps in Peru (7.32%), 23 bps in Hungary (7.49%), 14 bps in Indonesia (6.88%), and 11 bps in Brazil (11.66%). EM dollar bond yields spiked higher. Yields jumped 21 bps in Colombia (8.21%), 18 bps in Panama (6.76%), 16 bps in Turkey (8.56%), 14 bps in Indonesia (5.82%), 13 bps in Saudi Arabia (5.47%), 12 bps Mexico (6.34%), 12 bps in Peru (5.95%), and 11 bps in the Philippines (5.46%).

Global “risk off” was not contained within the “periphery.” Ten-year Treasury yields jumped 14 bps this week to 4.57%, the high back to October 2007. Benchmark MBS yields surged 18 bps to 6.36%, trading Thursday at 6.50% for the first time since April 2002. High yield CDS surged 35 to 481 bps, trading this week at highs since May. Curiously, U.S. bank CDS prices were at the top of the week’s global leaderboard. Bank of America CDS jumped 9.5 to a four-month high 96 bps. Citigroup CDS gained seven to a four-month high 86 bps, while JPMorgan CDS increased four to a four-month high 65 bps.

The Dollar Index traded to 106.8 in Thursday trading, the high back to November 2022. The euro traded below 1.05 versus the dollar for the first time since early January (before closing the week at 1.0573). The dollar/yen traded up to 149.70, almost breaching the 150 level for the second time (October 2022 the first) since 1990. Japan’s TOPIX Bank Index was slammed 5.3%, the largest decline since March. A Thursday Bloomberg headline: “Biggest Selloff in 25 years Hits Japan Bonds as BOJ Loosens Grip.”

September 25 – Dow Jones (Megumi Fujikawa): “Bank of Japan Gov. Kazuo Ueda said… he has seen some positive signs of sustainable inflation, but he isn’t ready to unwind monetary easing yet. ‘Japan’s economy has entered a critical phase in terms of realizing a virtuous cycle between wages and prices, and what is important at this phase is to carefully nurture the buds of change in the economy,’ Ueda told business leaders…”

September 28 – Bloomberg (Yumi Teso and Masaki Kondo): “The Bank of Japan announced an unscheduled bond-purchase operation Friday in a reminder to the market of its determination to manage the upward momentum in sovereign yields. The buying clipped half a basis point off the benchmark 10-year yield… Japan’s 30-year yields reached a peak last seen in 2013 and the 20-year maturity touched the highest since 2014 on Thursday amid a selloff that’s hitting bonds around the world.”

While the renminbi held steady, Chinese sovereign and bank CDS rose again this week. Things took a dramatic turn for the worse at Evergrande (See China Watch), with no end in sight for the great deflating Chinese apartment Bubble.

September 25 – Bloomberg: “Fresh drama at property developers including China Evergrande Group is jeopardizing President Xi Jinping’s latest efforts to end the housing crisis. Just as China enters a key holiday sales season, a raft of headlines are weighing on already-frail confidence in the property market. Evergrande said it has to revisit its debt restructuring plan and a unit missed a yuan bond payment. Former executives at the defaulted real estate giant have been detained… Meanwhile, China Oceanwide Holdings Ltd. said it is facing liquidation and Country Garden Holdings Co. is still trying to avoid a potential default.”

The Wall Street Journal ran what is surely a prescient headline: “LTCM Crisis Took One Bailout. We Should Be So Lucky Next Time.” The world is not prepared for globalized de-risking/deleveraging. The Fed/FHLB March banking bailout unleashed a six-month speculative cycle, emboldening market speculation. Not only was the Fed liquidity backstop further validated, but the “Fed put” arrived before “risk off” even had a chance to get going.

The unfolding crisis will be so much more problematic. A synchronized global de-risking/deleveraging will snare scores of levered funds across markets. It’s worth noting that this week had inklings of trouble for multiple popular strategies, including 60/40, risk parity, quant strategies, and long/short (Goldman Sachs short index up 2.1%).

There will be no easy fix for systemic de-risking/deleveraging. We witnessed in March 2020 how the massive growth in levered speculation had created the need for Trillions of central bank support to reverse speculative deleveraging. But that was before inflation had become a major issue – and prior to the spike in global bond yields.

The next big central bank market bailout will present quite a test. How destabilizing will de-risking/deleveraging become before central bankers are compelled to act? Are central bankers prepared to orchestrate another massive liquidity injection? Would this liquidity onslaught stoke bond market inflation fears? Would global currency markets, already at the cusp of disorderly trading, turn chaotic? It doesn’t take much to imagine wild instability taking hold across global markets.

September 27 – Bloomberg (Marc Rubinstein): “After the fact, one of the LTCM partners summed it up well: ‘The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen. So you have to monitor what other people are doing.’”

For the Week:

The S&P500 declined 0.7% (up 11.7% y-t-d), and the Dow fell 1.3% (up 1.1%). The Utilities sank 7.4% (down 17.9%). The Banks slipped 0.3% (down 22.4%), and the Broker/Dealers declined 0.8% (up 7.7%). The Transports were little changed (up 11.8%). The S&P 400 Midcaps increased 0.3% (up 3.0%), and the small cap Russell 2000 recovered 0.5% (up 1.4%). The Nasdaq100 was about unchanged (up 34.5%). The Semiconductors rallied 2.1% (up 35.6%). The Biotechs were little changed (down 5.0%). With bullion down $77, the HUI gold equities index sank 7.3% (down 10.0%).

Three-month Treasury bill rates ended the week at 5.3025%. Two-year government yields declined seven bps this week to 5.04% (up 61bps y-t-d). Five-year T-note yields rose five bps to 4.61% (up 60bps). Ten-year Treasury yields jumped 14 bps to 4.57% (up 69bps). Long bond yields surged 18 bps to 4.70% (up 73bps). Benchmark Fannie Mae MBS yields jumped 18 bps to 6.36% (up 97bps).

Greek 10-year yields jumped 16 bps to 4.34% (down 23bps y-t-d). Italian yields surged 19 bps to 4.78% (up 8bps). Spain’s 10-year yields rose 11 bps to 3.93% (up 42bps). German bund yields gained 10 bps to 2.84% (up 40bps). French yields rose 11 bps to 3.40% (up 42bps). The French to German 10-year bond spread widened one to 56 bps. U.K. 10-year gilt yields surged 19 bps to 4.44% (up 77bps). U.K.’s FTSE equities index declined 1.0% (up 2.1% y-t-d).

