Credit Bubble Bulletin : December 2019

Tuesday, December 31, 2019

Wednesday's News Links

[Reuters] China cuts banks' reserve ratios again, frees up $115 billion to spur economy

[CNBC] Small business pay checks are growing at a fast pace as job gains slow

[Reuters] China's central bank says economic growth resilient despite large pressure

[Reuters] Protesters burn security post at U.S. Embassy in Iraq; Pentagon sending more troops to region

[Reuters] Taiwan leader rejects China's offer to unify under Hong Kong model

[Reuters] Kim says North Korea to show 'new strategic weapon,' leaves room for talks

[Reuters] Twelve dead, several missing as Australia counts the cost of devastating bushfires

[WSJ] China’s Monetary Policy Eases Into the New Year

[FT] As the efficient markets hypothesis turns 50, it is time to bin it

Tuesday Evening Links

[Reuters] Global stocks end 2019 near record highs, dollar slides

[Reuters] U.S. stocks end firm to cap a banner year, decade

[Reuters] Treasuries - Bonds on track to post best year since 2014

[Reuters] Oil posts biggest yearly rise since 2016

[Reuters] Fed sees small take-up of repo, rates fall for year-end

[Reuters] Protesters demonstrate at U.S. embassy in Iraq in new test for Trump

[Bloomberg] U.S. Stocks Rally to Cap Best Year Since 2013: Markets Wrap

[Bloomberg] Nasdaq Caps a $7 Trillion Decade With Its Best Rally In 10 Years

[Bloomberg] High-Grade Issuers to Sell $120 Billion of Debt in January Spree

[WSJ] Student Housing Party on Wall Street May Be Over

[FT] Fed curbs repo volatility on final day of 2019

Monday, December 30, 2019

Tuesday's News Links

[Reuters] Global stocks end 2019 close to record highs

[Reuters] Oil falls but on track for biggest yearly rise since 2016

[CNBC] Trump says he will sign ‘phase one’ China trade deal on Jan. 15 at the White House

[Reuters] Fed sees small takeup of repo, rates steady for critical year-end

[MarketWatch] Home-price growth accelerated in October on the heels of low mortgage rates

[Reuters] China outbound M&A plummets to 10-year low on trade tensions, economic slowdown

[Reuters] China's factory activity grows as easing trade spat revives demand

[Reuters] China's service sector activity grows at slower pace in December: official PMI

[Reuters] From opioid deaths to student debt: A view of the 2010s economy in charts

[Reuters] Trump blames Iran for 'orchestrating' attack on U.S. embassy in Iraq

[Reuters] Thousands of people trapped in Australian coastal town by huge wildfires

[Bloomberg] U.S. Home Prices Rise Most in Five Months as Markets Strengthen

[Bloomberg] Fed Wins Year-End Repo Battle, But War to Control Rates Drags On

[Bloomberg] Wild Year in China Markets Ends With Record Defaults and Dull Yuan

[FT] US companies power a surge in megadeals in 2019

[FT] End of the party: why Lebanon’s debt crisis has left it vulnerable

[FT] The eurozone’s tectonic plates are shifting

Monday Evening Links

[Reuters] Wall Street slips from records as investors lock in year-end gains

[Reuters] Treasuries - Yield curve steepest since October 2018

[Reuters] Dollar falls in thin trade on lower safe-haven demand

[CNN] Residents warned it's 'too late to leave' parts of Australia's Victoria state as fires rage

[Reuters] Iraq condemns U.S. air strikes as unacceptable and dangerous

[Reuters] Turkey may send allied Syrian fighters to Libya: sources

[Bloomberg] Flash-Crash Risks Are Back as Japan Shutters for Six-Day Holiday

[Bloomberg] North Korea Signals Escalation Ahead of Kim’s Big Speech

[WSJ] After a Tumultuous Decade, Bond Investors See Rocky Times Ahead

[WSJ] Small Businesses Rush to Borrow Online, Sparking Fears of High Rates, Costly Terms

Sunday, December 29, 2019

Friday, December 27, 2019

Saturday's News Links

[Reuters] China to switch benchmark for floating-rate loans to lower funding costs

[Bloomberg] China to Scrap Benchmark Lending Rate in Shift to New System

[WSJ] Leveraged-Loan Downgrades Signal Cracks in Corporate-Debt Rally

[WSJ] Bills Come Due for China’s Local Governments

[WSJ] China 2020: Trade Risks Become Debt Risks

[WSJ] As China’s Troubles Mushroom, Xi Collects a Special Title

Weekly Commentary: Just the Facts - December 27, 2019

For the Week:

The S&P500 added 0.6% (up 29.2% y-t-d), and the Dow increased 0.7% (up 22.8%). The Utilities slipped 0.3% (up 22.2%). The Banks added 0.3% (up 32.3%), while the Broker/Dealers declined 0.8% (up 22.6%). The Transports increased 0.3% (up 19.3%). The S&P 400 Midcaps were little changed (up 24.0%), while the small cap Russell 2000 declined 0.2% (up 23.8%). The Nasdaq100 advanced 1.1% (up 38.6%). The Semiconductors added 0.3% (up 60.9%). The Biotechs fell 1.2% (up 21.0%). With bullion jumping $29, the HUI gold index surged 8.2% (up 47.9%).

Three-month Treasury bill rates ended the week at 1.52%. Two-year government yields fell five bps to 1.58% (down 91bps y-t-d). Five-year T-note yields dropped five bps to 1.68% (down 83bps). Ten-year Treasury yields declined four bps to 1.88% (down 81bps). Long bond yields slipped three bps to 2.32% (down 70bps). Benchmark Fannie Mae MBS yields fell five bps to 2.70% (down 79bps).

Greek 10-year yields added a basis point to 1.42% (down 297bps y-t-d). Ten-year Portuguese yields declined three bps to 0.39% (down 134bps). Italian 10-year yields slipped three bps to 1.37% (down 137bps). Spain's 10-year yields fell three bps to 0.41% (down 101bps). German bund yields were little changed at negative 0.26% (down 50bps). French yields were about unchanged at 0.05% (down 66bps). The French to German 10-year bond spread was little changed at 31 bps. U.K. 10-year gilt yields dipped three bps to 0.76% (down 52bps). U.K.'s FTSE equities index gained 0.8% (up 13.6% y-t-d).

Japan's Nikkei Equities Index was little changed (up 19.1% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to 0.00% (unchanged y-t-d). France's CAC40 increased 0.3% (up 27.6%). The German DAX equities index was about unchanged (up 26.3%). Spain's IBEX 35 equities index added 0.3% (up 13.6%). Italy's FTSE MIB index fell 1.0% (up 29.7%). EM equities were mixed. Brazil's Bovespa index rose 1.2% (up 28.0%), while Mexico's Bolsa declined 0.5% (up 6.3%). South Korea's Kospi index was unchanged (up 8.0%). India's Sensex equities index dipped 0.3% (up 15.3%). China's Shanghai Exchange was little changed (up 20.5%). Turkey's Borsa Istanbul National 100 index jumped 2.3% (up 24.6%). Russia's MICEX equities index gained 1.1% (up 28.7%).

Investment-grade bond funds enjoyed inflows of $5.160 billion, while junk bond funds posted outflows of $190 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.74% (down 81bps y-o-y). Fifteen-year rates were unchanged at 3.19% (down 82bps). Five-year hybrid ARM rates jumped eight bps to 3.45% (down 55bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 4.00% (down 44bps).

Federal Reserve Credit last week surged $32.8bn to $4.120 TN, with a 15-week gain of $361 billion. Over the past year, Fed Credit expanded $76.4bn, or 1.9%. Fed Credit inflated $1.310 Trillion, or 47%, over the past 372 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $3.8 billion last week to $3.409 TN. "Custody holdings" gained $12.3 billion, or 0.4% y-o-y.

M2 (narrow) "money" supply jumped $74.4bn last week to a record $15.420 TN. "Narrow money" surged $1.085 TN, or 7.6%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits gained $24.5bn, and Savings Deposits surged $48.6bn. Small Time Deposits were little changed, and Retail Money Funds were unchanged.

Total money market fund assets added $4.8bn to $3.604 TN. Money Funds gained $565bn y-o-y, or 18.6%.

Total Commercial Paper increased $2.3bn to $1.131 TN. CP was up $76bn, or 7.2% year-over-year.

Currency Watch:

The U.S. dollar index declined 0.7% to 97.014 (up 0.9% y-t-d). For the week on the upside, the Norwegian krone increased 1.8%, the South African rand 1.6%, the New Zealand dollar 1.5%, the Brazilian real 1.3%, the Australian dollar 1.2%, the euro 0.9%, the Swiss franc 0.8%, the Swedish krona 0.7%, the Canadian dollar 0.6%, the British pound 0.6%, the Mexican peso 0.4% and the Singapore dollar 0.2%. On the downside, the South Korean won declined 0.1%. The Chinese renminbi increased 0.15% versus the dollar this week (down 1.68% y-t-d).

Commodities Watch:

December 25 – Reuters (Ranjeetha Pakiam and Yvonne Yue Li): “Gold firmed up a foothold above $1,500 an ounce as investors positioned for 2020, with post-Christmas gains coming even as global equities inched higher and U.S.-China trade concerns eased. Silver rose along with platinum in what’s been a banner year for precious metals. Spot bullion advanced for a fourth day, the best run since October, and headed for the highest close in more than seven weeks. The metal is on pace for biggest annual gain since 2010.”

The Bloomberg Commodities Index gained 1.2% this week (up 5.7% y-t-d). Spot Gold jumped 2.0% to $1,511 (up 18%). Silver surged 4.2% to $17.943 (up 15.5%). WTI crude jumped $1.28 to $61.72 (up 36%). Gasoline rose 2.4% (up 32%), while Natural Gas sank 4.2% (down 24%). Copper increased 0.8% (up 8%). Wheat jumped 2.6% (up 11%). Corn increased 0.6% (up 4%).

Market Instability Watch:

December 24 – CNBC (Jesse Pound): “Global stock markets have been on a torrid run in 2019, adding more than $17 trillion in total value, according to Deutsche Bank calculations. The value of global equities began the year just under $70 trillion but has now surpassed $85 trillion, according to… Deutsche Bank’s Torsten Slok… Central banks around the world have taken a more dovish approach, boosting markets. The Federal Reserve has cut its benchmark interest rate three times this year, and the European Central Bank cut its already negative rates even further.”

December 23 – Wall Street Journal (Gunjan Banerji): “Stocks and bonds are staging an extraordinary run, on track for their biggest simultaneous gains in more than two decades. Heading into the final two weeks of 2019, the S&P 500 has soared 28.6%, while a bond rally has pushed the yield on the benchmark 10-year Treasury note down three quarters of a percentage point. If the gains continue through the final days of December, it would mark the first time the broad stock index has jumped by at least 20%, while Treasury yields have slipped by at least that much since 1998, …when the Federal Reserve trimmed interest rates three times to avoid a recession.”

December 27 – Bloomberg (Brandon Kochkodin and Michael Gambale): “The cost to protect against default on North American high-grade debt fell to its lowest level in the post-credit crisis era on Friday in New York. The credit derivatives index, known as CDX, closed below 44 bps Thursday for the first time since at least 2011… On Friday, it dipped to 43.712 bps, the lowest on record.”

December 23 – Reuters (David Randall): “Exchange-traded funds that use leverage to offer double or triple the daily return of benchmark U.S. stock indexes rank among the 10 top-performing funds of the decade, with returns that in some cases neared 2,000%, despite warnings that they are not suitable for most investors. The huge gains for leveraged ETFs reflect the benefits of betting on growth during the longest bull market in history. But they also highlight the subtle ways in which record-low volatility bolstered investors.”

December 23 – Reuters (Hugh Bronstein and Walter Bianchi): “Argentina’s black market peso weakened 4.56% on Monday to an all-time low of 76.75 to the U.S. dollar, traders said, as the market digested new government data showing economic activity contracted 0.9% in October versus the same month last year.”

