Saturday, February 15, 2020

Saturday's News Links

[Reuters] Trump administration eyes 10% middle-class tax cut proposal

[Reuters] Xi says China must keep economic, social order while battling coronavirus

[CNBC] Coronavirus live updates: State Department will evacuate Americans from cruise ship, first death confirmed in Europe

[Reuters] Wall Street Week Ahead: Investors bet emerging markets will weather coronavirus impact

[CNBC] Investors are flocking to the largest US growth stocks as concerns rise over the global economy

[Reuters] China issues measures to support manufacturers, businesses hit by coronavirus

[Bloomberg] PBOC Vows Coronavirus Won’t Cause Large Price Rises in China

[NYT] To Tame Coronavirus, Mao-Style Social Control Blankets China

[WSJ] U.S. Seeks to Rally Wary Europeans Against China

[FT] US warns Europe against embracing China’s 5G technology

Weekly Commentary: One Extraordinary Year

Confirmed coronavirus cases almost doubled over the past week to 67,000. Part of the spike was the result of including a group diagnosed through CT imaging scans rather than with typical coronavirus testing. The ballooning number of patients with viral symptoms has overwhelmed the capacity for normal testing. Troubling news came Friday of 1,700 Chinese healthcare workers having been infected (with 25,000 deployed to Hubei Province). Also, quarantines were further tightened in Wuhan and Beijing. Returning Beijing residents are to remain isolated in their homes for 14 days. As the NYT put it, “It was the latest sign that China’s leaders were still struggling to set the right balance between restarting the economy and continuing to fight the coronavirus outbreak.”

Staring at a rapidly unfolding economic and financial crisis, Beijing has made the decision to move forward with efforts to get their faltering economy up and running. This comes with significant risk. Global markets, by now fully enamored with aggressive monetary and fiscal stimulus, are predisposed to fixate on potential reward (keen to disregard risk). That future students of this era will be more than a little confounded has been a long-standing theme of my contemporaneous weekly chronicle. Booming market optimism in the face of what has been unfolding in China will ensure years and even decades of head-scratching.

China is definitely not alone in gambling with aggressive late-cycle stimulus, as it desperately tries to postpone the unavoidable dreadful downside after historic Bubble Inflations. Coming at this key juncture of end-of-cycle fragilities, it’s a challenge to envisage more delicate timing for such an outbreak – in China and globally. Clearly, when global markets hear “stimulus” they immediately salivate over the thought of bubbling liquidity and ever higher securities prices. Critical nuances of global Inflation Dynamics go unappreciated.

February 9 – Bloomberg: “China’s consumer prices rose the fastest in more than eight years last month, with the outbreak of the coronavirus and subsequent shutdowns of transport links across the country making further gains in the coming months likely. Consumer prices rose 5.4%, with food prices jumping the most since 2008 in January. Even before the coronavirus, prices were likely to have risen sharply due to the normal spike in demand around the Lunar New Year and the effects of the African Swine Fever outbreak which has killed millions of pigs and damaged pork supplies. Pork prices gained the most on record.”

China has an escalating consumer price inflation problem, one manifestation of intensifying Monetary Disorder. It’s a fundamental Credit Bubble Analytical Postulate that inflationary fuel will gravitate to areas already demonstrating the strongest inflationary biases. As we’ve been witnessing globally, dump stimulus into a backdrop of powerful securities market inflationary psychology and the upshot will be more intense speculation, acute asset price inflation and increasingly destabilizing market Bubbles. China, facing its own particular Inflationary Dynamics, has now embarked on a course that never ends well: aggressive fiscal and monetary stimulus in an environment of rising consumer inflation and general monetary and economic instability.

China’s CPI Food Index posted a 20.6% y-o-y increase in January, the highest rate since March 2008. For many of its citizens, food purchases make up a significant percentage of monthly expenditures (some estimates as high as 30%). While the doubling of pork prices is inflating price aggregates, even vegetable prices were up a notable 17% y-o-y. And this was before the escalation of the coronavirus outbreak. Beijing has acknowledged the risk to social stability from the coronavirus. Policymakers, as well, face a challenge in trying to stimulate a faltering maladjusted economy without exacerbating the hardship inflicted upon much of its population from surging consumer prices. Stimulus measures are working well for global market participants. For Chinese citizens, the jury is out.

Meanwhile, China’s Credit mechanism is in disarray. Over the past two years in particular, stimulus measures stoked China’s consumer borrowing and spending boom. This upsurge was integral in sustaining China’s Bubble economy in the face of mounting manufacturing overcapacity and associated corporate Credit issues. It comes at a steep cost. In particular, China’s apartment Bubble went to even more precarious extremes.

February 10 – Bloomberg: “Home sales in China have been dealt a huge blow by the spreading coronavirus with figures showing transactions plunged in the first week of February. New apartment sales dropped 90% from the same period of 2019, according to preliminary data on 36 cities compiled by China Merchants Securities Co. Sales of existing homes plummeted 91% in eight cities where data is available. ‘The sector is bracing for a worse impact than the 2003 SARS pandemic,’ said Bai Yanjun, an analyst at property-consulting firm China Index Holdings Ltd. ‘In 2003, the home market was on a cyclical rise. Now, it’s already reeling from an adjustment.’”

The above “apartment sales dropped 90%” Bloomberg article was confirmation of the dramatic upheaval the coronavirus is having both on China’s economy and Credit system. And while Beijing stimulus will surely have significant economic impact, it will not easily replace the flow of household mortgage finance that evolved into a powerful force for Chinese and global economies.

China’s aged apartment Bubble was increasingly vulnerable prior to the coronavirus. At this point, it would appear there is a clear catalyst for the piercing of one of history’s greatest Bubbles. I’ll assume easier lending terms and additional borrowings will bolster the gargantuan - and highly indebted - Chinese homebuilders. Yet sustaining China’s highly inflated apartment prices will prove a much greater challenge. Estimates have as many as 60 million unoccupied apartment units throughout China. Homes for “living in and not speculation”? When risk aversion begins to take hold generally in Chinese housing (a break in inflationary psychology), there is potential for far-reaching economic and financial disruption.