Japan’s Nikkei Equities Index dropped 1.7% (up 22.1% y-t-d). Japanese 10-year “JGB” yields added two bps to 0.77% (up 34bps y-t-d). France’s CAC40 dipped 0.7% (up 10.2%). The German DAX equities index fell 1.1% (up 10.5%). Spain’s IBEX 35 equities index declined 0.8% (up 14.6%). Italy’s FTSE MIB index lost 1.2% (up 19.1%). EM equities were mixed. Brazil’s Bovespa index increased 0.5% (up 6.2%), while Mexico’s Bolsa index dropped 1.5% (up 5.0%). South Korea’s Kospi index dropped 1.7% (up 10.2%). India’s Sensex equities index slipped 0.3% (up 8.2%). China’s Shanghai Exchange Index declined 0.7% (up 0.7%). Turkey’s Borsa Istanbul National 100 index jumped 3.7% (up 51.3%). Russia’s MICEX equities index rose 2.8% (up 45.5%).

Investment-grade bond funds posted outflows of $1.663 billion, and junk bond funds reported negative flows of $2.410 billion (from Lipper – data to be discontinued).

Federal Reserve Credit declined $23.3bn last week to $7.980 TN. Fed Credit was down $921bn from the June 22nd, 2022, peak. Over the past 211 weeks, Fed Credit expanded $4.253 TN, or 114%. Fed Credit inflated $5.169 TN, or 184%, over the past 568 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.0bn last week to $3.436 TN. “Custody holdings” were up $70bn, or 2.1%, y-o-y.

Total money market fund assets added $6.3bn to $5.644 TN, with a 29-week gain of $750bn (27% annualized). Total money funds were up $1.054 TN, or 23.0%, y-o-y.

Total Commercial Paper rose another $11.1bn to $1.195 TN. CP was down $35.4bn, or 2.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 12 bps to 7.35% (up 65bps y-o-y) – the high since December 2000. Fifteen-year rates rose 11 bps to 6.79% (up 83bps) – the high since December 2000. Five-year hybrid ARM rates declined six bps to 6.96% (up 168bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 16 bps to 7.78% (up 96bps) – the high since November 2000.

Currency Watch:

September 27 – Bloomberg (Iris Ouyang): “The Chinese yuan is facing multiple headwinds. Now comes the Golden Week holiday, when trading will be frozen in mainland China, but continues in most other places worldwide — thus potentially creating disconnects with other assets. During the eight-day holiday period, there won’t be any daily reference rates during the closing of the onshore market. Volumes are already declining into the period, as the People’s Bank of China tightens its grip on the currency…”

September 26 – Bloomberg (Erica Yokoyama and Emi Urabe): “Japan’s finance minister issued his second salvo of warnings to players in foreign-exchange markets in a day after the yen reached its lowest against the dollar since October, the month authorities last intervened to prop up the currency. ‘As I said at the morning press conference, I’m watching market trends with a high sense of urgency,’ Finance Minister Shunichi Suzuki said…”

For the week, the U.S. Dollar Index increased 0.6% to 106.17 (up 2.6% y-t-d). For the week on the upside, the Swedish krona increased 1.9%, the New Zealand dollar 0.6%, and the Norwegian krone 0.6%. On the downside, the Brazilian real declined 1.9%, the Mexican peso 1.3%, the Swiss franc 1.0%, the South Korean won 0.9%, the South African rand 0.9%, the euro 0.8%, the Canadian dollar 0.7%, the Japanese yen 0.7%, the British pound 0.3%, the Australian dollar 0.1%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi was about unchanged versus the dollar (down 5.47%).

Commodities Watch:

September 26 – Bloomberg (Sybilla Gross): “China’s suddenly full of gold bugs. The market for bullion in China has surged this month, at times commanding a record premium over international prices of more than $100 an ounce, compared with an average over the past decade of less than $6. On Wednesday, an ounce of gold in Shanghai cost $2,007, about 6% higher than the price in London or New York… It’s a flight to safety familiar to students of economic stress. ‘With the yuan falling, the property market slumping and capital controls keeping money from leaving the country, investors are buying gold,’ Bloomberg economists David Qu and Chang Shu wrote…”

September 27 – Yahoo Finance (Ines Ferré): “Oil futures hit a 2023 high on Wednesday after inventories at the largest storage hub in the US fell toward levels nearing operational minimums. West Texas Intermediate jumped more than 3% to settle at $93.68 per barrel following a drop in stockpiles to just below 22 million barrels at the Cushing, Okla., hub.”

The Bloomberg Commodities Index declined 1.3% (down 7.1% y-t-d). Spot Gold dropped 4.0% to $1,849 (up 1.3%). Silver sank 5.9% to $22.18 (down 7.4%). WTI crude added 76 cents, or 0.8%, to $90.79 (up 13%). Gasoline dropped 6.3% (down 2.4%), while Natural Gas surged 11.1% to $2.93 (down 35%). Copper rallied 1.1% (down 1.9%). Wheat sank 6.6% (down 32%), while Corn was little changed (down 30%). Bitcoin rallied $340, or 1.3%, to $26,900 (up 62.3%).

Market Instability Watch:

September 29 – Reuters (Moira Warburton and Richard Cowan): “Hardline Republicans in the U.S. House of Representatives on Friday rejected a bill proposed by their leader to temporarily fund the government, making it all but certain that federal agencies will partially shut down beginning on Sunday. In a 232-198 vote, the House defeated a measure that would extend government funding by 30 days and avert a shutdown. That bill would have cut spending and imposed immigration and border security restrictions, Republican priorities that had little chance of passing the Democratic-majority Senate.”

September 25 – Financial Times (Kate Duguid and Lauren Fedor): “A US government shutdown would threaten the country’s triple A credit rating, Moody’s warned… Moody’s, the last major rating agency yet to have downgraded the US’s debt, on Monday said a shutdown would be ‘credit negative for the US sovereign’. The warning came as congressional leaders and White House officials warned a shutdown was growing likely unless a rightwing flank of House Republicans compromised with their own party’s leadership and voted to continue funding the government.”

September 25 – Bloomberg (Alicia Diaz): “Representative Matt Gaetz, a key Republican holdout on a stopgap spending measure, said he’s ready for a multiday US government shutdown if that’ll get demands such as conservative border policies into the federal budget. If the departments of labor and education ‘have to shut down for a few days as we get their appropriations in line, that’s certainly not something that is optimal,’ Gaetz said… ‘But I think it’s better than continuing on the current path we are to America’s financial ruin.’”