Trump Administration Watch:

December 22 – CNBC (Jacob Pramuk): “President Donald Trump signed bills Friday to prevent a government shutdown and make major changes to U.S. health policy. The president approved the $1.4 trillion appropriations package with only hours to spare before funding lapsed Saturday. The legislation, which boosts funding for both domestic programs and the military, keeps the government running through Sept. 30.”

December 24 – Reuters (Alexandra Alper and Ben Blanchard): “U.S. President Donald Trump said… he and Chinese President Xi Jinping will have a signing ceremony to sign the first phase of the U.S.-China trade deal agreed to this month. ‘We will be having a signing ceremony, yes,’ Trump told reporters. ‘We will ultimately, yes, when we get together. And we’ll be having a quicker signing because we want to get it done. The deal is done, it’s just being translated right now.’”

December 26 – Wall Street Journal (Daniel Kruger): “The Treasury Department auctioned seven-year notes Thursday, closing the door on a record year for sales of longer-term debt in 2019. The auction lifted the total of notes and bonds sold by the U.S. government with maturities ranging from two to 30 years to $2.55 trillion, a 26% increase from 2017, when Congress and President Trump agreed to massive corporate tax cuts.”

Federal Reserve Watch:

December 21 – Bloomberg (Alex Harris): “At the Federal Reserve, 2020 will be all about making the repo market boring again. Policy makers will find this easier said than done. The central bank’s liquidity injections -- including almost half a trillion dollars earmarked to ensure New Year’s Eve is a snooze -- and Treasury bill purchases have nudged the vital market for repurchase agreements back toward normalcy after a funding crunch sent rates soaring in September. This has anchored the Fed’s benchmark rate firmly within policy makers’ preferred range… But next year will test whether the Fed can end its interventions without chaos re-emerging. Chairman Jerome Powell recently said the Fed isn’t trying to eliminate all volatility from markets. However, if the repo market is erratic, it signals the Fed doesn’t have good control over the financial system’s plumbing. That’s something policy makers and the broader market can’t tolerate.”

U.S. Bubble Watch:

December 24 – Wall Street Journal (Michael Wursthorn): “Stock gains have lapped corporate profit growth during the roaring 2019 rally, but few portfolio managers are entering the new year concerned about investor exuberance. The S&P 500’s 29% rise for the year, on track for the best showing since 2013, stands out in part because corporate earnings have contributed a modest 0.4% to the climb. Rising earnings are typically the most dependable fuel for sustained stock-price gains, so the sight of major indexes climbing to records while profits shuffle behind often stokes concern about the risks of runaway sentiment, as seen in the 2000 dot-com bust.”

December 25 – Reuters (Nivedita Balu, Ismail Shakil and Andrea Shalal): “U.S. shoppers spent more online during this year’s holiday shopping season, a report by Mastercard Inc showed…, with e-commerce sales hitting a record high. E-commerce sales this year made up 14.6% of total retail and rose 18.8% from the 2018 period, according to Mastercard’s data tracking retail sales from Nov. 1 through Christmas Eve. Overall holiday retail sales, excluding autos, rose 3.4%.”

December 23 – Bloomberg (Eliza Ronalds-Hannon): “Retailers are strapping in for the final days of their traditional do-or-die holiday shopping period. For some, that could be meant literally, as creditors and vendors decide which ones are still worth supporting in a field plagued by fewer shoppers, more online competition and too much debt… In 2019 alone, Coresight Research estimates, retailers have shut more than 9,300 stores.”

December 27 – Wall Street Journal (Eric Morath and Jeffrey Sparshott): “Rank-and-file workers are getting bigger raises this year—at least in percentage terms—than bosses. Wages for the typical worker—nonsupervisory employees who account for 82% of the workforce—are rising at the fastest rate in more than a decade, a sign that the labor market has tightened sufficiently to convey bigger pay increases to lower-paid employees… A short supply of workers, increased poaching and minimum-wage increases have helped those nearer to the bottom of the pay scale. Pay for the bottom 25% of wage earners rose 4.5% in November from a year earlier… Wages for the top 25% of earners rose 2.9%."

December 26 – CNBC (Amelia Lucas): “The move toward a $15 minimum wage is gaining steam, with 21 states raising minimum wages in 2019 and more increases on the way in 2020. Restaurant workers and Democratic presidential candidates are among those leading the charge for higher wages.”

December 24 – Wall Street Journal (Will Parker): “U.S. home builders benefited from low interest rates this year as housing starts climbed to levels not seen in a decade and new-home sales surged after a disappointing 2018. Builder confidence, as measured by the National Association of Home Builders, is now the highest since 1999. And publicly traded home-builder stocks beat the S&P 500 average this year, rising 40% as of Dec. 23, compared with the broad index’s 29% gain over the same period. Home builders cranked up volume partly by focusing on homes more buyers can afford.”

December 22 – Wall Street Journal (Christopher M. Matthews, Bradley Olson and Allison Prang): “Some of the banks that helped fuel the fracking boom are beginning to question the industry’s fundamentals, as many shale wells produce less than companies forecast. Banks have begun to tighten requirements on revolving lines of credit, an essential lifeline for smaller companies, as these institutions revise estimates on the value of some shale reserves held as collateral for loans to producers… Some large financial institutions… are likely to decrease the size of current and future loans to shale companies linked to reserves as a result of their semiannual reviews of the loans, the people say. The banks are concerned that if some companies go bankrupt, their assets won’t cover the loans, the people say.”

December 24 – CNBC (David Randall): “This year’s IPOs crop wasn’t as bad as it may have appeared. Despite the high-profile struggles of Uber and Lyft shares, an index that tracks initial public offerings has outperformed the S&P 500 in what could be a historic year for stocks. ‘The long-awaited debuts of mega unicorns Uber and Lyft were mega busts, capped off by WeWork’s kamikaze IPO attempt in September,’ said Kathleen Smith, principal at Renaissance Capital. ‘But beyond these headline-grabbing disappointments, the IPO market had a mostly good year.’ Renaissance Capital’s IPO Index, a basket of newly public companies, is up 33% this year versus a 29% rise in S&P 500. More than half of newly listed companies were trading above their issue price at the end of the year, compared with about 40% last year…”

December 22 – Bloomberg (Crystal Tse and Liana Baker): “Move over, IPOs. Special purpose acquisition companies, once a last resort for owners looking to exit an investment, have become a popular choice for private companies spooked by the swings in the regular IPO market. This helped lead SPAC volumes to their best year yet with a range of top dealmakers from private equity firm TPG to banker Michael Klein getting into the mix. Instead of a regular initial public offering that would raise funds through a share sale, a small but growing number of IPO candidates are choosing to sell themselves to SPACs instead.”

December 24 – Wall Street Journal (Katherine Clarke): “In 2019, a small group of enormous real estate deals… had an outsize impact on the national conversation about wealth inequality and the rapidly expanding billionaire class. A boom in ultrahigh priced deals in Palm Beach this year, including the $111 million sale of an oceanfront estate, raised questions about the number of wealthy New Yorkers fleeing to Florida in response to a 2017 change in federal tax law. A string of $100 million-plus deals completed in Los Angeles put the spotlight on high-end real estate on the West Coast. Hedge-fund manager Ken Griffin’s roughly $238 million purchase of a New York penthouse, which set a price record for the nation, bolstered the arguments of legislators who support additional property taxes for the super rich.”

Fixed-Income Bubble Watch:

December 23 – Reuters (Michelle Sierra): “What a difference 10 years make. It was December 2010, in the aftermath of the financial crisis when the US government was forced to approve a US$700bn rescue package slated to avert the collapse of the country’s financial system. The 2008 crisis was perhaps the first time many American households learned about leveraged loans for companies that take on significant amounts of debt… The loan market, which provides funding for US corporates… was just US$497.5bn in size in December 2010. Average loan bids bounced back from a low of 62.8 during the financial crisis… Fast forward to December 2019 and the size of the leveraged loan market has more than doubled to US$1.2trn. Loans have rallied, pushing prices to an average 98.95 cents on the dollar…”

December 23 – Bloomberg (Davide Scigliuzzo): “Bankers in the $2.5 trillion leveraged credit market are ready to get back to risk taking. After a volatile year that saw over $2 billion of loans pile onto their balance sheets as investors sought safer assets, underwriters are getting ready for another wave of risky sales in 2020. This time, they’re betting investors will be more receptive. Banks have high hopes that they’ll be able to place debt sales backing several leveraged buyouts and continue to chip away at a backlog of unsold loans come January. Investors favored safer junk bonds rated in the BB range for much of 2019, but their turn in sentiment has helped notes with ratings in the near-bottom CCC range outperform in December. ‘There has been a view that rates are going to stay low for long so you can hide out in BBs,’ said Marc Warm, co-head of U.S. leveraged finance capital markets at Credit Suisse Group…”

December 24 – Wall Street Journal (Matt Wirz): “Bonds with the lowest junk credit ratings have rallied in December, rebounding from a beating taken this fall… The junk-bond bounce comes as optimism about global growth and easing trade tensions stokes investor appetite for other risky assets such as copper. ‘People are looking at their funds and thinking ‘what can generate performance next year?’’ said Eric Hess, credit analyst at… Newfleet Asset Management. With higher quality bonds trading near record highs, investors are dipping back into the riskiest patch of high yield… Bonds rated triple-C—one of the lowest ratings rungs in the below-investment-grade category—returned 4.7% this month through Dec. 23 counting price changes and interest payments…”

December 22 – Reuters (Yoruk Bahceli): “From Harley Davidson to Colgate-Palmolive, U.S. companies are flocking to borrow in euros and their record issuance is breathing life into a market where yields have been hammered by the European Central Bank’s renewed stimulus push. Offshore fundraising by U.S. firms… has been a regular feature of the euro debt market. But issuance by non-financial, investment-grade U.S. firms has quadrupled this year from 2018 levels, to around 93 billion euros ($103bn), Dealogic data shows. That accounted for 27% of a total 346 billion euros ($383bn) of euro-denominated investment-grade corporate bond issuance…”

December 23 – Bloomberg (Gerson Freitas Jr): “U.S. utilities are on a record borrowing spree this year, selling more than $90 billion in bonds for the first time ever. The surge in debt from NextEra Energy Inc., Duke Energy Inc. and other power giants comes as interest rates are at historic lows, leaving investors hungry for the safe and relatively strong returns offered by utility bonds… ‘Financing costs are lower than we ever thought they would be,’ Morgan Stanley analyst Stephen Byrd said… ‘The low-interest rate environment helps the deployment of renewables.’”

China Watch:

December 23 – Wall Street Journal (Grace Zhu and Chao Deng): “China will cut import tariffs for frozen pork, pharmaceuticals and some high-tech components starting from Jan. 1, a move that comes as Beijing and Washington are trying to complete a phase-one trade deal. The plan, approved by China’s cabinet, will lower tariffs for all trading partners on 859 types of products to below the rates that most-favored nations enjoy…”

December 23 – Bloomberg (Jeff Black and Yinan Zhao): “The Chinese government is trying to set the economy up for a stronger start to 2020, with a multi-pronged policy push ranging from easier monetary settings to freer trade. The latest pledge came late Monday, when Premier Li Keqiang signaled that further cuts in the amount of cash that banks have to park as reserves will be forthcoming. In theory, that will free up funds to lend to private-sector companies that have struggled to access loans this year. The funding promise follows a wide-ranging set of initiatives to boost the non-state sector announced at the weekend, and a fresh round of tariff cuts designed to spur domestic demand released on Monday.”

December 25 – Bloomberg: “China’s policy makers will unveil a three-year action plan in early 2020 on the reform of state enterprises, with an aim to improve the performance of the sector and create world-class champions… The plan will tighten how the performances of state firms, often referred to as SOEs, are evaluated, and also seek ‘new breakthroughs’ in introducing more strategic private-sector investors, Hao Peng, head of the country’s state assets manager, was cited in the China Securities Journal as saying.”