China will inevitably face its first housing and mortgage finance bust, a painful bursting Bubble episode made much worse by Beijing repeatedly resorting to stimulus measures. It’s difficult to overstate ramifications for China’s economy, financial system and social stability.

February 9 – Bloomberg: “Just as it looked like Beijing was starting to get a handle on its regional banking crisis, a much more severe threat is engulfing the world’s largest banking system as a deadly new virus hits the country’s economy. The impact of the spreading coronavirus risks bringing to life the worst-case economic scenarios contained in China’s annual banking stress tests. Last year’s exercise envisaged annual economic growth slowing to as low as 4.15% -- a scenario which showed that the bad loan ratio at the nation’s 30 biggest banks would rise five-fold. Analysts now say that the outbreak could send first-quarter growth to as little as 3.8%. Banks are already suffering record loan defaults as the economy last year expanded at the slowest pace in three decades. The slump tore through the nation’s $41 trillion banking system, forcing the first bank seizure in two decades and bailouts of two other key lenders.”

China’s protracted Bubble aroused delusions of grandeur - within the communist party as well as throughout its population. It’s incredible to ponder what’s at stake. Beijing is in no way willing to cede its global ambitions. An assertive American administration only strengthens their resolve. Communist leadership will reject any challenge to its control and dominance. Meanwhile, a bursting Bubble throws everything into disarray.

Beijing has declared a “people’s war” against the forces of Bubble deflation. And this explains why markets so confidently operate under the assumption a bust won’t be tolerated. Extraordinary fragilities only ensure epic stimulus; Chinese and global Punchbowls Runneth Over. “Washington will never allow a U.S. housing bust.” “The West will never allow Russia to collapse.” There are monumental presumptions that underpin historic boom and bust cycles. “The Beijing meritocracy has everything under control.”

February 12 – Associated Press (Joe McDonald): “China’s auto sales plunged in January, deepening a painful downturn in the industry’s biggest global market and adding to economic pressures as the country fights a virus outbreak. Sales of SUVs, sedans and minivans fell 20.2% from a year earlier to 1.6 million, an industry group, the China Association of Automobile Manufacturers, reported… ‘Enterprises are under huge pressure,’ it said…”

Over the past decade, China’s domestic auto industry grew into a behemoth. It is another critical sector both from economic and financial standpoints. And while I don’t view it in the same context as the vulnerable apartment Bubble, it is another market that could suffer lingering effects.

I am well aware of the market's view that the coronavirus crisis will soon pass. We can expect Beijing stimulus measures to help shore up GDP figures and stock prices. At least in the near-term, it will support confidence. Hopefully the outbreak has peaked, with stimulus measures and an accommodative banking system helping China’s economy to muddle through. Global equities markets have been content to “look across the valley.” Disregarded are China’s acute financial and economic fragilities, the of risk stimulus measures exacerbating Monetary Disorder and mounting risks to social stability. How quickly does the Chinese population bounce back – again eagerly taking on debt, buying apartments and autos and dreaming of a bright and prosperous future?

That equities can run higher in the face of mounting risks is not as confounding as it might first appear. Credit drives the global Bubble – and Credit in the near-term is further benefiting from the outbreak. Overheated securities (speculative) Credit is really benefited. Global monetary stimulus is further assured - rate cuts and more QE. One can now add aggressive PBOC liquidity injections to the Fed and global central bank QE throwing gas on a speculative fire raging throughout global fixed-income markets.

February 13 – Bloomberg (Gregor Stuart Hunter): “Investors who poured money into bond funds last year are showing little sign of stopping in 2020… Inflow to fixed-income assets nearly doubled last year to $1 trillion, according to… Morningstar Inc. With fears about the coronavirus outbreak dimming growth prospects for the global economy and prompting a search for haven assets, bond funds are on track to exceed this haul in 2020. ‘We’re in uncharted territory,’ Nikolaos Panigirtzoglou, a JPMorgan... strategist, said… ‘Based on January flows, it’s going to be another very strong year for bond fund flows.’”

Equities at record prices garner all the attention. Yet the manic behavior in global bond markets is more extraordinary and consequential. U.S. fixed income ETFs attracted another $7.3bn this week (ETF.com), as “money” keeps rolling in. The $64 TN question is how much speculative leverage continues to accumulate throughout global bond and derivatives markets. Here again, the timing of the coronavirus outbreak is of great consequence – inciting speculative excess and attendant leverage when global fixed-income was already engulfed by powerful Inflationary Biases. Added leveraging works to inject additional liquidity into already over-liquefied global markets. And the last thing overheated global risk markets – with such powerful Inflationary Biases - needed at this point was additional liquidity.

I view the equities Bubble as an offshoot of the greater Bubble that continues to inflate in global debt, securities Credit and derivatives markets. On the one hand, it is extraordinary to see equities markets essentially dismiss such consequential developments in China. It does, however, present important support for the Bubble Thesis. Equities rallied to record highs just months before the LTCM/Russia collapse in 1998. Stocks rallied to record highs in 2007 even as the mortgage finance Bubble faltered.

It’s only fitting that global stocks rally to record highs as the faltering China Bubble places the global Bubble in serious jeopardy. If the coronavirus stabilizes over the coming weeks and months, attention can then shift to November U.S. elections. It’s poised to be One Extraordinary Year. A Friday CNBC headline: “White House Considering Tax Incentive for More Americans to Buy Stocks, Sources Say.” A strong equities market boosts optimism for a Trump reelection - bullishness that spurs further stock gains. Yet there is potential for self-reinforcing dynamics to the downside. A break in stock prices would incite election nervousness and heightened market risk aversion. Can this game sustain for another nine months?