September 27 – CNBC (Elliot Smith): “The U.S. is in a weaker position now than when S&P downgraded its sovereign credit rating in 2011, according to the former chairman of the agency’s sovereign rating committee. The world’s largest economy is once again facing the prospect of a government shutdown… John Chambers, former chairman of the Sovereign Rating Committee at S&P Global Ratings at the time of that 2011 downgrade, told CNBC… a government shutdown is likely and that the whole episode was a ‘sign of weak governance’… ‘Right now the deficit of the general government — which is the federal and the local governments combined — is over 7% of GDP and the government debt is 120% of GDP. At the time, we forecasted that it might get to 100% of GDP, and the government ridiculed us for being too scaremongering,’ he said.”

September 28 – Financial Times (Martin Arnold, Harriet Clarfelt and Amy Kazmin): “European government bond prices dropped sharply on Thursday as investors took fright at Italy’s larger than expected budget deficit and mounting concerns that central banks will keep interest rates high for an extended period. Italian 10-year government bond yields rose as much as 0.17 percentage points to 4.96%, their highest level in a decade, after prime minister Giorgia Meloni’s government raised its fiscal deficit targets and cut its growth forecast for this year and next… Italy’s government late on Wednesday predicted this year’s fiscal deficit would come in at 5.3% of gross domestic product, up from the 4.5% target it set in April…”

September 29 – Bloomberg (Vinícius Andrade and Carolina Wilson): “One of the most-profitable trades across emerging markets this year is quickly losing its appeal. An index of local-currency bonds from developing nations is dangerously close to erasing its gains for the year after a 2% drop in September put it on track for its worst month since February. Now HSBC Bank Plc and Goldman Sachs… are turning more cautious on the asset class, which lured traders early this year amid easing global inflation and prospects for interest-rate cuts. HSBC made a complete U-turn on emerging-market local debt this week, cutting its recommendation to underweight from overweight on the back of expectations for higher-for-longer interest rates in the US and a stronger greenback.”

September 25 – Financial Times (Kate Duguid, Costas Mourselas and Ortenca Aliaj): “One year ago, a pocket of borrowed money on the edge of UK bond markets imploded with enough force to topple a prime minister and draw the Bank of England into an emergency rescue. Now the world’s most influential regulators are intensifying their scrutiny of a mounting potential risk to the gilt market’s much bigger cousin: the $25tn US government bond market. Over the past month, the Bank for International Settlements…, and US Federal Reserve researchers have pointed to a rapid build-up in hedge fund bets in the Treasury market. The so-called basis trade involves playing two very similar debt prices against each other — selling futures and buying bonds — and extracting gains from the small gap between the two using borrowed money.”

September 29 – Bloomberg (Ryan Vlastelica): “The Fed-induced selloff in technology stocks has traders dusting off their turmoil playbooks. Trouble is, one of the most popular strategies isn’t working: hiding out in Apple Inc. Recent weeks have seen the stock fail to live up to its reputation as a haven. Concerns over China and recent growth trends — coupled with central bank policy that has contributed to the tech sector falling into a correction — has erased nearly $270 billion in value this month alone. Since the end of July, Apple is down 13%…”

September 28 – Financial Times (Laura Noonan): “The world’s financial stability watchdog is launching a probe of the build-up of debt outside traditional banks, as it seeks to limit hedge funds’ borrowing and boost transparency. Klaas Knot, chair of the Financial Stability Board, told the Financial Times the review was intended to address rising risks from so-called non-banks, which include hedge funds and private capital. ‘If we want to arrive at a world where these vulnerabilities are less, we have to tackle this issue,’ he said, referring to the key role played by non-banks’ debt in stoking recent crises… Knot said the review was a priority because non-banks’ leverage ‘can potentially threaten financial stability’.”

September 27 – Bloomberg (Lu Wang): “To Wall Street worrywarts, a large options position owned by a JPMorgan… equity fund has the potential to add fuel to this sweeping US stock selloff. The $16 billion JPMorgan Hedged Equity Fund (JHEQX), a long-stock product that uses derivatives to protect its portfolio from declines and volatility, holds tens of thousands of protective put contracts expiring Friday with a strike price not far below the current level of the S&P 500. That matters because dealers on the other side of the trade risk unwanted exposure as the expiration nears…”

September 22 – Financial Times (William Cohan): “In the last 10 years, both retail and institutional investors have swarmed into US money-market mutual funds… At the moment, some $5.6tn of cash sits in these funds…, up from $2.6tn a decade ago. Is this something to worry about, or just a reflection of the human instinct to creep up the risk scale in exchange for a higher yield? …Top-yielding money-market funds are these days offering investors an annual return of around 5%. Investors have noticed. According to The Kobeissi Letter, since the Federal Reserve started raising interest rates in March 2022, some $862bn in bank deposits has been withdrawn and invested elsewhere, including in money-market funds…”

September 25 – Bloomberg (Vildana Hajric): “The largest long-dated bond ETF is suffering its biggest drawdown on record as the Federal Reserve’s higher-for-longer interest rates start to sting. The $39 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has lost 48% from its 2020 all-time high and is trading at its lowest point since 2011…”

Bubble and Mania Watch:

September 26 – Bloomberg (Katie Greifeld and Vildana Hajric): “The stock market is buckling under the weight of a simple equation: cash earns more than equities. Currently, six-month Treasury bills yield about 5.5% — the highest since 2001 — compared to the S&P 500’s earnings yield of roughly 4.7%. That’s the biggest advantage that cash has enjoyed relative to equities since 2000, according to data compiled by Bloomberg.”

September 23 – Wall Street Journal (Shane Shifflett and Peter Santilli): “As it rolls toward downtown San Francisco, the California Street cable car passes the gothic Grace Cathedral and an 8-foot tall statue of Tony Bennett. Then riders start to see the city’s newest landmarks. Among them is 650 California Street, a 34-story office building that has defaulted on its mortgage. Further on is 101 California, whose second-biggest tenant left last year and whose biggest is slashing staff and office space. Go around the corner, and Embarcadero Square is for sale for $90 million. Its owner bought it for $245 million in 2018. Walk down Market Street, and you will hit San Francisco Centre, the city’s largest mall. An owner’s name was pried off the wall when it stopped loan payments, but traces of the logo remain. Last month the retailer Nordstrom closed its five-story flagship store there.”