December 25 – Wall Street Journal (Chuin-Wei Yap): “Tens of billions of dollars in financial assistance from the Chinese government helped fuel Huawei Technologies Co.’s rise to the top of global telecommunications, a scale of support that in key measures dwarfed what its closest tech rivals got from their governments. A Wall Street Journal review of Huawei’s grants, credit facilities, tax breaks and other forms of financial assistance details for the first time how Huawei had access to as much as $75 billion in state support as it grew from a little-known vendor of phone switches to the world’s largest telecom-equipment company—helping Huawei offer generous financing terms and undercut rivals’ prices by some 30%, analysts and customers say.”

December 23 – Bloomberg: “China has a mounting debt problem. Not just over-leveraged companies, but a rapid build-up on household balance sheets that is hitting records. You can blame youth for a borrowing binge that, if left unchecked, could be China’s next credit bubble. Household debt hit levels of 57% of gross domestic product in the third quarter…, more than double just 27% in 2010. Fitch Ratings said in July that it was surging at a pace roughly double nominal GDP growth. Behind it lies increasing use of mortgages, credit cards and smartphone lending apps. As a percentage of disposable income, household debt jumped to 99.9% in 2018 from 93.4% a year earlier…”

December 25 – Financial Times (Don Weinland): “Corporate defaults in China surged to a record high in 2019, raising new questions over how policymakers in Beijing will manage mounting financial distress among large private and state-owned companies. Onshore corporate defaults hit Rmb130bn ($18.6bn) in the final weeks of the year, breaking the record of Rmb122bn last year… Private companies that expanded rapidly in recent years, accruing large piles of debt, have been at the heart of the explosion in corporate distress. Some of the country’s leaders in sectors such as chemicals and textiles have faced financial pressures in recent weeks.”

December 23 – Bloomberg: “Troubled Chinese conglomerate HNA Group Co. repaid a 1.3 billion yuan ($185 million) bond due Tuesday…, avoiding what could have been its first default on a publicly issued note. HNA’s move is the latest of a series of developments that have helped calm frayed nerves in China’s debt markets in recent days. Peking University Founder Group secured an extension on a local bond repayment deadline and luxury clothing giant Shandong Ruyi Technology Group Co. also repaid a dollar note.”

December 24 – Bloomberg: “China’s financial regulators are calling for more transparent and fair handling of defaults to restore investor confidence in the world’s second-largest bond market, after repayment failures hit a record high this year. Senior officials from the central bank, the securities regulatory body, the supreme court and other departments discussed court-mediated dispute resolution concerning bond defaults at a symposium in Beijing…”

December 24 – Reuters: “China will curb financial risks in the rental housing market by tightening lending to rental housing companies and capping the ratio of their rental income from loans taken by tenants at 30%, the housing ministry said… The Chinese government has vigorously promoted the rental housing market since 2017 to address housing affordability as home prices skyrocketed across the country. But rapid growth in the sector with little regulatory control has created unexpected financial risks. The ministry described the sector’s development as ‘chaotic’, saying it had been filled with false listing information and malicious practices such as misuse of loans, illegal withholding of security deposits and forced evictions.”

December 25 – Reuters (Lusha Zhang and Ryan Woo): “The eastern Chinese city of Nantong, with a population of more than 7 million, has introduced a new rule to ban near-term resale of certain cheap homes in the latest step by authorities in the country to curb property market speculation.”

Central Banking Watch:

December 22 – Reuters (Bart Meijer): “Interest rates in the euro zone could remain historically low for years, but the European Central Bank’s (ECB) ultra-loose monetary policy risks becoming counterproductive, ECB governing council member Klaas Knot said… ‘I do not have a crystal ball, but I cannot rule out that the current low interest rate environment could last another five years’, Knot told… De Volkskrant. ‘This worries me, because temporarily low interest rates are something quite different from persistently low interest rates.’”

December 26 – Reuters (Leika Kihara and Yoshifumi Takemoto): “The Bank of Japan has nearly exhausted its policy ammunition to boost the economy as deepening negative interest rates, seen as the most likely step if it were to expand stimulus, will do more harm than good, former BOJ Deputy Governor Toshiro Mutoh said. …He questioned BOJ Governor Haruhiko Kuroda’s argument that the central bank could take short-term rates deeper into negative territory if the economy needed more stimulus. ‘There are too many demerits to deepening negative rates,’ Mutoh told Reuters…”

Brexit Watch:

December 26 – PTI: “The European Union and Britain will struggle to seal an agreement on trade and other aspects of their future ties after Brexit next year and should consider extending the negotiations beyond 2020, a top EU official said… The UK is scheduled to leave the EU on January 31. If it does, it will be the first time a country leaves the world’s biggest trading bloc. Negotiations between the remaining members and the British government on future trade, fisheries, education and transport relations can only begin after that date and must conclude by the end of 2020. ‘I am very concerned about how little time we have,’ European Commission President Ursula von der Leyen told… Les Echos. ‘It seems to me that, on both sides, we should seriously consider whether the negotiations are feasible in such a short time.’”

EM Watch:

December 19 – Financial Times (Tommy Stubbington): “Developing countries racked up a ‘towering’ $55tn of debt by the end of last year, in a borrowing surge since the financial crisis that has been the fastest and widest in modern history, according to World Bank research. Fuelled by the era of very low interest rates, total debt has rocketed to 170% of emerging markets’ gross domestic product, a 54 percentage point increase since 2010… ‘The size, speed and breadth of the latest debt wave should concern us all,’ said David Malpass, World Bank group president. The bank warned that, on many measures, emerging economies were more vulnerable today than before the global financial crisis. Three-quarters have budget deficits, while corporate debt denominated in foreign currencies is much higher and current account deficits are four times larger than in 2007.”

December 20 – Reuters (Nigam Prusty and Shilpa Jamkhandikar): “More than 1,500 protesters have been arrested across India in the past 10 days, officials said, as police try to quell sometimes violent demonstrations against a citizenship law that critics say undermines the country’s secular constitution.”

Europe Watch:

December 26 – Financial Times (Tony Barber): “A few weeks ago, Germany’s ruling Christian Democratic party put out a tweet that, depending on your viewpoint, was either naively sincere or shamelessly provocative. …The CDU said: ‘We have a small fetish: solid finances without new debts.’ Fiscal rectitude, the tweet went on to say, represents justice between older and younger generations and is a precondition of investments in society’s future. Here, in a nutshell, is everything that France, Italy and other eurozone governments find frustrating about Germany’s economic policies and its approach to reforming the 19-nation currency union… The stalemate is symptomatic of a deeper malaise in European integration. Whether it be migration policies, attitudes to Russia or the size and focus of the EU’s 2021-27 budget, the Europeans are divided. In some cases, it is west versus east; in others, north versus south; in still others, left versus right. The divisions cut through every national political system and society as well as between governments, making it a truly Herculean task to find solutions.”

Global Bubble Watch:

December 26 – Barron’s (Luisa Beltran): “More than 10 years after the Financial Crisis, the M&A market is on an upswing—and showing few signs of stopping. Expect another good year in 2020… The number of global announced transactions in 2019 fell 3.7% to 34,482 as of Dec. 19, according to… Dealogic, down from 35,976 in 2018. Those deals were valued at roughly $4 trillion, a 2.4% dip from last year’s $4.1 trillion… The slight drop comes at the tail end of a five-year bull run for mergers. Global M&A volume has surpassed $3 trillion in volume each year since 2014, Dealogic said. ‘The last four years have been terrific,’ said Brendan Ryan, a managing director and co-head of Raymond James’s technology and services group.”

December 22 – Financial Times (James Politi and Demetri Sevastopulo): “A top US development finance official has warned that China's $1.3tn global spending spree on infrastructure is destined to collapse, shattering some emerging market economies. Adam Boehler, the chief executive of the US International Development Finance Corporation, told the Financial Times that China’s international investments were ‘100%’ like a house of cards because of ‘debt overload, poor infrastructure, bribes [and] lack of transparency’. ‘Everything comes around, it’s only a matter of time. It was only a matter of time before WeWork came around, right?,’ Mr Boehler said… ‘We have to be there as an alternative because I could see China take down a whole bunch of emerging countries . . . there will be more and more cracks and then the glass will break,’ he added.”

December 26 – Bloomberg (Fabiola Moura, Vinícius Andrade and Patricia Lara): “Sao Paulo real estate has never been so hot. Walking around Brazil’s wealthiest city, it’s impossible to avoid the construction sites suddenly breathing life into formerly empty lots. One street alone in Itaim Bibi, the city’s financial district, has five skyscrapers going up. Newspapers are packed with ads for new high rises targeting just about anyone with a steady paycheck. And then there are the real estate brokers. In some neighborhoods, they seem to be everywhere, waiting to pounce on any passer-by who might seem like a potential buyer. They lurk outside of bakeries and wait at traffic lights, proffering leaflets showing grand renderings of buildings covered in lush green plants or packed with all the services of a five-star hotel.”

December 23 – Bloomberg (Takashi Nakamichi and Takako Taniguchi): “Japan needs to remain vigilant about its banks’ overseas investments in bundled credit products because the underlying loans may be less spread out across industries or individual companies than they appear, a senior regulatory official said. ‘Even if banks individually think they are well-diversified, it is possible that overall risks in the market are concentrated in the same sector or the same debtors,’ said Tokio Morita, director-general of the Financial Services Agency’s Strategy Development and Management Bureau. ‘It is important for us to continue to analyze the situation closely’ to prevent trouble for the financial system, he said.”

Japan Watch:

December 22 – Reuters (Daniel Leussink and Tetsushi Kajimoto): “Japan’s ‘Abenomics’ stimulus program appears to be reaching a turning point as growth is sputtering and the hit to exports from slowing global demand is spreading to various sectors of the economy. The slowdown makes it more likely that the government and central bank will need to devise novel ways to stimulate growth in the world’s third-largest economy in 2020, although they are hampered by a near-empty policy arsenal.”

Leveraged Speculation Watch:

December 27 – Financial Times (Lindsay Fortado and Laurence Fletcher): “Hedge funds are on track for their best year since 2013 but continue to lag the broader market, adding to pressure on an industry that charges some of the highest fees in the investment world. After failing to capture much of 2019’s strong rally in stocks and bonds, the hedge fund industry has delivered an overall return of 8.5% this year, according to… HFR. Although it is the best performance in six years, it is still well behind the S&P 500’s 29.1% gain this year. The US bond market, measured by a Bloomberg Barclays index, returned 14.5%.”

December 23 – Wall Street Journal (Juliet Chung): “Hedge-fund firms York Capital Management and Southpaw Asset Management are barring clients from getting back all of the money they have requested for year-end, a sign of the pressure that investors in distressed assets are facing. Funds at both firms faced significant client redemptions, according to people familiar... In response, the funds have erected so-called ‘gates,’ or barriers that limit withdrawals of money from a fund. Gates are a controversial tool used by hedge funds during the financial crisis, but have been deployed rarely since then.”

Geopolitical Watch:

December 22 – Reuters (Hyonhee Shin): “South Korean and U.S. special forces troops recently conducted drills simulating the infiltration of an enemy facility, U.S. military photos seen by Reuters… show, as tensions with North Korea ratchet up ahead of a year-end deadline.”

December 21 – Reuters (Josh Horwitz): “China’s top lawmaking body… criticized the defense bill that Washington passed this week as ‘interference’… You Wenze, a spokesperson for the Foreign Affairs Committee of China’s National People’s Congress (NPC), expressed ‘strong dissatisfaction’ with the National Defense Authorization Act (NDAA), passed overwhelmingly in the U.S. Senate this week… You said the Taiwan content of the bill undermined peace and stability across the Taiwan strait. Under the bill, the United States would work to support the military strength of Taiwan, the self-governing island that Beijing considers a part of the People’s Republic of China.”

December 26 – Reuters (Ben Blanchard and Babak Dehghanpisheh): “China, Iran and Russia will hold joint naval drills starting on Friday in the Indian Ocean and Gulf of Oman, China’s defense ministry said…, amid heightened tension in the region between Iran and the United States. China will send the Xining, a guided missile destroyer, to the drills, which will last until Monday and are meant to deepen cooperation between the three countries’ navies, ministry spokesman Wu Qian told a monthly news briefing.”