For the Week:

The S&P500 rose 1.6% (up 4.6% y-t-d), and the Dow gained 1.0% (up 3.0%). The Utilities rallied 2.6% (up 9.0%). The Banks increased 0.5% (down 3.6%), and the Broker/Dealers jumped 1.9% (up 4.2%). The Transports were little changed (down 0.4%). The S&P 400 Midcaps gained 2.4% (up 1.6%), and the small cap Russell 2000 rose 1.9% (up 1.1%). The Nasdaq100 advanced 2.4% (up 10.2%). The Semiconductors surged 4.9% (up 5.8%). The Biotechs rose 2.9% (up 3.7%). Though bullion rallied $14, the HUI gold index slipped 0.5% (down 6.9%).

Three-month Treasury bill rates ended the week at 1.54%. Two-year government yields rose three bps to 1.43% (down 14bps y-t-d). Five-year T-note yields added a basis point to 1.42% (down 27bps). Ten-year Treasury yields were little changed at 1.59% (down 33bps). Long bond yields slipped one basis point to 2.04% (down 35bps). Benchmark Fannie Mae MBS yields rose four bps to 2.45% (down 26bps).

Greek 10-year yields dropped 11 bps to 0.93% (down 50bps y-t-d). Ten-year Portuguese yields fell three bps to 0.29% (down 15bps). Italian 10-year yields dipped two bps to 0.92% (down 49bps). Spain's 10-year yields added a basis point to 0.29% (down 17bps). German bund yields declined two bps to negative 0.40% (down 22bps). French yields fell two bps to negative 0.16% (down 27bps). The French to German 10-year bond spread was little changed at 26 bps. U.K. 10-year gilt yields jumped six bps to 0.63% (down 19bps). U.K.'s FTSE equities index declined 0.8% (down 0.8%).

Japan's Nikkei Equities Index slipped 0.6% (unchanged y-t-d). Japanese 10-year "JGB" yields added one basis point to negative 0.03% (down 2bps y-t-d). France's CAC40 increased 0.7% (up 1.5%). The German DAX equities index jumped 1.7% (up 3.7%). Spain's IBEX 35 equities index rose 1.5% (up 4.3%). Italy's FTSE MIB index advanced 1.6% (up 5.8%). EM equities were mostly higher. Brazil's Bovespa index gained 0.5% (down 1.1%), and Mexico's Bolsa rose 1.4% (up 3.3%). South Korea's Kospi index jumped 1.4% (up 2.1%). India's Sensex equities index increased 0.3% (unchanged). China's Shanghai Exchange rallied 1.4% (down 4.4%). Turkey's Borsa Istanbul National 100 index declined 0.7% (up 5.0%). Russia's MICEX equities index added 0.3% (up 1.7%).

Investment-grade bond funds saw inflows of $6.232 billion, and junk bond funds posted inflows of $2.827 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased two bps to 3.47% (down 90bps y-o-y). Fifteen-year rates were unchanged at 2.97% (down 84bps). Five-year hybrid ARM rates fell four bps to 3.28% (down 60bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down eight bps to 3.61% (down 78bps).

Federal Reserve Credit last week rose $17.1bn to $4.135 TN, with a 22-week gain of $408 billion. Over the past year, Fed Credit expanded $146bn, or 3.7%. Fed Credit inflated $1.324 Trillion, or 47%, over the past 379 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $32.1 billion last week to $3.458 TN. "Custody holdings" were up 0.9% y-o-y.

M2 (narrow) "money" supply slipped $4.9bn last week to $15.490 TN. "Narrow money" surged $1.028 TN, or 7.1%, over the past year. For the week, Currency increased $0.4bn. Total Checkable Deposits surged $120.8bn, while Savings Deposits sank $128.1bn. Small Time Deposits dipped $2.4bn. Retail Money Funds rose $4.5bn.

Total money market fund assets added $7.9bn to $3.625 TN, with institutional money fund assets down $8.4bn to $2.268 TN. Total money funds jumped $545bn y-o-y, or 17.8%.

Total Commercial Paper declined $6.0bn to $1.113 TN. CP was up $52.3bn, or 4.9% year-over-year.

Currency Watch:

February 10 – Bloomberg (Satyajit Das): “Asia’s emerging-market currencies are sliding as the coronavirus outbreak threatens to slow the region’s economy and drives outflows into the dollar. Investors may consider the region’s copious foreign-exchange reserves to be a buffer against severe economic dislocation, capital flight and currency fluctuations. That would be a mistake. Asia’s reserves have expanded vastly since the 1997-98 financial crisis to reach more than $5 trillion, 40% of the global total. Often cited as a strength, they may prove of limited value in any future crisis. First, reserves aren’t profits. In addition to net export payments, they include foreign investment. The asset (reserve investments) is offset by a liability (the amount owed to foreign investors). China is the world’s biggest holder of reserves, with $3.1 trillion as of the end of January. While that looks substantial in dollar terms, it considers only one side of the coin. Since 2009, growth in China’s foreign-exchange assets has tracked accumulated investment liabilities.”

For the week, the U.S. dollar index added 0.4% to 99.124 (up 2.7% y-t-d). For the week on the upside, the Mexican peso increased 1.2%, the British pound 1.2%, the South African rand 1.0%, the Australian dollar 0.6%, the Norwegian krone 0.6%, the Brazilian real 0.6%, the New Zealand dollar 0.6%, the Canadian dollar 0.4% and the South Korean won 0.3%. For the week on the downside, the euro declined 1.1%, the Swedish krona 0.7%, the Swiss franc 0.5%, and the Singapore dollar 0.2%. The Chinese renminbi increased 0.22% versus the dollar this week (down 0.34% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index recovered 0.8% (down 6.8% y-t-d). Spot Gold rallied 0.9% to $1,584 (up 4.3%). Silver increased 0.2% to $17.734 (down 1.0%). WTI crude recovered $1.73 to $52.05 (down 15%). Gasoline rallied 3.9% (down 6%), while Natural Gas fell 1.1% (down 16%). Copper rose 2.1% (down 7%). Wheat sank 2.7% (down 3%). Corn slipped 0.4% (down 1.5%).