September 26 – Wall Street Journal (Konrad Putzier): “Commercial property owners, already struggling with high interest rates and rising vacancies, face exploding insurance costs that keep hitting new highs. Natural disasters, inflation and a shrinking reinsurance market have pushed insurance premiums to record levels, echoing the surge in home insurance rates for much of the U.S. That leaves many landlords in a bind. Their building values and rental income are down, yet expenses keep rising. Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody’s Analytics… While insurance premiums are rising virtually everywhere and for all building types, some cities have been particularly hard hit, especially for multifamily buildings. Costs to insure rental-apartment buildings rose 14.4% annually on average in Dallas, 13% in Los Angeles and 12.6% in Houston. Some owners struggle to find anyone willing to insure their buildings, Moody’s said.”

September 26 – Wall Street Journal (Patricia Kowsmann, Caitlin Ostroff and Angus Berwick): “After FTX crashed, the world of crypto seemed to belong to the largest exchange, Binance. Less than a year later, Binance is the one in distress. Under threat of enforcement actions by U.S. agencies, Binance’s empire is quaking… And while Binance still looms large in crypto, its dominance is dwindling. Binance now handles about half of all trades where cryptocurrencies are directly bought and sold, down from about 70% at the start of the year, according to data provider Kaiko.”

September 28 – Bloomberg (Ellen Schneider, Erin Hudson and John Sage): “Companies that need to refinance hundreds of billions of dollars of floating-rate loans stemming from the cheap-money era are increasingly tapping private credit funds for high-cost debt that lets them delay interest payments. The new obligations, including mezzanine or junior debt and even preferred equity, are riskier for the investors providing financing, because in addition to payments potentially being deferred, if the company goes bankrupt, these obligations can be close to end of the line to be repaid… ‘Banks won’t underwrite this stuff,’ said Chris Wright, head of private markets at… Crescent Capital Group. ‘It’s going into the hands of private credit.’”

September 27 – Wall Street Journal (Eric Wallerstein): “Petco took out a $1.7 billion loan two years ago at an interest rate around 3.5%. Now it pays almost 9%. Interest costs for the pet-products retailer surged to nearly a quarter of free cash flow in this year’s second quarter. Early in 2021, when Petco borrowed the money, those costs were less than 5% of cash flow. Now, executives say easing that burden is a company priority… Petco isn’t alone. Many companies borrowed at ultralow rates during the pandemic through so-called leveraged loans. Often used to fund private-equity buyouts—or by companies with low credit ratings—this debt has payments that adjust with the short-term rates recently lifted by the Federal Reserve. Now, interest costs in the $1.7 trillion market are biting and Fed officials are forecasting that they will stay high for some time.”

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

September 25 – Wall Street Journal (Walter Russell Mead): “The most important fact in world politics is that 19 months after Vladimir Putin challenged the so-called rules-based international order head-on by invading Ukraine, the defense of that order is not going well. The world is less stable today than in February 2022, the enemies of the order hammer away, the institutional foundations of the order look increasingly shaky, and Western leaders don’t yet seem to grasp the immensity of the task before them. This isn’t just about the military threats to the international system in such places as Ukraine and the Taiwan Strait. Even as the global geopolitical crisis becomes more acute, the core institutions and initiatives of the American-led world order and the governments that back them are growing progressively weaker and less relevant.”

September 28 – Wall Street Journal (Dustin Volz and Michael R. Gordon): “The Chinese government is pouring billions of dollars annually into a global campaign of disinformation, using investments abroad and an array of tactics to promote Beijing’s geopolitical aims and squelch criticism of its policies, according to a new State Department assessment. Beijing’s broad-ranging efforts, the assessment said, feature online bot and troll armies, legal actions against those critical of Chinese companies and investments and content-sharing agreements with media in Latin America and Africa.”

De-globalization and Iron Curtain Watch:

September 28 – Bloomberg (Joe Deaux): “US Energy Secretary Jennifer Granholm said the world is up against a dominant supplier of critical minerals that is willing to exploit its position for political gain, in remarks apparently aimed at China, and warned that energy security will become increasingly complex due to the transition to cleaner power. The remarks to high-level government officials, executives and academics came Thursday in Paris at the International Energy Agency’s first-ever meeting about critical minerals.”

Inflation Watch:

September 28 – Wall Street Journal (Benoît Morenne and Collin Eaton): “U.S. oil prices soared Wednesday to their highest level in more than a year. Most frackers plan to stay on the sidelines. Surging global demand coupled with output cuts by Saudi Arabia and Russia have sent crude prices to levels not seen since last August. The increase is hitting consumers at the pump, vexing policy makers’ fight against inflation and posing new challenges for President Biden ahead of the 2024 election. Though some analysts say oil prices could soon hit $100 a barrel, U.S. shale companies aren’t rushing to drill more. That means that unlike in past years when frackers flooded the market with crude and alleviated pressure, oil prices might remain elevated until someone else adds production or demand ebbs.”

September 28 – Bloomberg (Chunzi Xu): “Summer is over but gasoline prices are heating up in California, prompting Governor Gavin Newsom to lift an anti-smog rule for relief at the pump. Regular gasoline cost an average of $6.03 in California Wednesday, the highest since October and almost $2.20 a gallon above the national average, up from $1.20 in early August. That already was the highest level ever for this time of year…”

September 25 – Bloomberg (Ilena Peng): “High rice prices… bring the risk of political instability in Asia and Africa, according to the head of a United Nations agency. Prices for the crop, a staple for half the world, surged to the highest in almost 15 years after the top shipper began curbing exports… Soaring prices are fueling concerns about food insecurity for billions of people in Asia and Africa… ‘Rice, especially in Africa, can certainly bring potential conflict or social unrest, which at this moment in time would be quite dangerous, Alvaro Lario, who leads the International Fund for Agricultural Development, said…”

September 28 – Bloomberg (Lucy White): “Bank of England rate-setter Megan Greene said the economic impact of climate change could be on the scale of the 1970s oil shock, requiring central bankers to make difficult choices. Greene, who joined the BOE’s nine-member Monetary Policy Committee in July, chose to reference a paper from renowned French economist Jean Pisani-Ferry, who said that decarbonization efforts needed to minimize climate change could be ‘regarded as an adverse supply shock — very much like the oil shocks of the 1970s.’”