December 26 – Reuters (Ece Toksabay and Ali Kucukgocmen): “Turkey will send troops to Libya at the request of Tripoli as soon as next month, President Tayyip Erdogan said…, putting the North African country’s conflict at the center of wider regional frictions.”

December 24 – Reuters (Norihiko Shirouzu): “Japanese Prime Minister Shinzo Abe… told Chinese Premier Li Keqiang that there would be no true improvement in bilateral relations without stability in the East China Sea… The two leaders held a bilateral meeting in the Chinese city of Chengdu, on the sidelines of a three-way summit with South Korea. Abe also urged Li to swiftly remove import restrictions on Japanese food products, the ministry said…”

Friday Evening Links

[Reuters] S&P 500, Dow eke out records; Nasdaq win streak ends

[AP] Japan revises Fukushima cleanup plan, delays key steps

[Bloomberg] Gold Registers Best Week Since August After Rally Gathers Pace

[Bloomberg] Bizarre Fortunes Flourish as World’s Richest Gain $1.2 Trillion

[NYT] Stocks Are on the Verge of the Best Year Since 1997

Thursday, December 26, 2019

Friday's News Linsk

[Reuters] Wall St. hits another record as investors cheer China data

[Reuters] Oil hits three-month highs as strong U.S. consumer spending underpins growth hopes

[Reuters] Copper touches near 8-month high on China data and trade deal hopes

[Reuters] Fed accepts $25.80 bln at overnight repo operation

[Reuters] China’s corporate borrowing soars and cash flows deteriorate, independent survey shows

[Reuters] Japan's output, retail sales fall, signaling economic strains

[Reuters] ECB's Holzmann: Return to positive interest rates in 2020 unlikely

[Reuters] Deepening negative rates would do more harm than good: ex-BoJ deputy governor Mutoh

[Bloomberg] The ‘Fire and Ice’ Decade That Changed Everything on Wall Street

[Bloomberg] Gold Heads for Best Week Since August After Rally Gathers Pace

[WSJ] Rank-and-File Workers Get Bigger Raises

[FT] Trades to forget: the big market slip-ups of 2019

[FT] Hedge funds record best year since 2013 but still trail market

Thursday Evening Links

[Reuters] Optimism on trade, online shopping pushes Wall Street to records

[MarketWatch] Gold price marks highest finish in more than 8 weeks

[Reuters] Oil up 1% at highest since September on trade pact and crude supplies

[AP] Markets in 2019: record stocks, lower rates, so-so IPOs

[Bloomberg] Fed’s Repo Op Is Undersubscribed, Suggesting Dealers at Capacity

[Bloomberg] China’s Government Is Letting a Wave of Bond Defaults Just Happen

[NYT] Americans Keep Spending: Holiday Sales Grew 3.4%

[WSJ] Fed’s U-Turn on Assets Faces a Year-End Test

[WSJ] U.S. Government Sets Record for Debt Auctions

Wednesday, December 25, 2019

Thursday's News Links

[Reuters] Stocks hover near record highs as investors count on trade deal

[Reuters] Oil hits highest since September on trade hopes, OPEC cuts

[Reuters] Record online sales give U.S. holiday shopping season a boost: report

[CNBC] Minimum wage hikes hit 21 states in 2019—and more are on the way in 2020

[Reuters] China's Nantong city imposes five-year ban on resale of cheap homes to curb speculation

[Reuters] Turkey to send troops to Libya at Tripoli's request: Erdogan

[Reuters] China, Russia and Iran to hold joint naval drills from Friday

[Bloomberg] Gold Makes Headway Above $1,500 as 2020 Comes Into Closer Focus

[Bloomberg] The Corporate Bond Market’s $100 Billion Buyer Is Here to Stay

[Bloomberg] China Plans New Push to Revamp State Firms Starting Next Year

[Bloomberg] China Vows to Improve Bond Handling as Defaults Hit Record

[WSJ] Buyers Return to Riskiest Junk Bonds

[WSJ] A Record Number of Homes Closed for $100 Million-Plus This Year

[WSJ] Eleven Years in the Making: Breaking Even on JPMorgan’s Purchase of Bear Stearns

[WSJ] Chinese Auto Makers Join Forces as Industry Woes Deepen

[FT] Corporate defaults in China surge in 2019 to record high $18.6bn

[FT] Year in a word: negative yields

Tuesday, December 24, 2019

Wednesday's News Links

[AP] Japan stocks lower, China little-changed on Christmas Day

[Reuters] Global stocks hover near record highs, gold breaches $1,500

[Reuters] Trump says he and Xi will sign China trade deal

[Reuters] China moves to clamp down financial risks in rental housing market

[CNBC] Global stock markets gained $17 trillion in value in 2019

[Reuters] Yuan to gain from U.S.-China deal but vulnerable: ex-currency regulator

[Reuters] Japan's Abe tells China no improvement in ties without stability in East China Sea

[Reuters] 'It doesn't matter if it's Christmas': Hong Kong pro-democracy activists keep up protests

[Reuters] Australian firefighters spend Christmas Day containing blazes; temperatures to soar

[WSJ] State Support Helped Fuel Huawei’s Global Rise

[WSJ] Last-Minute Shoppers Push Retailers Over the Top

[FT] ‘Santa rally’ puts US stocks on course for best year in six

Monday, December 23, 2019

Tuesday's News Links

[Reuters] Festive world markets pause for breath near record highs

[Reuters] Oil rises on supply cut pledges and slow return of Gulf field

[Reuters] U.S. yields rise in pre-holiday trade; focus on 5-year note auction

[Reuters] Fed accepts $24.80 bln at overnight repo operation

[Reuters] How risky ETFs won the decade - and why they might not repeat that performance

[CNBC] IPOs overall beat the market this year despite some ‘mega busts’

[Reuters] Exclusive: Malware broker behind U.S. hacks is now teaching computer skills in China

[Bloomberg] China Widens Economic Policy Blitz With Cash Injection Move

[Bloomberg] China Takes a Risk on GenZ’s Love Affair With Credit

[Bloomberg] HNA Faces Pressure to Avoid Its First Public Bond Default

[Bloomberg] India’s Slowing Economy Has Sparked Jump in Lending For LBOs

[WSJ] Stocks Are Climbing Faster Than Profits, but Investors Aren’t Worried

Monday Evening Links

[Reuters] Wall Street posts records amid trade optimism; Boeing juices Dow

[Reuters] Treasuries - U.S. yields rise in line with equities, after tame auction

[Reuters] Argentina's black market peso weakens 4.56% to all-time low -traders

[AP] Boeing ousts its CEO after two deadly 737 Max crashes

[Reuters] South Korea, U.S. commandos practice raiding enemy facility as North Korea tensions rise

[Bloomberg] Defaults in Asia Set to Rise With Hot Spots in China and India

[Bloomberg] Fed’s Year-End Repo Is Underscribed Again, But Outlook Cloudy

[Bloomberg] ‘Blank-Check’ Deals Get New Look After High-Profile IPO Flops

Sunday, December 22, 2019

Monday's News Links

[Reuters] S&P 500, Nasdaq hit new records; Boeing lifts Dow

[Reuters] U.S. new home sales rebound in November; October sales revised lower

[Reuters] U.S. business spending on equipment weak; housing regaining footing

[Reuters] Repo is Wall Street's big year-end worry. Why?

[Reuters] Leveraged loan market size doubles in ten years, private credit explodes

[Reuters] The Yankees are coming! U.S. firms rush to euro debt markets

[Reuters] China's industrial output to grow around 5.6% year-on-year in 2019: ministry

[Reuters] ECB's Knot says low rate policy risks becoming counterproductive

[Reuters] Abenomics sputters as trade damage spreads, tax revenues undershoot

[Reuters] Explainer: Why India's new citizenship plans are stirring protests

[Reuters] Hong Kong braces for protests over Christmas holidays

[Bloomberg] America’s Utilities Are On a Record Borrowing Spree This Year

[Bloomberg] Here’s What Credit Pros Are Watching as Defaults Rise in China

[Bloomberg] China Vows More Support for Private Sector to Stabilize Growth

[Bloomberg] Stores That Stocked Up on Debt Face a Harsh Holiday Reckoning

[WSJ] Stocks and Bonds Haven’t Rallied Like This Since 1998

[WSJ] China to Cut Tariffs on Range of Goods Amid Push for Trade Deal

[WSJ] The Financial Lesson of 2008-09 That Most Investors Have Forgotten

[WSJ] Distressed-Asset Hedge Funds Run Into Trouble

[FT] The big market moments of 2019

[FT] China’s $1.3tn global spending spree will collapse, says top US official

Sunday's News Links

[Reuters] Trump says trade deal with China to be signed 'very shortly'

[CNBC] Here’s how China became the world’s No. 2 economy and how it plans on being No. 1

[Reuters] Clashes as police try to clear Hong Kong protesters after Uighur support rally

[Bloomberg] Our Guide to What the World’s Top Central Banks Will Do Next Year

[WSJ] Banks Get Tough on Shale Loans as Fracking Forecasts Flop

Saturday, December 21, 2019

Dave Collum: 2019 Year in Review

Dave Collum part I

Dave Collum part II

Saturday's News Links

[CNBC] Trump signs bills to avoid shutdown, scrap Obamacare taxes and raise tobacco buying age

[Reuters] China criticizes U.S. defense bill as interference

[Reuters] Australia's bushfires circle Sydney as temperatures soar

[Reuters] Hundreds arrested in India during days of protests over citizenship law

[Reuters] Hong Kong protesters face off with police in mall protests

[Bloomberg] The Fed Is Entrenched in the Repo Market. How Does It Get Out?

[WSJ] SEC Probes Listings of Slack, Other Unicorns on NYSE

[WSJ] An $809 Car Payment, a $660 Income: How Dealers Make the Math Work

[FT] World Bank warns on ‘towering’ $55tn emerging market debt pile

Friday, December 20, 2019

Weekly Commentary: Last of the Great Central Bankers

Oregon’s economy was at the time ravaged by our nation’s high inflation and Paul Volcker’s battle to rein it in. The state’s unemployment rate was over 10% when I graduated from the University of Oregon in 1984. I don’t recall having animus toward the Federal Reserve but was instead frustrated with Washington’s huge deficits.

Paul Volcker was a courageous public servant. From the New York Times: “He prevailed by delivering shock therapy, driving the economy into a deep recession to persuade Americans to abandon their entrenched expectation that prices would keep rising rapidly.”

Much has been written over the past week honoring an extraordinary life. My thoughts returned to heart-felt comments uttered a couple months back by Chairman Powell:

“I’ve known Paul Volcker since I was an Assistant Secretary in the Treasury in 1992 or 1991. Of course, at that time, he had just relatively recently left the Fed - and I was frightened of even meeting him. I was just so intimidated by this global figure. And he couldn’t have been nicer and more interested in helping me and supporting me and we kind of kept up. He was really a great person to know. I read numerous accounts of his life. This book, if you haven’t read it, really sums it up really well. I don’t think there has been a greater public servant in our broad area in our lifetimes. He really just did exactly what he thought was the right thing – all the time. And he lets the chips fall where they may. He was famously booed at a Washington Bullets basketball game when he had rates very high… He’s a great man. I’m still in touch with him. I actually thought that I should buy 500 copies of this book and just hand them out at the Fed. I didn’t do that. It’s a book I strongly recommend, and we can all hope to live up to some part of who he is.”

And from Ben Bernanke (quote from NYT): “He came to represent independence. He personified the idea of doing something politically unpopular but economically necessary.”

“Paul Volcker was the most effective chairman in the history of the Federal Reserve.” Alan Greenspan

The Financial Times’ Martin Wolf began Paul Volcker's tribute article with the opening lines from his review of Mr. Volcker’s memoir, “Keeping At It: The Quest for Sound Money and Good Government.” “Paul Volcker is the greatest man I have known. He is endowed to the highest degree with what the Romans called virtus (virtue): moral courage, integrity, sagacity, prudence and devotion to the service of country.”