Market Instability Watch:

February 14 – Bloomberg: “China’s currency and bond markets have been devoid of traders as coronavirus cases continue to climb. That has made it tougher to gauge the outbreak’s market impact. Daily transactions involving the yuan have on average halved since the market reopened on Feb. 3 after a week-plus holiday, compared to levels over the past year…”

China Watch:

February 10 – Reuters (Kevin Yao): “China’s fiscal spending climbed 8.1% in 2019 from the previous year, the finance ministry said…, outpacing economic growth as policymakers sought to ward off a sharper slowdown. Fiscal revenues increased an annual 3.8% last year, dragged by a 1.0% rise in tax receipts due to huge tax cuts…”

February 14 – Bloomberg: “A top Chinese technology company that’s struggled for months to assure creditors of its financial stability has seen its efforts to secure a fresh loan disrupted by the coronavirus crisis. With payments on a dollar loan coming due next month, Tsinghua Unigroup Co. has been engaged with lenders on a $900 million financing deal. That loan has been delayed partly due to the coronavirus outbreak and the Lunar New Year holiday…”

February 9 – Bloomberg (Sheenu Gupta and Wendy Tan): “More Chinese foreign-currency bonds have slumped toward distress in 2020, as a coronavirus slowed the economy and made it harder to refinance. Riskier bonds slid this year after creditors of… Tewoo Group Co. and Qinghai Provincial Investment Group Co. were offered haircuts of as much as 63% in dollar debt restructurings. Chinese issuers have about $100 billion of principle on foreign-currency bonds due this year, with March among the busiest months for repayments at more than $12 billion.”

February 9 – Bloomberg (Rebecca Choong Wilkins and Molly Dai): “China’s most stressed dollar debtors face a major test of their financing capacity next month, with over a tenth of all bonds coming due just as the nation grapples with the economic impact of a virus that continues to spread. About $2.1 billion of offshore notes with yields of at least 15% -- characterizing them as stressed -- are due in March, the biggest monthly maturity wall this year…”

February 11 – Wall Street Journal (Xie Yu): “China’s crushing debt burden is weighing on an unlikely place: one of its top universities. Peking University Founder Group, a conglomerate majority-owned by the school, for years used its research prowess, elite connections and implicit state backing to expand in industries from electronics to commodities trading and health-care services. International investors helped fund the rapid growth by buying up the group’s debt… But problems were bubbling up, and the bond prices began sliding. By December, after missing interest and principal payments on some short-term notes, Founder Group had to strike a deal with creditors to help avoid a default on $3 billion of U.S. dollar bonds.”

February 12 – Bloomberg (Jinshan Hong and Daniela Wei): “Neither the glitzy jewelry stores in China’s upscale shopping malls nor its spicy hotpot restaurants that once saw long waiting lines are likely to come back to life anytime soon as their owners plan to wait out the deadly coronavirus outbreak. Big consumer firms from Chow Tai Fook Jewellery Group Ltd. to Yum China Holdings Inc. have closed as many as 80% of total stores as China races to curb the contagion which has already killed over 1,100 people and infected more than 44,000 in China.”

February 8 – Bloomberg (Jason Gale): “The new coronavirus might have infected at least 500,000 people in Wuhan, the Chinese city at the epicenter of the global outbreak, by the time it peaks in coming weeks. But most of those people won’t know it. The typically bustling megacity, where the so-called 2019-nCoV virus emerged late last year, has been in effective lockdown since Jan. 23, restricting the movement of 11 million people. Recent trends in reported cases in Wuhan broadly support the preliminary mathematical modeling the London School of Hygiene & Tropical Medicine is using to predict the epidemic’s transmission dynamics.”

February 8 – Bloomberg (Clara Ferreira Marques): “Grocery runs in Asia’s financial powerhouse have begun to remind me of shopping in Russia in the chaotic summer of 1998. You grab what you can find, and if there is a queue, you consider joining it. Surgical masks and sanitizer gel are bartered for; detergent shelves are bare. A run on toilet paper last week, after an online rumor, was reminiscent of Venezuela. Crowds are irrational everywhere, and social media hardly helps. Yet the palpable anxiety in coronavirus-hit Hong Kong these days suggests worrying levels of distrust in a city where citizens have always expected private enterprise at least, if not the state, to keep things ticking over. Both have failed miserably, preparing inadequately even after the SARS outbreak that killed almost 300 people in the city in 2003.”

Global Bubble Watch:

February 9 – Bloomberg (Debby Wu and Yuan Gao): “Chinese-based manufacturers began to restart factories Monday, but no one knows for sure when they’ll be back at full-speed -- or what sort of chaos may ensue. Foxconn, which makes the majority of the world’s iPhones in Zhengzhou, a few hundred miles from the epicenter of the coronavirus outbreak, resumed some production on Monday but it wasn’t clear how many workers returned to the factory… ‘How we can make sure there will be no infection within our campuses will be the first priority, because if you put a lot of people together and one of them gets infected, that will be a nightmare,’ Foxconn investor relations chief Alex Yang told… ‘We try very hard to make sure the possibility of any on-site infection will be as low as zero, although it will be challenging.’”

February 11 – Bloomberg (Brendan Murray): “Global supply chains look to be suffering longer-than-expected disruptions tied to coronavirus as China’s government tries to nudge idled factories back to work to limit the damage to the world’s second-largest economy. To contain the crisis, Chinese authorities have ordered city lockdowns and extended holidays but the human impact is unrelenting, with deaths topping 1,000. The economic fallout could extend well into March with rising numbers of bankruptcies, increasing layoffs and worsening demand, according to economists at Nomura… Bloomberg is reporting that thousands of businesses are in limbo, waiting to hear from local authorities on when they can resume operations. Even when they get the all-clear, it might take days to get back to full staff…”

February 11 – Wall Street Journal (Benoit Faucon and Costas Paris): “China’s coronavirus outbreak has scrambled the global trade in commodities, hitting the country’s massive appetite and challenging global supply lines set up to feed it. Markets for essentials like natural gas, copper and pork have all swooned amid worry over a broad weakening of demand. Prices for some natural resources are plumbing multiyear lows. Chinese companies are canceling orders for crude oil and other commodities, and the country’s once-heaving ports are quieter. Analysts say the disruption could be long lasting, as stockpiles of commodities grow and ships lay idle.”