Biden Administration Watch:

September 28 – Yahoo Finance (Ben Werschkul): “The Biden administration has confirmed that the government’s usual firehose of economic information is set to abruptly cease if a shutdown this weekend goes forward, with potential effects expanding all the way to the Federal Reserve’s next interest rate decision in November. The Bureau of Labor Statistics (BLS) is the hub of much of the government’s data and will ‘completely cease operations’ in the event of a shutdown…”

September 22 – Reuters (Trevor Hunnicutt and Nandita Bose): “The Biden administration is in talks with Vietnam over an agreement for the largest arms transfer in history between the ex-Cold War adversaries, according to two people familiar with a deal that could irk China and sideline Russia. A package, which could come together within the next year, could consummate the newly upgraded partnership between Washington and Hanoi with the sale of a fleet of American F-16 fighter jets as the Southeast Asian nation faces tensions with Beijing in the disputed South China Sea…”

Federal Reserve Watch:

September 26 – Reuters (Ann Saphir): “A ‘soft landing’ for the U.S. economy is more likely than not, Minneapolis Federal Reserve Bank President Neel Kashkari said…, but there is also a 40% chance that the Fed will need to raise interest rates ‘meaningfully’ to beat inflation. Under the more likely scenario — Kashkari pegged the probability at about 60% — the Fed ‘potentially’ raises rates one more quarter of a percentage point and then holds borrowing costs steady ‘long enough to bring inflation back to target in a reasonable period of time,’ he said…”

September 26 – CNBC (Jeff Cox): “JPMorgan… CEO Jamie Dimon is warning that interest rates could go up quite a bit further as policymakers face the prospects of elevated inflation and slow growth… ‘I am not sure if the world is prepared for 7%,’ he said… ‘I ask people in business, ‘Are you prepared for something like 7%?’ The worst case is 7% with stagflation. If they are going to have lower volumes and higher rates, there will be stress in the system. We urge our clients to be prepared for that kind of stress.’”

U.S. Bubble Watch:

September 29 – Reuters (David Shepardson and Joseph White): “Ford Motor Chief Executive Jim Farley blasted United Auto Workers leaders on Friday, saying they were holding up a new U.S. labor agreement hours after the UAW escalated the strike that is now in its third week, with the companies and workers far apart on their demands. UAW President Shawn Fain on Friday expanded the first-ever simultaneous strike against the Detroit Three, ordering workers to walk off the job at Ford’s Chicago assembly plant and GM’s Lansing, Michigan, assembly plant. He said Stellantis was spared after last-minute concessions by the Chrysler parent.”

September 28 – Bloomberg (David Welch, Keith Naughton and Gabrielle Coppola): “The United Auto Workers union wants to emerge from its strike against Detroit’s three major automakers with at least a 30% pay raise… That’s the level — which is lower than the around 40% hike it initially proposed to Ford Motor Co., General Motors Co. and Stellantis NV — that the union believes will allow it to satisfy existing members and organize non-union plants. It takes into account a cost-of-living allowance, or COLA, and a general wage increase, according to the people…”

September 26 – Bloomberg (Esha Dey): “Among the sticking points highlighted by United Auto Workers on strike are the billions of dollars Detroit’s legacy carmakers have plunged into stock repurchases. Now, as the strike extends into its second week, some investors say they’re willing to forgo those coveted share buybacks as the companies face soaring labor costs over the next several years. The UAW is asking General Motors Co., Stellantis NV and Ford Motor Co. for significant pay raises and other concessions in their next four-year contract.”

September 27 – Bloomberg (Jo Constantz and Josh Eidelson): “On picket lines around the country, auto workers aren’t just demanding higher wages. They want to get back their once-sacred retirement pensions. While United Auto Workers members who were hired prior to the 2008 financial crisis have pensions, those brought on since have received 401(k) plans instead. The union is demanding the auto companies provide pensions for new employees and those who currently lack them.”

September 29 – Reuters: “U.S. consumer spending increased in August, but underlying inflation moderated, with the year-on-year rise in prices excluding food and energy slowing to below 4.0%. With gasoline price surging, inflation as measured by the personal consumption expenditures (PCE) price index rose 0.4% in August after climbing 0.2% in July. In the 12 months through August, the PCE price index advanced 3.5% after rising 3.4% in July.”

September 26 – Reuters (Lucia Mutikani): “U.S. consumer confidence dropped to a four-month low in September, weighed down by persistent worries about higher prices and rising fears of a recession, though households remained generally upbeat about the labor market. The second straight monthly decline in confidence reported by the Conference Board… also reflected higher interest rates and concerns about the political environment. The Conference Board said its consumer confidence index dropped to 103.0 this month, the lowest reading since May, from an upwardly revised 108.7 in August… A sharp decrease in the expectations measure accounted for the decline in confidence…”

September 28 – Associated Press (Matt Ott): “U.S. applications for unemployment benefits inched up modestly this week after reaching their lowest level in eight months the previous week, as the labor market continues to defy the Federal Reserve’s interest rate hikes meant to cool it. Filings for jobless claims rose by 2,000 to 204,000 for the week ending Sept. 23… Last week’s figure was the lowest since January.”

September 28 – Bloomberg (Prashant Gopal): “Mortgage rates in the US climbed to the highest since 2000, ramping up the pressure on potential buyers. The average for a 30-year, fixed loan rose for a third week, reaching 7.31%, up from 7.19% last week, Freddie Mac said…”

September 27 – Bloomberg (Paige Smith): “The average monthly payment for new mortgages increased 46% in 2022 as interest rate hikes squeezed US home borrowers, according to the Consumer Financial Protection Bureau. Payments on conventional 30-year fixed-rate mortgages increased to $2,045 in December 2022 from $1,400 a year earlier… The trends are expected to persist this year, ‘given further increases in interest rates in 2023,’ CFPB Director Rohit Chopra said…”

September 28 – Reuters (Amina Niasse): “Contracts to buy U.S. existing homes fell more than expected in August, tumbling by the most in nearly a year as high mortgage rates erode affordability… The National Association of Realtors’ Pending Home Sales Index fell 7.1% to 71.8 from July’s revised 77.3. The decrease, the largest since September 2022, exceeded the median economist forecast for a 0.8% fall… On a year-over-year basis, pending sales were down 18.7%.”

September 26 – CNBC (Diana Olick): “Sales of newly built homes fell 8.7% in August from July to a seasonally adjusted annualized pace of 675,000 units… That is the slowest pace since March. Sales were still 5.8% higher than August 2022… In September, 32% of builders said they cut prices, compared to 25% in August. That’s the largest share of builders reducing prices since December 2022, when 35% were doing so. The average price cut was 6%.”