Somehow Wolf allowed his memorial to descend (pathetically) into inflationist propaganda: “When demand is weak and inflation low, however, central banks must ease monetary policy. But expansionary policy is technically difficult once short-term interest rates reach zero. Central banks have to consider various unconventional alternatives: expansion of balance sheets via ‘quantitative easing’; negative interest rates; and what the monetarist Milton Friedman called ‘helicopter drops’ of money to the public through direct payments or permanent monetary financing of fiscal deficits.”

Spare us (especially when honoring a noble sound money proponent).

The passing of Paul Volcker marks the end of “the greatest generation” of monetary policy stewards. To be sure, the periods from McChesney Martin to Volcker were far from perfect. But they were also a far cry from reckless.

It’s now a profoundly changed era. Chairman Volcker was resolutely determined to pop the consumer price inflation Bubble. He was intensely criticized and, of course, faced political backlash. Yet there was a strong constituency that recognized inflation’s deleterious effects. No one would dare contemplate popping today’s inflationary asset price Bubble. An incredibly powerful constituency is resolute in perpetuating one of history’s most threatening inflations.

I believe Chairman Powell had hoped “to live up to some part of” the Volcker legacy. Powell’s courage to stand up to the markets was rather decisively quashed in a few short weeks. The lesson here – that would be vehemently scorned if only the world wasn’t hopelessly oblivious – is that Bubbles not repressed grow progressively powerful. Dr. Bernanke may admire Volcker’s independence and determination to pursue a politically unpopular policy course. Just imagine the fortitude necessary to drive interest rates to 20%, as equities and bonds tanked and the economy gasped. It’s infinitely easier to slash rates and expand the Fed’s balance sheet (creating electronic “money” and captivating bull markets in the process).

Volcker is a true policy hero whose virtues and accomplishments have withstood the test of time. He was willing to inflict acute short-term pain for the prospect of long-term gains. Volcker accepted being a villain with no expectation of vindication. He steadfastly followed his moral and ethical guiding light. In a financial world colored with seductive variations of gray, Paul Volcker’s “sound money” framework readily distinguished right from wrong.

He would take a stand and withstand the wrath. Our world today is desperately lacking such leadership. Sounding hopelessly archaic, I foremost blame the current disheartening state of the world on decades of increasingly unsound finance, with inescapable financial and economic fragilities along with social and geopolitical strains (having taken root soon after Volcker departed the Fed). A world devoid of a sound money and Credit anchor is inevitably a world unhinged.

I ponder Paul Volcker’s career path had he been born in 1957 instead of thirty years earlier. It’s difficult picturing him qualifying for a position as a top Fed official in our era. He would call BS on QE and zero/negative rates. It would be a decisive “hell no!” to propping up highly speculative financial markets. Volcker would be repulsed by the notion of the Fed accommodating Trillion dollar federal deficits in a non-crisis environment.

It’s more than a challenge envisaging how Volcker’s exemplary personal attributes would be showcased in this day and age. Some unfairly associated his contentious views over the past decade with senility. Such notions from a more junior Volcker would have been chalked up to the rantings of a nutball. He was a disciple of sound money principles from a bygone era. Operating in today’s world of rank inflationism, this great man would have been relegated to the unexemplary.

Mr. Volcker’s passing is a sad reminder of how severely the world has lapsed. It’s similar for individuals, corporations, governments and the markets: add a significant amount of debt and you lose flexibility – you sacrifice freedom, independence and more. Well-tested traditional values and principles are too easily abandoned. The corrosion starts subtly only to end outrageously. Pushing short-term rates these days to 20%? Ten-year Treasury yields above 15%? Inconceivable. But almost as farfetched today would be any imposition of tight monetary conditions. At this point, 3% Fed funds and 4% ten-year yields would surely spark financial crisis.

The irony of it all. A more youthful Paul Volcker would be a pariah – a wretched antagonist naysayer in today’s world of market-dominated loose finance and central bank kowtowing to the almighty markets. Yet those that would deride a young Volcker these days absolutely cherish his legacy. Because the Volcker Fed slayed the beastly inflation dragon, policymakers now enjoy the prerogative of doing whatever it takes to sustain bull markets and economic expansions.

With inflation eradicated, the sky’s the limit as to the optimal size of central bank balance sheets. No amount of deficit spending (bond issuance) risks a spike in market yields, not with the annihilation of inflation risk. Asset inflation is to be actively promoted rather than feared. Meager inflation ensures central bankers can aggressively reflate faltering market Bubbles without concern for unleashing inflationary pressures. Volcker’s accomplishment laid the groundwork for the abdication of business and market cycles: the wonder of Capitalism free from the hinderance of corrections and adjustment. It’s a narrative befitting of Volcker’s inflationist successors, while dishonoring the legacy of the Last of the Great Central Bankers.

Excerpt from a recent Paul Volcker writing published in the December 11th, 2019, Financial Times:

“By the late summer of 2018, it was already clear that the US and the world order it had helped establish during my lifetime were facing deep-seated political, economic, and cultural challenges. Nonetheless, I drew reassurance from my mother’s reminder that the US had endured a brutal civil war, two world wars, a great depression, and still emerged as the leader of the ‘free world’, a model for democracy, open markets, free trade, and economic growth. That was, for me, a source of both pride and hope.

Today, threats facing that model have grown more ominous, and our ability to withstand them feels less certain. Increasingly, by design or not, there appears to be a movement to undermine Americans’ faith in our government and its policies and institutions. We’ve moved well beyond former president Ronald Reagan’s credo that ‘government is the problem’, with its aim of reversing decades of federal expansion.

Today we see something very different and far more sinister. Nihilistic forces are dismantling policies to protect our air, water, and climate. And they seek to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.

Without them, the American example that my mother so cherished will revert to the kind of tyranny that once seemed to be on its way to extinction — though, sadly, it remains ensconced in some less fortunate parts of the world…

Monetary policy is important, but it cannot by itself sustain global leadership. We need open markets and strong allies to support economic growth and the prospects for peace. Those constructive American policies have been a large part of my life. Instead, confidence in the US is under siege.

Seventy-five years ago, Americans rose to the challenge of vanquishing tyranny overseas. We joined with our allies, keenly recognising the need to defend and sustain our hard-won democratic freedoms. Today’s generation faces a different, but equally existential, test. How we respond will determine the future of our own democracy and, ultimately, of the planet itself.”

Statesman to the end.

For the Week:

The S&P500 jumped 1.7% (up 28.5% y-t-d), and the Dow gained 1.1% (up 22.0%). The Utilities surged 2.7% (up 22.5%). The Banks added 0.5% (up 31.9%), and the Broker/Dealers rose 0.9% (up 23.5%). The Transports gained 1.2% (up 18.9%). The S&P 400 Midcaps jumped 2.0% (up 24.2%), and the small cap Russell 2000 rose 2.1% (up 24.0%). The Nasdaq100 advanced 2.2% (up 37.1%). The Semiconductors surged 3.2% (up 60.5%). The Biotechs gained 1.5% (up 22.5%). With bullion adding $5, the HUI gold index dropped 2.8% (up 36.7%).

Three-month Treasury bill rates ended the week at 1.53%. Two-year government yields added two bps to 1.63% (down 86bps y-t-d). Five-year T-note yields rose eight bps to 1.73% (down 78bps). Ten-year Treasury yields jumped 10 bps to 1.92% (down 77bps). Long bond yields gained nine bps to 2.34% (down 67bps). Benchmark Fannie Mae MBS yields rose six bps to 2.75% (down 75bps).

Greek 10-year yields rose eight bps to 1.42% (down 298bps y-t-d). Ten-year Portuguese yields gained four bps 0.42% (down 131bps). Italian 10-year yields surged 15 bps to 1.41% (down 134bps). Spain's 10-year yields increased three bps to 0.44% (down 97bps). German bund yields gained four bps to negative 0.25% (down 49bps). French yields rose five bps to 0.05% (down 66bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields slipped a basis point to 0.78% (down 50bps). U.K.'s FTSE equities index surged 3.1% (up 12.7% y-t-d).

Japan's Nikkei Equities Index declined 0.9% (up 19.0% y-t-d). Japanese 10-year "JGB" yields rose two bps to negative 0.02% (up 1 bp y-t-d). France's CAC40 rose 1.7% (up 27.3%). The German DAX equities index added 0.3% (up 26.1%). Spain's IBEX 35 equities index rose 1.2% (up 13.3%). Italy's FTSE MIB index jumped 2.9% (up 31.0%). EM equities were higher. Brazil's Bovespa index rose 2.3% (up 26.5%), and Mexico's Bolsa increased 0.6% (up 6.9%). South Korea's Kospi index gained 1.6% (up 8.0%). India's Sensex equities index rose 1.6% (up 15.6%). China's Shanghai Exchange advanced 1.3% (up 20.5%). Turkey's Borsa Istanbul National 100 index added 0.6% (up 21.8%). Russia's MICEX equities index increased 0.6% (up 27.3%).

Investment-grade bond funds saw outflows of $180 million, while junk bond funds posted inflows of $695 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.73% (down 89bps y-o-y). Fifteen-year rates were unchanged at 3.19% (down 88bps). Five-year hybrid ARM rates added a basis point to 3.37% (down 61bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.93% (down 55bps).

Federal Reserve Credit last week surged $40.4bn to $4.088 TN, with a 14-week gain of $361 billion. Over the past year, Fed Credit expanded $39.5bn, or 1.0%. Fed Credit inflated $1.277 Trillion, or 45%, over the past 371 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.3 billion last week to $3.405 TN. "Custody holdings" gained $2.3 billion, or 0.1% y-o-y.

M2 (narrow) "money" supply declined $19.2bn last week to $15.346 TN. "Narrow money" surged $1.015 TN, or 7.1%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits jumped $29.9bn, while Savings Deposits sank $48.1bn. Small Time Deposits dipped $3.1bn. Retail Money Funds added $1.4bn.

Total money market fund assets fell $19.5bn to $3.600 TN. Money Funds gained $591bn y-o-y, or 19.6%.

Total Commercial Paper declined $10.6bn to $1.129 TN. CP was up $55bn, or 5.1% year-over-year.

Currency Watch:

The U.S. dollar index gained 0.5% to 97.69 (up 1.6% y-t-d). For the week on the upside, the South African rand increased 2.0%, the South Korean won 1.0%, the Norwegian krone 0.7%, the Mexican peso 0.6%, the Australian dollar 0.4%, the Brazilian real 0.2%, and the Swiss franc 0.1%. On the downside, the British pound declined 2.5%, the euro 0.4%, the Singapore dollar 0.1%, the Swedish krona 0.1% and the Japanese yen 0.1%. The Chinese renminbi declined 0.43% versus the dollar this week (down 1.83% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rose 1.2% this week (up 4.4% y-t-d). Spot Gold added 0.4% to $1,482 (up 15.5%). Silver gained 1.2% to $17.224 (up 10.8%). WTI crude added 37 cents to $60.44 (up 33%). Gasoline jumped 2.6% (up 29%), and Natural Gas recovered 1.4% (down 21%). Copper gained 0.9% (up 7%). Wheat rose 1.8% (up 8%). Corn jumped 1.8% (up 3%).

Market Instability Watch:

December 16 – Financial Times (Colby Smith): “The Federal Reserve on Monday cleared the first big hurdle in its attempts to keep a lid on short-term borrowing costs in what traders have been concerned could be a turbulent end to the year. Despite a similar cash squeeze to the one that sent overnight rates unexpectedly soaring to 10% in September, actions by the New York arm of the US central bank helped hold the overnight repo rate to 1.7%, just 8 bps higher than on Friday and in line with normal fluctuations. The Fed has been flooding the system with cash in the form of short-term loans since the September alarm, for fears banks were unwilling or unable to lend enough.”