February 13 – Financial Times (Harry Dempsey and Sun Yu): “China’s slowdown in response to the deadly coronavirus has sent the global shipping industry veering off course, with transit rates falling to record lows as ships are turned away from ports. All shipping segments from oil tankers to container lines have been hit by the economic impact from factory shutdowns and travel restrictions… The Capesize Index, which tracks freight costs for the largest carriers of dry bulk commodities such as iron ore, coal and grain, fell into negative territory last week for the first time since its creation in 1999, indicating that shipping companies are running at a loss on certain routes. Brokers and analysts say the slump in demand for the transportation of goods in and out China… will leave its mark on the shipping industry and commodity trading for months to come.”

February 11 – New York Times (Matt Phillips): “In Australia, after hauling hundreds of thousands of tons of iron ore to China, returning freighters can face a 14-day quarantine before being able to reload. BHP, …one of the world’s largest copper mining companies, has been in talks to possibly delay shipments to Chinese ports. And from Qatar to Indonesia, exporters of liquefied natural gas face the prospect of disrupted shipments after a crucial importer in China is reportedly turning back deliveries after invoking clauses in long-term contracts that blame a ‘greater force.’ The coronavirus outbreak in China has generated economic waves that are rocking global commodities markets and disrupting the supply networks that act as the backbone of the global economy.”

February 10 – Reuters (Jan Wolfe): “As the coronavirus outbreak in China shows no signs of abating any time soon, some companies that buy and sell goods in the Chinese market are considering the legal defense of force majeure. Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations. The underlying event must be unforeseeable and not the result of actions undertaken by the party invoking force majeure. Natural disasters, strikes, and terrorist attacks can all be force majeure events. Declaring force majeure may allow a party to a contract to avoid liability for nonperformance.”

February 7 – CNBC (Emma Newburger): “Antarctica just set its hottest temperature ever recorded at 64.9 degrees Fahrenheit as climate change continues to accelerate, according to measurements from an Argentinian research station thermometer… It beats the continent’s previous record of 63.5 degrees tallied in March 2015, and comes shortly after the Earth saw its hottest January on record and hottest decade on record in the 2010s. Scientists say that they see no end to the way climate change continues to shatter temperature records across the world…”

February 12 – CNBC (Fred Imbert): “Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, issued a dire warning about the future… ‘I think there are lots of troubles coming,’ he said… ‘There’s too much wretched excess.’ Munger… highlighted how much risk investors are taking when investing, particularly in China. ‘In China, … they love to gamble in stocks. This is really stupid,’ Munger said. ‘It’s hard to imagine anything dumber than the way the Chinese hold stocks.’”

Trump Administration Watch:

February 12 – Reuters (David Lawder): “U.S. Treasury Secretary Steven Mnuchin insisted on Wednesday that President Donald Trump’s tax cuts will still pay for themselves over 10 years, even as the administration forecasts near-term deficits close to $1 trillion… The Congressional Budget Office predicted in January that U.S. deficits would average $1.3 trillion a year over the next decade, far higher than envisioned in Trump’s budget…”

February 9 – Associated Press (Andrew Taylor): “Confronted with the threat of trillion-dollar-plus deficits for as far as the eye can see, President Donald Trump is offering a $4.8 trillion budget plan for the upcoming fiscal year that rehashes previously rejected spending cuts while leaving Social Security and Medicare benefits untouched. Trump’s fiscal 2021 budget plan… isn’t likely to generate a serious Washington dialogue about what to do, if anything this election year, about entrenched fiscal problems that have deficits surging despite a healthy economy.”

February 11 – Reuters (Andrea Shalal and David Lawder): “An emboldened President Donald Trump has set his sights on restructuring the more than $1 trillion U.S. trade relationship with the European Union, raising the specter of another major trade war as the global economy slows and he seeks re-election. Trump, who has long complained that the EU’s position on trade is ‘worse than China,’ on Monday told U.S. governors that he was training his sights on Europe after signing a Phase 1 deal… with China. ‘Europe has been treating us very badly,’ he said. ‘Over the last 10, 12 years, there’s been a tremendous deficit with Europe. They have barriers that are incredible ... So we’re going to be starting that. They know that.’”

February 10 – Associated Press (Eric Tucker and Michael Balsamo): “Four members of the Chinese military have been charged with breaking into the computer networks of the Equifax credit reporting agency and stealing the personal information of tens of millions of Americans, the Justice Department said…, blaming Beijing for one of the largest hacks in history… The hackers in the 2017 breach stole the personal information of roughly 145 million Americans, collecting names, addresses, Social Security and driver’s license numbers and other data stored in the company’s databases. The intrusion damaged the company’s reputation and underscored China’s increasingly aggressive and sophisticated intelligence-gathering methods.”

February 13 – Associated Press (Eric Tucker): “The Justice Department has added new criminal charges against Chinese tech giant Huawei and several subsidiaries, accusing the company in a brazen scheme to steal trade secrets from competitors in America, federal prosecutors announced… The company also provided surveillance equipment to Iran that enabled the monitoring of protesters during 2009 anti-government demonstrations in Tehran, according to the indictment, and also sought to conceal business that it was doing in North Korea despite economic sanctions there.”

February 12 – Wall Street Journal (Bojan Pancevski): “U.S. officials say Huawei Technologies Co. can covertly access mobile-phone networks around the world through ‘back doors’ designed for use by law enforcement, as Washington tries to persuade allies to exclude the Chinese company from their networks. Intelligence shows Huawei has had this secret capability for more than a decade, U.S. officials said. Huawei rejected the allegations. The U.S. kept the intelligence highly classified until late last year, when U.S. officials provided details to allies including the U.K. and Germany… That was a tactical turnabout by the U.S., which in the past had argued that it didn’t need to produce hard evidence of the threat it says Huawei poses to nations’ security.”