September 26 – Bloomberg (Alicia Clanton): “Home prices in the US climbed to a record high as the market bounces back. A national gauge of prices rose for a sixth straight month, increasing 0.6% in July from June, according to… S&P CoreLogic Case-Shiller. So far this year, the national measure has climbed 5.3%. This year’s gains have offset the 5% decline in prices from last year’s peak in June 2022 to January 2023, when the market was slowing.”

September 25 – Wall Street Journal (David Harrison): “The U.S. economy has sailed through some rough currents this year but now faces a convergence of hazards that threaten to create more turbulence. Among the possible challenges this fall: a broader auto workers strike, a lengthy government shutdown, the resumption of student loan payments and rising oil prices. Each on its own wouldn’t do too much harm. Together, they could be more damaging, particularly when the economy is already cooling due to high interest rates. ‘It’s that quadruple threat of all elements that could disrupt economic activity,’ said Gregory Daco, chief economist at EY-Parthenon.”

September 25 – Bloomberg (Alex Tanzi): “Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances. For the bottom 80% of households by income, bank deposits and other liquid assets were lower in June this year than they were in March 2020, after adjustment for inflation. All income groups have seen their balances decline in real terms from a peak in 2021… But among the wealthiest one-fifth of households, cash savings are still about 8% above their level when Covid hit. By contrast, the poorest two-fifths of Americans have seen an 8% drop in that period. And the next 40% — a group that roughly corresponds with the US middle class — saw their cash savings drop below pre-pandemic levels in the last quarter.”

September 29 – Bloomberg (Alex Tanzi): “California, Illinois and New York each saw personal income declines last year, according to revised government data… The personal income declines in all three states were the first since 2009, and New York’s drop was the worst in the US. Income also flipped from positive to negative in Rhode Island, Louisiana and Mississippi in 2022, according to revised Bureau of Economic Analysis data…”

Fixed Income Watch:

September 29 – Bloomberg (Skylar Woodhouse): “US state and local debt is headed for its worst month in a year… Munis have slumped 3.33% so far in September…, on track for its poorest performance since a 3.84% drop the same time last year. Yields on 10-year munis jumped almost 50 bps since Sept. 20, after investors sold bonds as they digested the Fed’s message that it would keep borrowing costs higher for longer.”

September 25 – Bloomberg (Sri Taylor): “Corporations are buying back bonds at the slowest pace in decades — a sign that they’re waiting to refinance — though this hesitancy could come back to haunt them as maturities pile up and interest rates stay higher for longer. Globally, around $76 billion of corporate bonds have been repurchased so far this year, representing the lowest volume of bonds bought back since 2009, and a 40% drop from this time last year…”

September 25 – Financial Times (Harriet Clarfelt and Nicholas Megaw): “High-grade US companies are piling into the convertible bond market — typically the preserve of junk-rated issuers — as they try to minimise rising borrowing costs… Investment-grade borrowers have sold $12bn of convertible bonds so far this year, more than 30% of total issuance, according to… Bank of America — the highest share in at least a decade and three times the average rate. Highly rated companies sold just $2bn of so-called converts in 2022, or 7% of the overall market.”

September 28 – Bloomberg (Allison McNeely): “Executives at Ares Management Corp. and Oaktree Capital Management see more trouble brewing in credit markets, including in broadly syndicated loans, than is readily apparent right now as higher interest rates bite. Older leveraged loans, particularly those used to fund private equity buyouts, could face stress because they were put in place when base rates were 0.25%, compared with more than 5% now, Armen Panossian, Oaktree’s incoming co-chief executive officer…”

China Watch:

September 24 – Reuters (Albee Zhang and Ryan Woo): “Even China’s population of 1.4 billion would not be enough to fill all the empty apartments littered across the country, a former official said…, in a rare public critique of the country’s crisis-hit property market. China’s property sector… has slumped since 2021 when real estate giant China Evergrande Group defaulted on its debt obligations… As of the end of August, the combined floor area of unsold homes stood at 7 billion square feet, the latest data from the National Bureau of Statistics (NBS) show. That would be equal to 7.2 million homes… That does not count the numerous residential projects that have already been sold but not yet completed due to cash-flow problems, or the multiple homes purchased by speculators… that remain vacant, which together make up the bulk of unused space… ‘How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people,’ said He Keng, 81, a former deputy head of the statistics bureau. ‘That estimate might be a bit much, but 1.4 billion people probably can’t fill them’…”

September 28 – CNBC (Clement Tan): “China’s small economic rebound appears to have stalled in September, with retail sales and pricing power as well as manufacturing production and loan growth weaker than the print for the month before, according to the monthly China Beige Book survey… Among the more significant findings in this privately administered survey, corporate borrowing fell back to ‘very low levels’ as loan rejections and average loan rates spiked despite several moves from the People’s Bank of China to lower the cost of borrowing… China’s beleaguered property sector showed signs of further deterioration in September. ‘Home builders said prices contracted outright this month as sales slowed. Realtors reported weaker prices, and sales flattened despite a sizable drop in mortgage rates,’ China Beige Book said. ‘Commercial property’s troubles deepened, with price gains narrowing sharply and the pace of transactions sliding hard alongside,’ the survey administrators added.”

September 27 – Wall Street Journal (Stella Yifan Xie): “China’s gigantic real estate bubble has popped, but despite the market’s prolonged downturn, prices still haven’t fallen much. In part, that is because of price controls which many Chinese cities imposed on housing over the past two years to keep values stable. Now China is starting to loosen the rules—with unpredictable consequences. Under the rules, which were applied in dozens of cities, local governments typically blocked developers of new homes from offering discounts of 10% to 15% or more on unsold properties. In some cities, officials put a floor on sale prices for existing homes as well. In recent weeks, articles appearing in state media have argued that it may be time to ditch the policies and some cities are starting to loosen them.”

September 26 – Reuters (Keven Yao): “China’s central bank said… it would step up policy adjustments and implement monetary policy in a ‘precise and forceful’ manner to support an economy whose recovery was improving with ‘increasing momentum’. The People’s Bank of China (PBOC) will keep liquidity reasonably ample and maintain stable credit expansion, the bank said… ‘The current external environment is becoming more complex and severe, international economic trade and investment are slowing down, inflation is still high, and interest rates in developed countries remain high,’ the central bank said.”