December 17 – Wall Street Journal (Sam Goldfarb): “A spirited rally is pushing some types of corporate bonds toward their best year in a decade… Including price changes and interest payments, U.S. investment-grade corporate bonds have returned 14.2% year-to-date through Monday—on track for their first double-digit tally since 2009, according to Bloomberg Barclays data. Speculative-grade bonds have returned 13.5%. December is shaping up to be a particularly good month for corporate debt investors. Not only have higher-quality bonds rallied, as they have for most of the year, but prices have climbed on… bonds with near-rock bottom, or triple-C, ratings that investors have largely shunned since May.”

December 19 – Financial Times (Jennifer Alban): “Investors have been scrambling to buy the bonds of the riskiest US corporate borrowers as the year draws to a close, underscoring a desperate hunt for yield as interest rates remain rooted near historic lows. In December alone, companies across the US rated triple C — the bottom tier of the ‘junk’ bond market — have returned 4.4%, according to Oleg Melentyev, head of US high-yield strategy at Bank of America Global Research.”

December 16 – Financial Times (Anna Gross): “US stocks have hit all-time highs this year, but not everyone in the market will be celebrating. Investors have pulled more money out of US-focused equity funds than in any year on record. Investors have taken a total of more than $156bn out of mutual and exchange traded funds this year, according to… Refinitiv Lipper — the highest annual figure since the company started collecting data in 1992. Equity mutual funds had outflows of $248bn, while $92bn was drawn into equity ETFs. Investors have been funnelling money into bonds and money-market funds, which are seen as havens in periods of uncertainty.”

December 17 – Bloomberg (Gregory Calderone): “An outsize CBOE Volatility Index options trade could signal the return of ‘50 Cent,’ an investor who earned the moniker for a proclivity to buy cheap options in large amounts. Someone snapped up roughly 130,000 January $22 calls on the index for about 50 cents each Tuesday, contracts that would pay off if the volatility gauge almost doubles from its current level. The trade came as the S&P 500 Index climbed toward a record for the fourth session in a row and the VIX, which tracks the 30-day implied volatility for stocks in the benchmark gauge, hovered near its lowest level of the year.”

Trump Administration Watch:

December 15 – Financial Times (James Politi): “Even in the euphoria of finally reaching a trade deal with China following months of tempestuous talks, US trade representative Robert Lighthizer struck a wary tone on whether Beijing would follow through on the pledges it had just agreed. ‘We think it was a good negotiation and will make a real difference. A sceptic would say we’ll see, that’s probably a wise position to take,’ Mr Lighthizer told reporters… ‘But our expectation is they will keep their obligations.’”

December 16 – Reuters (Makini Brice and Susan Heavey): “The so-called Phase One trade deal between Washington and Beijing has been ‘absolutely completed,’ a top White House adviser said on Monday, adding that U.S. exports to China will double under the agreement. ‘They’re ... going to double our exports to China,’ National Economic Council Director Larry Kudlow told Fox News…”

December 18 – Reuters (Stella Qiu and Martin Pollard): “China and the United States are in touch over the signing of their Phase 1 trade deal, China’s commerce ministry said, which will see lower U.S. tariffs on Chinese goods and higher Chinese purchases of U.S. farm, energy and manufactured goods. The Phase 1 deal was announced last week after more than two years of on-and-off trade talks, although neither side has released many specific details of the agreement.”

December 17 – Reuters (Susan Heavey and David Lawder): “U.S. Trade Representative Robert Lighthizer… said details of Chinese purchases across U.S. agriculture, manufacturing, energy and service sectors in the ‘phase one’ China trade deal would be detailed in writing. Lighthizer, outlining the purchases in the agreement, told Fox Business Network in an interview: ‘This will all be written out,’ but gave no further details…”

December 18 – CNBC (Yun Li): “The ‘phase one’ trade deal between the U.S. and China, supposedly a game changer for the global economy going by the stock market’s rise to a record after the announcement, has left many analysts and investors puzzled about what was specifically agreed to… Skepticism is brewing in the markets as much of the details have not been confirmed by both sides. China, in particular, has been reluctant to commit to the amount of agriculture products it’s willing to buy, while big numbers are floating from Washington. Beijing has also been quiet about tariffs on U.S. goods as well as an enforcement mechanism. ‘There remains more questions than answers,’ Chris Krueger, Washington strategist at Cowen, said… ‘It’s ‘more trade truce than deal ... It is unclear if any China tariffs on U.S. goods have been reduced ... Vague promises on IP protections.’”

December 18 – Wall Street Journal (Josh Zumbrun and Kirk Maltais): “The limited trade pact reached by the U.S. and China last week could be a boon to American farmers hard hit by the trade war, but the agricultural sector’s relief over a deal is being tempered by skepticism over the ambitious targets set by U.S. negotiators. U.S. officials said China has committed to boosting agricultural purchases to at least $40 billion—and perhaps as high as $50 billion—annually over the next two years. The latter figure would nearly double peak sales before the trade war. ‘They need U.S. pork, they need U.S. soybeans. Do they need $50 billion of agricultural goods? Absolutely not,’ said Dave Marshall, a farm-marketing adviser with First Choice Commodities Inc.”

December 17 – Reuters (Alexandra Alper): “The Trump administration is finalizing a set of narrow rules to limit exports of sophisticated technology to adversaries like China, a document seen by Reuters shows, in a boon to U.S. industry that feared a much tougher crackdown on sales abroad. The Commerce Department is putting the finishing touches on five rules covering products like quantum computing and 3-D printing technologies that were mandated by a 2018 law to keep sensitive technologies out of the hands of rival powers.”

December 14 – New York Times (Keith Bradsher): “President Trump’s initial retreat from his trade-war threats has handed hard-liners in China a victory. A longer, pricklier trade war and stiff Chinese resistance to economic reforms could result. Mr. Trump on Friday outlined a partial trade deal that deferred new tariffs on $160 billion a year in Chinese-made goods, a move that would have had him taxing virtually everything China sells to the United States. He also agreed for the first time to broadly reduce tariffs he had already imposed on Chinese goods, halving tariffs on more than $100 billion a year worth of products like clothing and lawn mowers — a striking about-face for a protectionist president who last year described himself as a ‘tariff man.’”

Federal Reserve Watch:

December 17 – Bloomberg (Rich Miller): “The Federal Reserve is running the risk of fomenting an eventual financial crisis by easing banking regulations at the same time that it’s cut interest rates. So say some former Fed officials, including ex-Vice Chairman Alan Blinder and financial stability experts Daniel Tarullo and Nellie Liang. They worry that the combination of looser credit and laxer rules will prompt financial institutions and investors to pile on leverage and take excessive risks. While that may spur economic growth in the short run, it could end up triggering a recession once the speculative bets are unwound. ‘When you lower rates and put incentives in place to increase borrowing, it should not be surprising that risks will increase,’ said Liang, former director of the Fed’s financial stability division. ‘That means this is not the right time to be also significantly loosening financial regulations.’”

December 17 – Wall Street Journal (Michael S. Derby): “Two Federal Reserve officials said they expect to hold interest rates steady for the time being, even as President Trump once again lobbied for lower borrowing costs. The presidents of the Dallas and Boston Fed banks… sounded upbeat on the U.S. economy’s likely prospects in 2020 and comfortable with the Fed’s current policy stance. ‘I’ve got penciled in no change’ in rates for 2020 said the Dallas Fed’s Robert Kaplan… Boston Fed leader Eric Rosengren… concurred with the case for holding steady. It is time for the Fed to be ‘patient for a fairly material period of time until we actually see a significant change in the outlook,’ Mr. Rosengren said… In between their appearances, Mr. Trump tweeted that it ‘would be sooo great if the Fed would further lower interest rates and quantitative ease. The Dollar is very strong against other currencies and there is almost no inflation. This is the time to do it. Exports would zoom!’”

U.S. Bubble Watch:

December 17 – Associated Press (Andrew Taylor): “House leaders on Monday unveiled a $1.4 trillion government-wide spending package that’s carrying an unusually large load of unrelated provisions catching a ride on the last train out of Congress this year. A House vote is slated for Tuesday on the sprawling package, some 2,313 pages long, as lawmakers wrap up reams of unfinished work — and vote on impeaching President Donald Trump. The legislation would forestall a government shutdown this weekend and give Trump steady funding for his U.S.-Mexico border fence. The year-end package is anchored by a $1.4 trillion spending measure that caps a difficult, months-long battle over spending priorities.”

December 14 – Wall Street Journal (James Mackintosh): “Are U.S. companies making more money than ever before, or are they mired in one of their longest profit slumps since World War II? Widely used measures have diverged in recent years, leaving many investors worrying that something is amiss. Look at pretax domestic profits as measured by the Bureau of Economic Analysis, and it is easy to be bearish. Profits are down 13% in five years, the biggest drop outside a recession since World War II. President Trump’s tax cut has cushioned the blow to earnings, with after-tax corporate profits falling only a little. Profit margins also are down sharply, with the pretax margin for domestic business lower than the postwar average and below where it stood from World War II until 1970. Falling domestic profits suggest companies are in deep trouble, avoiding an even deeper slump only thanks to tax cuts. Earnings by S&P 500 companies tell the opposite story. Reported earnings per share were at a record in the 12 months to June, up 31% in five years and forecast to keep rising. The after-tax profit margin is slightly down from a record last year, but still higher than any time before that.”

December 18 – CNBC (Diana Olick): “Strong reads on the economy have researchers at mortgage giant Fannie Mae revising their 2020 housing forecast much higher. Fannie Mae’s Economic and Strategic Research Group predicts builders will expand production more than previously expected… After increasing just over 1% annually this year, growth in single-family housing starts will accelerate to 10% during 2020 and top 1 million new homes in 2021… That would mark a post-recession high but is still far below the annual peak of about 1.7 million single-family starts in 2005 and the 1.2 million annual pace experienced in the late ’90s… ‘It will likely take several years, even at a more robust pace, for new construction to address the existing pent-up demand for additional housing, as suggested by a still-increasing share of 25- to 34 year-olds living at home with their parents,’ according to the report… ‘We now expect single-family housing starts and sales of new homes to increase substantially, aided by a large uptick in new construction as builders work to replenish inventories drawn down by the recent surge in new home sales activity,’ said Fannie Mae chief economist Doug Duncan.”

December 16 – CNBC (Diana Olick): “A stronger economy and a severe housing shortage have the nation’s homebuilders feeling better than they have in two decades. Builder confidence in the newly built, single-family home market jumped 5 points in December to 76, the highest reading since June 1999, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Anything above 50 is considered positive… The index stood at 56 last December. At the worst of the housing crash, in 2009, builder sentiment hit a low of just 8.”

December 17 – Reuters (Lucia Mutikani): “U.S. homebuilding increased more than expected in November and permits for future home construction surged to a 12-1/2-year high as lower mortgage rates continue to boost the housing market and support the broader economy… Overall housing starts jumped 13.6% on a year-on-year basis in November. Building permits increased 1.4% to a rate of 1.482 million units in November, the highest level since May 2007.”

December 19 – CNBC (Diana Olick): “The number of homes for sale at the end of November was the lowest on record for the month, according to the National Association of Realtors, which began tracking this metric in 1999. There were just 1.66 million homes on the market, down 5.7% compared with November 2018. That represents a 3.7-month supply at the current sales pace, down from a 4-month supply a year ago. Supply is leanest on the low end, where demand is strongest. For homes priced below $100,000, inventory was down 15% annually. For those priced between $100,000 and $250,000, supplies were 7% lower annually… The housing shortage has reignited home prices, which had been cooling last year and into the first months of this year. The median price for an existing home sold in November was $271,300, the highest November price reading since the Realtors began tracking in 1999.”

December 19 – Reuters (Lindsay Dunsmuir): “U.S. home sales dropped more than expected in November due to an ongoing shortage of properties for sale, despite the sector receiving an overall boost from the Federal Reserve’s decision to cut interest rates this year. …Existing home sales fell 1.7% to a seasonally adjusted annual rate of 5.35 million units last month. October’s sales pace was downwardly revised to 5.44 million units… Existing home sales still rose 2.7% from one year ago, NAR said, the fifth straight month of year-on-year gains.”