February 8 – Reuters (David Brunnstrom): “U.S. Secretary of State Mike Pompeo urged governors of U.S. states and territories on Saturday to adopt a ‘cautious mindset’ when engaging in business with China, saying Beijing was seeking to use U.S. openness to undermine the United States. In a speech to the National Governors Association… Pompeo said China was pursuing a policy of exploiting U.S. freedoms to ‘gain advantage over us at the federal level, the state level and the local level.’”

February 11 – Wall Street Journal (John D. McKinnon and Deepa Seetharaman): “Federal regulators opened a new front in their investigation of big tech companies, seeking to determine whether the industry’s giants acquired smaller rivals in ways that harmed competition, hurt consumers and evaded regulatory scrutiny. The Federal Trade Commission… ordered Amazon.com Inc., Apple Inc., Facebook Inc., Microsoft Corp. and Google owner Alphabet Inc. to provide detailed information about their acquisitions of fledgling firms over the past 10 years.”

Federal Reserve Watch:

February 11 – Reuters (Heather Timmons): “Federal Reserve Chair Jerome Powell told Congress… that the U.S. economy is in a good place, even as he cited the potential threat from the coronavirus in China and concerns about the economy’s long-term health. With risks like trade policy uncertainty receding and global growth stabilizing, ‘we find the U.S. economy in a very good place, performing well,’ Powell told the U.S. House of Representatives Financial Services Committee. The U.S. economic expansion, now in its 11th year, is the longest on record. ‘There is no reason why the expansion can’t continue,’ he said…”

February 9 – Reuters (Gavyn Davies): “The Federal Reserve’s framework review of its monetary strategy and tools is approaching decision time, with announcements likely before mid-year. What should investors expect? Early guidance from Fed vice-chairman Richard Clarida suggested that the review would probably result in evolutionary not revolutionary changes. More recently, however, the Federal Open Market Committee has discussed more profound innovations, notably a switch to average inflation targeting (AIT). Chairman Jay Powell said… this would represent an important regime shift for the central bank. The fundamental objectives of any change in the format of the target are clear. Almost all members of the FOMC believe that the 2% inflation target introduced in 2012 has resulted in an unintended downward bias to inflation in the long term.”

February 13 – Bloomberg (Craig Torres, Christopher Condon and Erik Wasson): “President Donald Trump’s pick for the Federal Reserve Board, Judy Shelton, came under fire from Republican lawmakers…, signaling trouble ahead for her nomination. Speaking to reporters after a Senate Banking Committee hearing on her appointment, Senators Richard Shelby from Alabama, Patrick Toomey from Pennsylvania and John Kennedy from Louisiana all said they had not decided if they would vote for her confirmation. A single Republican ‘no’ vote on the committee is enough to block the Shelton nomination, assuming Democrats -- who were pointed in their criticism of her at the hearing -- are united in opposition.”

February 10 – Reuters (Ann Saphir): “A top U.S. central banker… called for using new tools to push up stubbornly low inflation as an aging population slows economic growth worldwide and globalization and other trends keep a lid on prices. ‘We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment,’ San Francisco Federal Reserve Bank President Mary Daly said…”

U.S. Bubble Watch:

February 11 – Reuters (Jonnelle Marte): “American households added $193 billion of debt in the fourth quarter, driven by a surge in mortgage loans, and overall debt levels rose to a new record at $14.15 trillion, the Federal Reserve Bank of New York said… Mortgage balances rose by $120 billion in the fourth quarter to $9.56 trillion… Mortgage originations - pushed up by an increase in refinancing - also rose to $752 billion in the fourth quarter, reaching the highest volume since the fourth quarter of 2005…”

February 8 – Wall Street Journal (Orla McCaffrey): “Mortgage rates are at their lowest level in more than three years, potentially boosting the U.S. housing market as it enters the crucial spring selling season. The average rate on the 30-year fixed-rate mortgage… dropped to 3.45%... That is down from 3.51% a week earlier and 4.41% this time last year… ‘It’s very much a historical opportunity for folks who have an existing mortgage to refinance and for credit-qualified people to lock in a low rate,’ said Doug Duncan, chief economist at Fannie Mae.”

February 14 – Bloomberg (Max Reyes): “U.S. consumer sentiment rose to the highest level in almost two years in February on brighter views of finances and the economy, adding to signs consumption will keep fueling growth. The University of Michigan’s preliminary sentiment index rose to 100.9 from 99.8 in January…”

February 11 – Wall Street Journal (Yuka Hayashi): “Credit-card debt rose to a record in the final quarter of 2019 as Americans spent aggressively amid a strong economy and job market, and the proportion of people seriously behind on their payments increased. Total credit-card balances increased by $46 billion to $930 billion, well above the previous peak seen before the 2008 financial crisis, according to… the Federal Reserve Bank of New York…”

February 10 – Financial Times (Robin Wigglesworth): “The wealthiest US households are strengthening their grip over corporate America. The richest 1% of Americans now account for more than half the value of equities owned by US households, according to Goldman Sachs. Since 1990, the wealthiest have bought a net $1.2tn in company stakes, while the rest of the population has sold more than $1tn. Three decades ago, ownership was also lopsided, but the top percentage point of Americans by wealth only controlled 46% of all US equities held by households. By the end of September 2019, that proportion had hit a record 56%, amounting to $21.4tn…”

February 9 – Wall Street Journal (Ruth Simon): “The number of people working at small companies essentially didn’t budge last year, even as larger businesses continued to expand their payrolls for a record 10th straight year. Head count at businesses with fewer than 20 employees was essentially unchanged in 2019… Small businesses are the first to feel the pinch from a tight labor market, but the challenges they face in adding workers highlight a threat to companies of all sizes and to the broader economy.”