September 25 – Financial Times (Thomas Hale): “Evergrande… has cast serious doubts over the future of its debt restructuring plan, saying an ongoing official investigation will prevent it from issuing new notes. Evergrande defaulted on its debts almost two years ago, sparking a cash crunch across China’s economically critical property sector and prolonged negotiations with offshore creditors. The world’s most indebted developer, which had more than $300bn in liabilities at the time of its failure in 2021, had planned to issue various notes, including those linked to its listed subsidiaries in Hong Kong, and was expected to hold key creditor votes this week.”

September 28 – Reuters (Scott Murdoch and Ziyi Tang): “China Evergrande Group’s founder is being investigated over suspected ‘illegal crimes’, the embattled developer said…, as creditors become increasingly concerned about the group’s prospects amid an uncertain debt revamp plan and liquidation risk. The world’s most indebted property developer with more than $300 billion in total liabilities did not say whether Hui Ka Yan was still in a position to run the company, or what crimes he is being investigated for.”

September 25 – Bloomberg (Jacob Gu): “The mainland unit of China Evergrande Group said it missed principal and interest payments totaling several billion yuan, adding further uncertainty to the fate of the giant developer at the center of the country’s property crisis. Hengda Real Estate Group failed to repay $547 million in principal plus interest due on Sept. 25…”

September 27 – Bloomberg: “Chinese developer Country Garden… is in talks with Houlihan Lokey Inc. and China International Capital Corp. for both to become financial advisers and put together an offshore-debt restructuring plan, according to people familiar… Country Garden, which has $11 billion of offshore bonds outstanding according to Bloomberg-compiled data, has become the face of China’s broader property debt crisis.”

September 25 – Bloomberg (Dorothy Ma): “A Chinese property investor that has struggled with several US projects faces court-ordered liquidation as a Bermuda court issued a winding-up order against the firm. China Oceanwide Holdings Ltd. disclosed the order in a Monday filing with Hong Kong’s stock exchange. Liquidators have been appointed and the company’s shares listed in the city have been suspended.”

September 27 – Financial Times (Kenji Kawase): “Top Chinese property developers recorded almost $3bn in foreign exchange losses, mainly on their US dollar borrowings, during the first half of the year as the renminbi weakened, adding pressure to their struggle to secure cash to service mounting debts. The aggregate net foreign exchange losses for 24 of the top 30 mainland-listed Chinese developers by contracted sales before the Covid-19 crackdown in 2020 totalled Rmb21.25bn ($2.75bn) for the first six months of this year, according to… Nikkei Asia.”

September 27 – Reuters (Qiaoyi Li and Ryan Woo): “Profits at China’s industrial firms extended a double-digit drop for the first eight months, but the pace of declines eased slightly as a flurry of policy support steps has started to stabilise parts of the stuttering economy. The 11.7% year-on-year fall in profits narrowed from a 15.5% contraction for the first seven months…”

September 28 – Bloomberg (Tom Hancock): “China has begun a program to allow local governments to swap so-called ‘hidden’ debt for bonds carrying lower interest costs, as it seeks to defuse risks from $9 trillion of off-balance sheet borrowing. The Inner Mongolia region will issue three ‘refinancing’ bonds worth $9 billion… Bloomberg reported earlier that Beijing will allow provincial-level governments to raise about 1 trillion yuan via bond sales to repay the debt of local-government financing vehicles and other state-owned off-balance sheet debt issuers.”

September 25 – Wall Street Journal (Rebecca Feng): “Chinese regulators have taken a novel approach to prop up the country’s faltering stock market by banning many companies’ biggest shareholders from selling. The country’s $11 trillion domestic stock market has slumped this year after a post-Covid rally… The CSI 300 index of the country’s largest listed companies is down 4.1% in the year-to-date period, following losses in the previous two calendar years. Authorities in China have taken several steps to boost the market recently, including cutting a tax on stock trading and slowing the pace of new listings to help balance supply and demand.”

Central Banker Watch:

September 25 – Bloomberg (Mark Cudmore): “The European Central Bank is withdrawing liquidity from the system at a much faster pace than other major peers, at least by one measure. Due to maturing Targeted Long-Term Refinancing Operation (TLTRO) loans, the ECB’s balance sheet has contracted by more than 20% from its peak in dollar terms. This has helped the combined balance sheet of the world’s four largest central banks to shrink by almost 15% in the 18 months until the end of August.”

Global Bubble Watch:

September 25 – Financial Times (Valentina Romei): “World trade volumes fell at their fastest annual pace for almost three years in July… Trade volumes were down 3.2% in July compared with the same month last year, the steepest drop since the early months of the coronavirus pandemic in August 2020. The latest World Trade Monitor figure… followed a 2.4% contraction in June and added to evidence that global growth was slowing.”

September 28 – Bloomberg (Catherine Bosley): “Investment-grade corporate bonds in Asia outside Japan are set to post their worst performance in eleven months in September, hurt by high US interest rates, rising energy costs and China’s ailing economy. A Bloomberg index of dollar-denominated bonds in the region has lost nearly 1.6%…”

September 27 – Reuters (Sinead Cruise and Iain Withers): “London’s embattled office market is in ‘rental recession’ as empty workspace across the UK capital’s West End, City and Canary Wharf business hubs hits a 30-year high, analysts at Jefferies said… In a note downgrading Land Securities, British Land, Derwent London and Great Portland Estates, Jefferies estimated a 20% contraction in London office usage due to post-pandemic hybrid working and tenants’ growing preference for greener buildings in the suburbs.”

September 28 – Bloomberg (Neil Callanan and Daedo Kim): “Investors in few, if any, countries in the world have been burned as badly by the collapse in the commercial real estate market as those in South Korea. Its pension funds, insurance companies and asset managers all plowed billions of dollars into properties across the globe just before the pandemic drove down their value. But as the losses are tabulated, it is Korea’s brokerages — and especially the smallest of them — that are causing the most angst in Seoul.”

September 26 – Bloomberg (Harry Suhartono): “The turmoil in Vietnam’s property sector continues, with creditors embroiled in a dispute with developer Novaland Investment Group Corp. after it failed to pay interest on a $300 million bond… Novaland is one of Vietnam’s largest developers and has become a prominent example of real estate firms in the country late with bond payments, at a time when China’s property crisis is also showing signs of intensifying.”