December 17 – Bloomberg (Prashant Gopal and Katia Dmitrieva): “Permits to build new apartment buildings in the U.S. are surging as a bulging population of millennials fuels demand for rentals and low interest rates ease construction financing costs. Authorizations for larger multifamily dwellings… jumped to an average annualized pace of 501,000 in the three months through November… That’s the highest since July 2015. Prior to that year, which was a hot one for condos and apartments, it’s the strongest since 1987. The rental market is booming as young people leave dorm rooms and their parents’ basements to strike out on their own.”

December 15 – CNBC (Michael Ivanovitch): “Looking at the latest U.S.-China trade numbers, one wonders how the agreement announced last week could lead to an acceptable balance of bilateral trade accounts. China’s surplus on its U.S. goods trade in the first 10 months of this year was $294.5 billion, and amounted to 40% of America’s total trade gap. During the same period, Beijing slashed U.S. exports to China by 14.5% to $87.6 billion. By contrast, Chinese goods sales to the U.S. were more than four times larger at $382.1 billion.”

December 16 – MarketWatch (Joy Wiltermuth): “U.S. consumers might have their pick of employment in today’s robust job market, but that doesn’t mean everyone is getting financed for a car. A Federal Reserve Bank of New York survey of consumer credit… showed a spike in the rate of auto-loan rejections, to 8.1% in October from 4.5% in the same month last year. And for the full year, the average rate of car-loan rejections was 7.1%, up from 6.1% for 2018, even through applicants reported fewer denials in other parts of the record $14 trillion consumer debt market for the same 12-month period.”

December 16 – Reuters (Jonnelle Marte): “U.S. consumers showed greater appetite for loans this year - driven by stronger demand for mortgages amid lower rates - and they had an easier time accessing credit when compared to a year earlier, a survey from the New York Federal Reserve showed… The greater demand for credit was driven by consumers seeking to take advantage of lower borrowing rates to buy homes.”

December 15 – Wall Street Journal (Rebecca Elliott): “America’s hottest oil-drilling regions—such as this one at the heart of the Permian Basin—are seeing their economies soften as shale producers slash spending, leading to emptier hotels, choosier employers and less overtime for workers. Early this year, demand for the tubing, bolts and valves used in fracking was so high that Homer Daniels’s oil-field equipment company, RK Supply, in the Midland area was on track to easily beat its annual revenue forecast. But by August, Mr. Daniels had to impose a hiring freeze as customers delayed projects. ‘It affects everybody’s bottom lines,’ Mr. Daniels said… ‘The boom time is done at this point, unless oil prices go up significantly,’ said Michael Plante, senior economist at the Federal Reserve Bank of Dallas.”

December 16 – Reuters (Eric M. Johnson, David Shepardson): “Boeing Co said… it would suspend production of its best-selling 737 MAX jetliner in January, its biggest assembly-line halt in more than 20 years, as fallout from two fatal crashes of the now-grounded aircraft drags into 2020. Boeing… said it would not lay off any of the roughly 12,000 employees there during the production freeze, though the move could have repercussions across its global supply chain and the U.S. economy.”

December 17 – CNBC (Thomas Franck): “Boeing will still burn more than $1 billion a month even after halting 737 Max production, according to J.P. Morgan. Boeing’s decision to stop suspend production of the troubled aircraft was made in light of months of cash-draining groundings worldwide, but the company’s internal overhead and labor expenses will remain and will increase cash burn, analyst Seth Seifman wrote to clients.”

December 19 – Reuters (Bharath Manjesh): “Moody’s… lowered its rating on Boeing Co’s debt and said it sees long-term risk to the company’s reputation in the wake of the planemaker’s plan to halt production of its best-selling 737 MAX jetliner. A further downgrade of the ratings could occur if the grounding runs into the second half of 2020, especially if aviation authorities identify some other component of the MAX’s flight management system that requires updating…”

December 17 – Bloomberg (Romy Varghese): “San Francisco is projecting a $420 million budget gap over the next two fiscal years as expenses such as pension contributions are rising faster than the growth in revenue for the technology hub.”

December 14 – Wall Street Journal (Maureen Farrell and Eliot Brown): “In early October, WeWork’s board of directors trickled into a brick building in lower Manhattan… After they took their seats around the conference room table, Mark Schwartz started to vent. ‘I’ve stayed silent too long,’ the… former Goldman Sachs… partner told the six other men on the board, including WeWork’s co-founder and chairman, Adam Neumann. Mr. Schwartz aired his frustrations about the state of the company, which was perilously low on cash after years of freewheeling spending and had become the butt of jokes on Wall Street… No more fantasies, he said, as advisers and others looked on. Now, he said, they needed to make decisions that would save the company. Even more remarkable than the content of Mr. Schwartz’s blistering rebuke was the fact that it came so late. The banker had stayed silent so long that the story was almost over.”

December 17 – Bloomberg (Sridhar Natarajan and Gillian Tan): “WeWork has obtained $1.75 billion in new financing in a fundraising push led by Goldman Sachs…, under terms that free up a mountain of cash for the struggling office-sharing company. The new line of credit is the first hurdle cleared by SoftBank in its pledge to put together $5 billion in debt financing for WeWork as part of a bailout package. The move should free up roughly $800 million in cash that WeWork had set aside to satisfy covenants on its previous credit line…”

December 17 – Bloomberg (Vildana Hajric and Olga Kharif): “Ether, the second-largest cryptocurrency, extended a three-day losing streak to turn lower for the year, bucking an uptrend set by most other major digital assets. Since the beginning of November, the coin has spent 64% of its days lower… It is down close to 1.3% for the year after more than doubling at one point.”

Fixed-Income Bubble Watch:

December 129 – Bloomberg (Liz Capo McCormick and Katherine Greifeld): “Normally, trillion-dollar deficits might be considered bad news for Uncle Sam. But these days, it seems there are fewer reasons to worry. With the Federal Reserve getting back into the business of buying Treasuries, the supply-demand picture for U.S. government debt is set to get a lot better in 2020. Not only will the central bank’s purchases reduce the amount the U.S. will need to borrow at auctions by almost a half-trillion dollars, but the Fed will also soak up nearly 60% of the Treasury’s net issuance to the public, according to JPMorgan…”

December 129 – Bloomberg (Sarah Husband and Ruth McGavin): “Threats to financial stability from recent growth in lending to risky companies are hard to assess because of shortfalls in understanding who holds the debt, an international banking supervisor has warned. The Financial Stability Board, which acts as a lookout for systemic risks in the banking system, encountered ‘important’ data gaps in a study of exposure to leveraged loans and collateralized-loan obligations… The global stock of leveraged loans to highly indebted companies may be as high as $3.2 trillion… Meanwhile, borrowers have become more indebted and investor protections included in documentation for loans have gotten weaker.”

December 16 – Financial Times (Richard Henderson, Colby Smith and Jennifer Ablan): “Investors have poured money into fixed income funds at a record pace this year, fuelling a blowout bond market rally that has taken veteran traders by surprise and sent borrowing costs back to their lowest levels on record. The latest data from EPFR Global… show that money has been added to fixed-income funds for 49 straight weeks. That stretch has added $468bn in new assets to bond funds, the largest uninterrupted haul in records going back to 2001 — eclipsing the $275bn over 54 weeks to December 2012, and the $250bn over 60 weeks ending in May 2010. Assets in bond funds now total $5.8tn, from $4.9tn at the start of the year, reflecting sharp rises in prices along with net inflows.”

December 18 – Financial Times (Joe Rennison and Tommy Stubbington): “Top-rated US companies flocked to sell bonds in Europe in 2019 in record amounts, taking advantage of borrowing costs pushed lower by a fresh wave of stimulus from the European Central Bank. The most creditworthy tier of American companies, known as investment-grade, has sold the equivalent of $129bn in euros so far this year, according to Dealogic… That is more than double last year’s tally of $56bn and much higher than the previous peak of $107bn in 2017.”

China Watch:

December 18 – Bloomberg (Tian Chen and Livia Yap): “China’s central bank injected the most liquidity via open-market operations since January, in a push to ensure ample cash supply ahead of seasonal tightness at year-end. The People’s Bank of China added 280 billion yuan ($40bn) into the financial system with 7 and 14-day reverse repurchase agreements… That came after the authorities restarted such operations after a 20-day hiatus on Wednesday. The overnight repo rate -- an indicator of interbank liquidity -- plunged the most in a month, while the benchmark seven-day tenor saw its biggest decline since July.”

December 17 – Bloomberg (Tian Chen and Heng Xie): “China’s government-bond investors will soon be looking for reassurance from the central bank that there’s plenty of cash in the financial system. The country will see a ‘liquidity hole’ of 2.8 trillion yuan ($400bn) in January, in large part because people across the nation will withdraw cash for the Lunar New Year holiday, according to Guotai Junan Securities Co. That means bond traders expect the central bank to unlock funds to avoid the liquidity-driven panic seen in October, when the benchmark 10-year yield spiked the most in six months.”

December 14 – Bloomberg: “China’s central bank warned property speculators that ‘homes are for living in’ as the regulator pledged to properly regulate the real estate market. The People’s Bank of China also said it will be ‘flexible’ and ‘appropriate’ in setting prudent monetary policy, and will boost financial support to manufacturers and the private sector… Authorities will increase mid to long-term funding for the manufacturing industry and further lower financing costs for private companies, the PBOC said.”

December 15 – Reuters (Lusha Zhang and Ryan Woo): “China’s new home prices grew at their weakest pace in nearly two years in November while property investment also eased, with tightening policies continuing to cool the market even as some local easing is expected to prevent a sharp slowdown… Average new home prices in China’s 70 major cities rose 0.3% in November from the previous month, lower than the 0.5% growth reported in October and the weakest since February 2018… On an annual basis, average new home prices in the 70 cities rose 7.1% in November, down from 7.8% in October… Most of the 70 cities surveyed still reported monthly price increases for new homes, but the number was down to 44 from 50 in October.”

December 18 – Financial Times (Don Weinland): “A top adviser to China’s central bank has warned of a possible ‘chain reaction’ of defaults among the country’s thousands of local government financing vehicles after one of these entities nearly missed a payment this month. Ma Jun, an external adviser to the People’s Bank of China, called on the government to introduce ‘intervention mechanisms’ to contain the risk associated with LGFVs — special entities used in the country to fund billions of dollars of roads, bridges and other infrastructure. ‘Among the tens of thousands of platform-style institutions nationwide, if only a few publicly breach their contracts it may lead to a chain reaction,’ Mr Ma said…”

December 16 – South China Morning Post (Amanda Lee): “Faced by the ‘cliff-like’ plunge in the main business of their largest group of clients, which has entered an ‘unprecedented cold winter period’, the tale in northern Hebei province is one that is replicated across the country, China’s small rural banks are scrambling to raise new capital as they struggle to contain a rapidly rising number of overdue loans. Due to sluggish domestic growth and the impact of the trade war with the United States, 29 rural banks this year have applied to the China Securities Regulatory Commission (CSRC) to raise capital by selling new shares to replenish their balance sheets… A total of 10 out of the 29 banks reported a non-performing loan ratio of more than 5%... Fitch… estimated that there are around 4,000 banks, including rural banks, in China that have assets of less than 100 billion yuan (US$14.2bn) but they account for 20% to 25% of the nation’s banking system assets.”

December 19 – Wall Street Journal (Nathaniel Taplin): “China is bailing out a large regional lender to the tune of $14 billion. It likely won’t be the last big check Beijing needs to write to solve its mounting bad-debt problem. In retrospect, Hengfeng Bank’s original choice of English name—'Evergrowing Bank’—should have raised a large red flag… Indeed, the troubles of Hengfeng… have been well known for some time. It hasn’t released an annual financial report for years—a reliable sign of serious problems—and authorities said earlier in 2019 that a restructuring was under way. Details are now arriving: The bank said… that an arm of China’s sovereign-wealth fund and the local government will together purchase most of a new 100 billion yuan ($14.3bn) equity issue, with UOB and other unnamed investors chipping in four billion yuan.”