February 11 – Wall Street Journal (Nicole Friedman and Leslie Scism): “U.S. companies are paying more for insurance, a reversal after years of flat or declining rates for property and liability policies. Insurers have raised prices aggressively in the past year on companies of all sizes across the country. And they have warned price hikes are likely to continue. The turnabout underscores a challenging landscape for U.S. insurers following several years of large catastrophe losses and continued low interest rates…”

February 10 – CNBC (Jessica Dickler): “Despite the dangers of high-interest debt, more consumers are testing the limits of plastic. To that point, more than 1 in 3 Americans — or 91 million people— said they’re afraid they’ll max out their credit card when making a large purchase, according to a new WalletHub credit cards survey. (Most of those polled considered a large purchase as anything over $100.)”

February 13 – Wall Street Journal (Benjamin Mullin): “Indiana Pacers guard Victor Oladipo was recovering from a ruptured quad tendon last year when he met with a banker from an investment firm at a workout. Before long, Mr. Oladipo… was also part of a new team, at Patricof Co., which helps athletes find potential private-equity investments. ‘I realized that I needed to start taking the necessary steps to make sure that life after basketball is still comfortable,’ Mr. Oladipo said. Flush with cash from rising salaries and lucrative endorsement deals, athletes are looking for opportunities to invest their money. Investment firms, in turn, are working to connect them with private-equity deals they might not otherwise find or have access to, across industries as varied as organic food, tech, entertainment and real estate.”

February 9 – New York Times (Nathaniel Popper): “New Orleans’s city government crippled. A maritime cargo facility temporarily closed. Hospitals forced to turn away patients. Small businesses shuttered. The cause in each of these incidents: ransomware attacks. In recent years, hackers have taken to locking down entire computer networks and demanding payments to let users back into their systems. The frequency of ransomware attacks — among the scariest and most costly online assaults — has been hard to pinpoint because many victims quietly pay off their attackers without notifying the authorities. Now, an array of new data provides perhaps the best available picture of the problem. In 2019, 205,280 organizations submitted files that had been hacked in a ransomware attack — a 41% increase from the year before…”

February 9 – Wall Street Journal (Gunjan Banerji and Gregory Zuckerman): “Fred Lande’s heart was pounding as he watched Tesla Inc. shares charge to an all-time high of $968.99 last week. It wasn’t because he was happy. He’d bet thousands of dollars that the frantic rally that has more than tripled the price of the shares in just a few months was doomed to end, and soon. Concluding his gamble was wrong, he closed the options trade at a loss… Tesla’s rocketing stock has meant an astonishing dive for investors who have staked their money on the proposition that Tesla shares were drastically overvalued and bound to fall. Their cost: $8.4 billion since January.”

Fixed-Income Bubble Watch:

February 9 – Reuters (Karen Pierog and Luis Valentin): “Puerto Rico would shed about $24 billion of debt and move closer to exiting bankruptcy under an agreement with bondholders announced on Sunday by the U.S. commonwealth’s federally created financial oversight board. The deal would cut $35 billion of bonds and claims to about $11 billion…”

Central Bank Watch:

February 13 – Bloomberg (Eric Martin): “Mexico’s central bank cut its key interest rate for a fifth straight decision, saying that economic growth is likely to be less than it previously projected. Banco de Mexico reduced its rate to 7%...”

February 13 – Financial Times (Colby Smith): “Brazil’s central bank stepped in to shore up its flagging currency after it fell to yet another record low against the dollar and solidified its ranking as the worst-performing emerging market currency this year. The central bank sold $1bn in foreign exchange swaps on Thursday as the country sought to avoid further depreciation in the real. The intervention came in the wake of a series of record lows against the dollar for Brazil’s currency that have seen the real shed 6.9% so far this year.”

EM Bubble Watch:

February 9 – Financial Times (Laura Pitel): “Turkey has further tightened controls imposed on the lira as it pushes ahead with efforts to manage the country’s currency even as it cuts interest rates and seeks a return to fast-paced growth. The banking regulator announced curbs on Sunday night aimed at limiting currency speculation by foreign traders after the lira weakened beyond 6 to the dollar on Friday — the first time that it has crossed the symbolic threshold since May.”

India Watch:

February 14 – Bloomberg (Vrishti Beniwal): “India’s trade deficit unexpectedly widened in January, as exports contracted for a sixth straight month while the decline in imports eased. The gap between exports and imports was at $15.2 billion last month, compared with $11.25 billion in December… That’s the widest gap since June and compares with the median estimate of an $11 billion deficit in a Bloomberg survey…”

Europe Watch:

February 14 – Financial Times (Martin Arnold): “The eurozone’s economy is growing at the slowest rate since the bloc’s debt crisis seven years ago…, dealing a blow to expectations that the outlook had begun to brighten. The single currency zone grew at a quarterly rate of 0.1% in the fourth quarter, its slowest rate of expansion since early 2013… Germany flatlined in the fourth quarter, producing zero growth, a performance that was below analysts’ expectations…”

February 13 – Economist: “Foreign newsreaders might have celebrated. But otherwise there was little to cheer when Annegret Kramp-Karrenbauer… announced on February 10th that she would resign as leader of Germany’s ruling Christian Democrats (cdu) and not stand as its candidate for chancellor at the next election. By forcing her party to confront its deep divisions, Ms Kramp-Karrenbauer has thrown German politics into a new era of uncertainty. Ms Kramp-Karrenbauer was tripped up by a debacle in the east German state of Thuringia, where the cdu had voted with the far-right Alternative for Germany (afd) to install a member of a third party as state premier. This ‘dam break’, the first time afd votes had secured such an office, so horrified Germany that Ms Kramp-Karrenbauer had to try to repair the damage.”

February 10 – Reuters (Angelo Amante): “Italy’s former Prime Minister Matteo Renzi… threatened a no-confidence motion against his own justice minister, posing a fresh risk to the survival of the fractious ruling coalition. Renzi’s small centrist Italia Viva party is in the coalition with the anti-establishment 5-Star Movement and the center-left Democratic Party (PD), but he has constantly taken issue with government policies since it was formed in September last year.”