Europe Watch:

September 29 – Reuters (Francesco Canepa and Maria Martinez): “Inflation in the euro zone fell to its lowest level in two years in September, suggesting the European Central Bank’s steady diet of interest rate hikes was succeeding in curbing runaway prices albeit at a growing cost for economic growth. Consumer prices in the 20 countries that share the euro rose by 4.3% in September, the slowest pace since October 2021, from 5.2% one month earlier…”

September 22 – Reuters (Riham Alkousaa and Klaus Lauer): “German housing prices fell by the most since records began in the second quarter as high interest rates and rising materials costs took their toll on the property market in Europe’s largest economy… Residential property prices fell by 9.9% year-on-year, the steepest decline since the start of data collection in 2000… Prices fell by 1.5% on the quarter, with steeper declines in larger cities than in more sparsely populated areas.”

Japan Watch:

September 25 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda said there was ‘very high uncertainty’ over whether companies would continue raising prices and wages, stressing anew the bank’s resolve to maintain ultra-loose monetary policy. He also offered a cautious take on the overseas economic outlook, warning of the fallout from aggressive U.S. interest rate hikes and sluggish growth in the Chinese economy… Ueda told the meeting the BOJ was ‘not fully convinced’ that wage hikes would keep accelerating… ‘The cost-push inflation we’ve seen so far hurts companies and households. That’s why we are supporting demand and the broader economy with easy monetary policy,’ he added. On the yen’s recent falls, Ueda said the BOJ was keeping a close eye on their impact on economic and price developments.”

September 28 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Inflation in Tokyo slowed more than expected in September, offering support for the Bank of Japan’s view that prices are set to cool further… Consumer prices excluding fresh food rose 2.5% in the capital, decelerating from 2.8% in August largely on the back of falling electricity and gas costs…”

September 28 – Dow Jones (Peter Landers): “The struggles in China’s real-estate industry and weak Chinese domestic demand pose a risk to the Japanese and global economies, Japan’s new economy minister said… Yoshitaka Shindo… said that because China accounts for nearly a fifth of Japan’s exports, the Chinese economic troubles could cause Japan’s economy to move a notch downward. Potentially, ‘the impact is really big’ given China’s central role in the global economy, Shindo said…”

September 26 – Reuters (Leika Kihara): “Bank of Japan policymakers agreed on the need to maintain ultra-loose monetary settings but were divided on how soon the central bank could end negative interest rates, minutes of its July meeting showed… The nine board members also diverged in their views on whether companies would keep hiking wages next year, the minutes showed, highlighting uncertainty on how quickly the BOJ could begin phasing out its massive stimulus programme.”

EM Watch:

September 27 – Bloomberg (Marcus Wong): “Southeast Asian central banks are using tools other than rate hikes to defend their currencies against the surging dollar as bets on higher-for-longer Federal Reserve rates take hold… ‘We expect central banks across the region to continue using a combination of liquidity tightening and intervention to lean against further depreciation in their currencies against the dollar,’ said Abhay Gupta, strategist at Bank of America in Singapore. Southeast Asian central banks are becoming more tolerant of ‘pseudo tightening,’ he added.”

Leveraged Speculation Watch:

September 25 – Bloomberg (Laura Benitez and Silas Brown): “Private equity firms have been increasingly adding another layer of debt to their complex borrowing arrangements, raising concern among some investors about potential risks to the wider industry and the financial system. Hit by a drought of deals and dwindling cash, some buyout firms are starting to resort to backroom financing to help meet fund commitments or enable succession planning. The loans — backed by assets including the promise of future income — carry interest of as much as 19%, a rate that’s more akin to the charges faced by consumers rather than corporate borrowing. Even a junk-rated company in the US paid 10% on a bond recently.”

September 28 – Wall Street Journal (Gregory Zuckerman and Peter Rudegeair): “Dan Loeb, one of the most successful hedge-fund managers of his generation, is having a rough year. Funds at his Third Point fell by about 1.6% this year through August after tumbling 21.8% or more in 2022… Loeb, who oversees roughly $11.7 billion, said he expected higher interest rates to take a bite out of the U.S. economy this year, so he turned cautious. As a result, he didn’t own enough technology shares to fully benefit from the summer’s AI-powered rally…”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 26 – Bloomberg (Michelle Ma): “The US is ill-prepared to tackle the myriad of risks that threaten to undermine reliability of the nation’s electric grids, says a group focused on energy security. ‘Extreme weather events, cyber espionage and domestic terror attacks, combined with increasing demand on aging infrastructure have turned the occasional power failure into alarmingly common events in cities across the United States,’ Thomas Coleman, executive director of SAFE’s Grid Security Project, said…”

September 27 – Washington Post (Scott Dance): “A fast-forming and strengthening El Niño climate pattern could peak this winter as one of the most intense ever observed, according to an experimental forecast released Tuesday. The new prediction system suggested it could reach top-tier ‘super’ El Niño strength, a level that in the past has unleashed deadly fires, drought, heat waves, floods and mudslides around the world. This time, El Niño is developing alongside an unprecedented surge in global temperatures that scientists say has increased the likelihood of brutal heat waves and deadly floods of the kind seen in recent weeks.”

September 25 – Reuters (Jake Spring): “Sea ice that packs the ocean around Antarctica hit record low levels this winter, the U.S. National Snow and Ice Data Center (NSIDC) said…, adding to scientists’ fears that the impact of climate change at the southern pole is ramping up. Researchers warn the shift can have dire consequences for animals like penguins…, while also hastening global warming by reducing how much sunlight is reflected by white ice back into space.”

September 28 – Bloomberg (Brian K. Sullivan): “Lingering drought in northwestern US have caused the US Energy Information Administration to cut its hydroelectric power forecast for the year. It’s likely there will be 6% less electricity generated by US hydroelectric plants due to lower water supply… About a half of the country’s hydropower is generated in the Northwest, and the EIA said it expects 19% less generation from the region this year than in 2022.”

Geopolitical Watch:

September 26 – Associated Press: “The Chinese government… accused Taiwan’s ruling party of seeking independence, a day after the self-governing island’s president lobbied for Australia’s support in joining a regional trade pact. Zhu Fenglian, spokesperson for China’s Taiwan Affairs Office, also said the recent Chinese military drills around Taiwan were held to combat ‘the arrogance of Taiwan independence separatist forces.’”

September 26 – Reuters (Neil Jerome Morales): “The Philippines vowed… not to back down in the face of a Chinese effort to block its fishermen from a fiercely contested shoal in the South China Sea, while Beijing warned the Southeast Asian nation not to ‘provoke and cause trouble’. The comments came a day after Manila cut a floating 300-m (980-ft) barrier installed by Beijing at the shoal, one of Asia’s most contested maritime features…”

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July 19, 2024: Election on the Brink
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June 30, 2024: Just the Facts
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