December 16 – Bloomberg: “Six privately owned companies in one of China’s wealthiest provinces have defaulted on their debt or come perilously close in the last three months. With 68.1 billion yuan ($9.7bn) in outstanding debt among those six companies alone, the distress in Shandong has rattled even seasoned investors. The problem isn’t the defaults themselves… It’s the practice common among Shandong companies of guaranteeing each others’ debts. Firms don’t have to make public these liabilities, leaving investors to wonder who’s on the hook and for how much. With the once-strong industrial economy flagging, the murky ties between the province’s private companies threaten to drag them all down together.”

December 16 – Financial Times (Don Weinland): “Over the past two decades, a handful of private entrepreneurs transformed Zouping county in China’s Shandong province from a rural backwater best known for its yams into an industrial hub home to one of the world’s largest aluminium producers. But the years of aggressive, highly leveraged expansion have also turned Zouping and several neighbouring counties into a hotspot for corporate defaults, most recently with privately held corn oil producer Xiwang Group’s failure to repay a Rmb1bn ($143m) bond. The distress in Shandong has become a harbinger for financial risk across the country this year. A wave of defaults on corporate bonds has pushed China’s private sector default rate to a record 4.9% as of the end of November, according to Fitch…, up from 0.6% in 2014.”

December 14 – Reuters (Kevin Yao): “China plans to set a lower economic growth target of around 6% in 2020 from this year’s 6-6.5%, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources said. Chinese leaders are trying to support growth to limit job losses that could affect social stability, but are facing pressure to tackle debt risks caused by pump-priming policies.”

December 15 – Reuters (Kevin Yao and Stella Qiu): “Growth in China’s industrial and retail sectors beat expectations in November, as government support propped up demand in the world’s second-largest economy and amid easing trade hostilities with Washington. Industrial production rose 6.2% year-on-year in November…, beating the median forecast of 5.0% growth…”

December 15 – Wall Street Journal (Mike Bird): “The favored funding source of China’s real-estate developers is under scrutiny in one of the country’s largest urban areas, posing a threat to a sector that has stretched creative financing to its limits. On Friday, the city of Xi’an in central China opened a consultation process on instituting an escrow system that would ensure developers hold on to funds worth 1.2 times the cost of building a new property when booking a presale. There is no existing escrow system of this kind in China, so funds from presales are used to cover existing liabilities… For developers, better-known funding routes are already congested. After a borrowing binge this year, Chinese developers make up half of the Asian high-yield dollar bond market… While investment by real-estate developers has risen by 46% in the last five years, funding from deposits and other advance payments has more than doubled. It is likely to reach around 6 trillion yuan ($859.4bn) this year, the source of more than one-third of total investment.”

December 17 – Bloomberg (Balkis Ammal, Wendy Tan and Si Hang Xie): “China’s offshore junk bonds returned 12% this year and issuance reached an all-time high as investors hunted for returns amid plunging global yields… S&P Global Ratings and Fitch Ratings made the most downgrades or withdrawals of ratings on China junk bonds since Bloomberg started compiling the data in 2009. Yet issuance climbed 70% this year to $34.3 billion.”

December 14 – Financial Times (Yuan Yang and Patrick Mathurin): “Tech spats between China and the US have encompassed smartphones and social media apps — and now the humble office keyboard. This week’s news that Beijing has ordered all government offices and public institutions to remove foreign computer equipment and software within three years marked another example of ‘decoupling’ between the two countries’ tech sectors. The new directive, nicknamed ‘3-5-2’, aims to increase China’s reliance on homemade technology and could deal a blow to foreign technology groups such as HP, Dell Technologies and Microsoft.”

Central Banking Watch:

December 19 – Financial Times (Richard Milne): “Sweden’s central bank ended its five-year experiment with negative rates amid growing concern about the implications for the economy, businesses and investors from sub-zero monetary policy. The Riksbank raised its main repo rate… by a quarter percentage point to zero, a level it was last at in February 2015…. The world’s oldest central bank has been under heavy scrutiny for its monetary policy ever since the 2008 global financial crisis. It raised rates in 2010 and 2011 leading to accusations of ‘sadomonetarism’ from Nobel laureate Paul Krugman before consistently cutting rates down to a record low of minus 0.5%... The Riksbank… repeated its warning from October that if negative rates continued for too long ‘the behaviour of economic agents may change and negative effects may arise’.”

December 19 – Reuters (Simon Johnson): “Sweden’s central bank ended five years of negative interest rates… when it raised benchmark borrowing costs by a quarter point to zero… The increase from -0.25% makes the Riksbank the first of the central banks that pushed rates below zero to inch its way back to what was long considered the floor for interest rates. Rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary, and with the exception of Hungary, are expected to remain so for some time to come. Riksbank Governor Stefan Ingves said negative rates had worked well, boosting inflation and the economy. ‘But it is a completely different question what would happen in an economy if you had negative rates for a very long period,’ he told reporters.”

Brexit Watch:

December 15 – Reuters (Elizabeth Piper): “British Prime Minister Boris Johnson will ‘get Brexit done’ by Jan. 31 and then agree a new trade deal with the European Union by the end of 2020, cabinet office minister Michael Gove said…, vowing to deliver on the government’s top priority. Johnson and his team were triumphant last week when he won a commanding majority of 80 at an early election he said he was forced to call to break the Brexit deadlock. Winning over many traditionally Labour voters in northern and central England, Johnson has proclaimed he will lead a ‘people’s government’.”

December 15 – Reuters (Elizabeth Piper): “Scotland’s first minister, Nicola Sturgeon, warned Prime Minister Boris Johnson… that he could not keep Scotland in the United Kingdom against the country’s will. Johnson and his government have repeatedly said they will not give the go ahead for another referendum on Scottish independence, but Sturgeon said after the Scottish National Party won 48 of Scotland’s 59 seats in the UK parliament, her party had been given a mandate for one. ‘If he thinks ... saying no is the end of the matter then he is going to find himself completely and utterly wrong,’ Sturgeon told the BBC…”

EM Watch:

December 19 – Wall Street Journal (Francis Yoon): “Companies in developing nations sold a record $118 billion of high-yield dollar bonds this year, and are likely to keep up a fast pace in 2020. The total has more than doubled from five years earlier, according to Dealogic... The figures cover debt in dollars with subinvestment grade credit ratings, or no rating, and run to Dec. 18. They don’t include bonds sold by governments.”

Europe Watch:

December 17 – Associated Press: “A closely watched survey showed… that business confidence in Germany, Europe’s biggest economy, rose for the second consecutive month in December. The Ifo institute said that managers’ assessment of both their current situation and their outlook for the next six months brightened. Its monthly index was up to 96.3 points from 95.1 in December, the latest evidence of an uptick in sentiment since it bottomed out in August.”

December 17 – New York Times (Liz Alderman): “Europe’s economy is struggling to gain traction after years of anemic growth. But the rock-bottom interest rates meant to power a recovery are fueling a property boom that is creating a new set of problems. Money is so cheap — a 20-year mortgage can be had in Paris or Frankfurt at a rate of less than 1% — that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe. In some parts of Europe, said Jörg Krämer, the chief economist at Commerzbank…, valuations have already returned to or exceeded levels that preceded the Continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.”

Global Bubble Watch:

December 18 – Bloomberg (Shelly Hagan): “Canadian underlying inflation hit the highest in a decade in November, reinforcing a decision by policy makers this month to refrain from cutting interest rates despite concerns around slowing growth. Inflation rose 2.2% in November from a year earlier, compared with 1.9% in October…”

December 14 – Reuters (Matthew Green and Jake Spring): “A handful of major states resisted pressure on Sunday to ramp up efforts to combat global warming as a U.N. climate summit ground to a close, angering smaller countries and a growing protest movement that is pushing for emergency action. The COP25 talks in Madrid were viewed as a test of governments’ collective will to heed the advice of science to cut greenhouse gas emissions more rapidly, in order to prevent rising global temperatures from hitting irreversible tipping points.”

December 17 – CNBC (Saheli Roy Choudhury): “Artificial intelligence used to carry out automated, targeted hacking is set to be one of the major threats to look out for in 2020, according to a cybersecurity expert. The tools and knowledge for developing malicious AI and machine learning codes are becoming more mainstream and there is a lot more data out there for hackers to gather and use, Etay Maor, chief security officer at cyberintelligence company IntSights, told CNBC. ‘We will see the adoption of AI tools for targeted and automated attacks,’ Maor said.”

Japan Watch:

December 16 – Bloomberg (Ayai Tomisawa): “Struggling to revive profits as low yields persist, a handful of troubled Japanese regional banks are wading deeper into riskier credits such as near-junk rated overseas bonds, according to a Bloomberg survey. Weaker regional lenders are fighting for survival as the government presses for consolidation in the industry, which has been wracked by shrinking rural populations. Unlike megabanks that can mitigate the blow from negative interest rates by diversifying more into businesses like investment banking, regional lenders sometimes lack the resources for such shifts. The country’s low rates have forced some of the traditionally conservative local lenders to dive into riskier assets after cutting holdings of Japanese government bonds, which have been their mainstay.”

December 15 – Bloomberg (Taiga Uranaka and Takahiko Hyuga): “Masayoshi Son’s Japanese bankers are taking a hard look at their most important client. After the costly rescue of office-sharing startup WeWork and a series of other high-profile setbacks for Son, senior executives at two of Japan’s biggest banking groups have said privately that they’ve grown less comfortable with the eccentric billionaire’s management of SoftBank Group Corp.’s $100 billion Vision Fund… Japanese banks have helped finance Son’s ventures for almost four decades and are currently sitting on at least $15 billion of loans to SoftBank and the Vision Fund.”

December 17 – Reuters (Daniel Leussink): “Japan’s exports slipped for a 12th straight month in November, as declining shipments to the United States and China hit the trade-reliant economy, raising the risk of a fourth-quarter contraction. …Japan’s exports fell 7.9% year-on-year in November, a smaller decline than the 8.6% decline expected…”

Leveraged Speculation Watch:

December 15 – Bloomberg (David Ramli): “On most mornings, Chong Chin Eai starts his day with a jog through Singapore’s Botanic Gardens. After taking his son to school, he trades futures on his laptop at home until it’s time for lunch, after which he might have a massage or perhaps a nap. If that sounds snoozy, Chong’s returns are anything but. His Vanda Global Fund Ltd., started with $24 million from friends and family and named after Singapore’s national orchid, is the world’s best-performing hedge fund this year, gaining more than 300%. Singapore is far from the skyscrapers of New York and The City of London, yet somehow it’s producing hedge funds that are trouncing global rivals. The city-state is home to two of the top 10 in 2019, and a third is partly based in the island nation.”

Geopolitical Watch:

December 13 – Reuters (Heekyong Yang and Josh Smith): “North Korea said it had successfully conducted another test at a satellite launch site, the latest in a string of developments aimed at ‘restraining and overpowering the nuclear threat of the U.S.’, state news agency KCNA reported…”

December 18 – Bloomberg (Pankaj Mishra): “India has exploded into protests against a citizenship law that explicitly discriminates against its 200 million-strong Muslim population. Narendra Modi’s Hindu nationalist government has responded with police firing on demonstrators and assaults on university campuses. The global wildfire of street protests, from Sudan to Chile, Lebanon to Hong Kong, has finally reached the country whose 1.3 billion population is mostly below the age of 25. The social, political, and economic implications couldn’t be more serious. It was only last month that students on the campus of Hong Kong Polytechnic University were throwing petrol bombs at the police, and fielding, in turn, teargas, rubber bullets and water cannons. This violent resistance to an authoritarian state is novel to Hong Kong…. The campaigners for democracy in Hong Kong today have also traveled very far away from the Chinese students who occupied Tiananmen Square in 1989, and to whom they have been wrongly compared.”

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