February 10 – Financial Times (Arthur Beesley): “Sinn Féin’s surge to Ireland’s biggest political force delivered a historic breakthrough for the nationalist party after decades on the fringes. Even party leader Mary Lou McDonald was caught off guard: Sinn Féin recorded the highest share of the popular vote but because it did not field enough candidates, it will not hold the biggest number of seats in parliament.”

Brexit Watch:

February 12 – Associated Press (Jill Lawless): “British Prime Minister Boris Johnson tightened his grip on the government Thursday with a Cabinet shake-up that triggered the unexpected resignation of his Treasury chief, the second-most powerful figure in the administration. Sajid Javid’s resignation was the most dramatic moment in a shuffle that saw Johnson fire a handful of Cabinet members he viewed as under-performing or untrustworthy, and promote loyal lawmakers to senior jobs.”

Global Debt Bubble Watch:

February 13 – Financial Times (Colby Smith and Richard Henderson): “Global investors poured a record amount of cash into fixed-income funds for the week ending Wednesday, as the coronavirus outbreak intensified fears of a global growth slowdown. Fixed-income mutual funds and exchange traded funds took in $23.6bn, the biggest weekly intake since 2001, according to EPFR Global. Inflows into US bond funds accounted for $15.4bn of the total. This included $10.3bn into US investment grade bonds.”

February 13 – Financial Times (George Hammond and Hudson Lockett): “Companies across Asia are raising hard-currency debt at a record rate as the deadly coronavirus outbreak pushes down bond yields in the region. Since the start of the year, businesses across Asia excluding Japan have raised $37.5bn in debt denominated in dollars, euros and yen, according to Dealogic… The previous high water mark was the $27.3bn raised during the same period in 2017.”

February 12 – Bloomberg (Netty Idayu Ismail): “Lebanon’s foreign debt sank to a record low as speculation mounted that the government may not repay a $1.2 billion Eurobond due in less than a month. Investors are pondering what shape a default might take, with the crisis-ridden nation’s government wrangling over whether to continue servicing its liabilities… The $1.2 billion of notes, due on March 9, plunged 7 cents to 74.7 cents on the dollar Wednesday. Lebanon’s $2.1 billion bond maturing in April next year fell 7 cents to 39…”

February 14 – Bloomberg (Laura Benitez and Fabian Graber): “European junk-rated auto companies were just starting to show signs of a recovery after a prolonged downturn, with improving bond prices and encouraging results. Then the coronavirus struck.”

February 10 – Reuters (Chris Fournier): “Canadian consumers filed the largest number of insolvencies in almost a decade at the end of last year, stoking concern about the impact of record indebtedness on households and the economy. Insolvencies totaled 35,155 in the final three months of 2019, the most in any one quarter since 2010…”

Leveraged Speculation Watch:

February 12 – Wall Street Journal (Paul J. Davies): “The euro is cheaper than many think it ought to be. One explanation: A surge in euro-based borrowing abroad is weighing the currency down. This could make the euro prone to wild swings in the future. A variety of actors are borrowing euros and exchanging them for other currencies, taking advantage of the region’s superlow, even negative interest rates. Some of this demand comes from hedge funds putting on what are called carry trades, in which they borrow in euros and swap them into higher-yielding currencies such as the Brazilian real or the Mexican peso. Data from the Commodities Futures and Trading Commission show leveraged funds had at the start of February… nearly the biggest volume of net shorts or bets against the euro since the end of 2016.”

February 11 – Bloomberg (Tom Maloney and Hema Parmar): “Twelve billion dollars. It’s more than JPMorgan… paid all 56,000 of its investment bank employees, and almost twice as much as gamblers lost in Las Vegas last year. It’s also what 15 hedge fund managers collectively earned in 2019. Five of them—Chris Hohn, Jim Simons, Ken Griffin, Steve Cohen and Chase Coleman—reaped more than $1 billion each…”

February 12 – New York Times (Ben Dooley): “SoftBank Group has taken another multibillion-dollar hit from its ambitious but costly bets on once high-flying companies like Uber and WeWork, putting growing pressure on the Japanese conglomerate to get its financial house in order. The company and its founder and chief, Masayoshi Son, have dominated the world of technology investment through the $100 billion Vision Fund. More recently, the company has become a target for the hedge-fund giant Elliott Management, which has been urging changes at the Japanese firm, including governance overhauls and stock buybacks.”

Geopolitical Watch:

February 10 – Reuters (Ben Blanchard and Yimou Lee): “A second day of drills by China’s military close to Taiwan were aimed at improving combat capabilities, the People’s Liberation Army said, after Taiwan’s air force scrambled to intercept Chinese jets that briefly crossed the Taiwan Strait’s mid-line. Tensions have spiked between China and the island since Sunday, when Taiwan F-16s shadowed Chinese fighters and bombers which flew around the island. Beijing claims Taiwan as its territory, to be taken by force if needed. On Monday, Taiwan’s air force scrambled after Chinese jets briefly crossed an unofficial middle line in the Taiwan Strait, which both sides’ forces generally stay on their respective sides of.”

February 11 – Wall Street Journal (David Gauthier-Villars in Istanbul and Nazih Osseiran): “Five Turkish soldiers were killed during a clash with Syrian government forces in northwestern Syria, raising the country’s troop losses to 13 over the past week and testing Turkey’s resolve to support rebels in an area that President Bashar al-Assad has vowed to reclaim… Turkish officials said the Turkish military had retaliated and sent cross-border convoys to beef up its military presence in Idlib.”

February 14 – Reuters (Paul Carrel): “Germany’s president took an indirect swipe at U.S. President Donald Trump on Friday in accusing Washington, China and Russia of stoking global mistrust and insecurity with a ‘great powers competition’ that could threaten a new nuclear arms race.”

February 8 – Reuters (Parisa Hafezi): “The sanctions imposed on Iran by the United States are a ‘criminal act’ against the country, Iranian’s Supreme Leader Ayatollah Ali Khamenei said… ‘These sanctions are criminal act ... but we can turn it to an opportunity by distancing Iran’s economy from being dependent on oil exports,’ said Khamenei.”