Friday, March 12, 2021

Weekly Commentary: Let the Facts Speak: Q4 2020 Z.1

I received a friendly email a few weeks back from a reader inquiring whether my analysis is Fact or opinion. Well, it’s my opinion that the world is in the “Terminal Phase” of history’s greatest Credit Bubble. It is opinion that U.S. and global equities markets are historic speculative Bubbles, fueled by runaway Monetary Inflation and Acute Monetary Disorder. It’s my opinion that markets in U.S. stocks, cryptocurrencies, corporate Credit and derivatives have evolved into full-fledged manias. It’s certainly my opinion that this all ends very badly.

But this week’s CBB is about Facts rather than opinion. History informs us that money and Credit are critically important – ignore their disorder at your own peril (policymakers at all our peril). That’s a Fact. The Fed’s Z.1 “flow of funds” report is our quarterly glimpse at Credit and financial developments – where "the rubber meets the road". As far as I’m concerned, the Facts Speak for themselves. It was another quarter that corroborates Bubble Analysis. Facts provide the foundation for my analysis and opinions, and Z.1 data reflect monetary inflation spiraling out of control.

Total Non-Financial Debt (NFD) ended 2020 at $61.167 TN, or a record 292% of GDP, having increased $27.8 TN, or 83%, since the end of 2007. NFD ended 2019 at 254% of GDP, up from 230% to finish 2007; 189% to end the nineties; 186% at the end of the eighties; and 140% to conclude the seventies.

NFD inflated an unprecedented $6.778 TN, or 12.5%, during 2020. For perspective, NFD expanded on average $1.831 TN annually over the previous decade. NFD grew $2.452 TN during 2019, somewhat below the all-time record $2.899 TN posted during the mortgage finance Bubble year 2004. NFD expanded $941 billion during Q4, more than double Q4 2019’s $458 billion, and up from Q3’s $808 billion. NFD surged $9.230 TN, or 17.8%, over two years.

The Credit Bubble continues to be fueled by a mind-boggling expansion of government debt. Outstanding Treasury Securities jumped $700 billion during the Q4. For the year, Treasuries surged an unprecedented $4.582 TN, or 24%, to a record $23.601 TN. Treasuries rose $5.759 TN, or 32.3%, over two years. Since the end of 2007, Treasuries have ballooned $17.550 TN, or 290%. Treasuries ended 2020 at a record 113% of GDP, up from 42% to end 2007.

Agency (GSE debt and MBS) Securities gained another $248 billion during Q4 to surpass $10 TN ($10.114 TN) for the first time. This boosted 2020 growth to $685 billion (7.3%), the largest expansion since 2008. For perspective, Agency Securities on average increased $133 billion annually during the previous decade. Agency Securities expanded $1.002 TN over the past two years.

Combined (“Washington Finance”) Agency and Treasury Securities expanded $5.267 TN, or 18.5%, during 2020 to a record $33.715 TN (2-yr growth of $6.761 TN). Treasury and Agency Securities increased to a record 157% of GDP, up from 92% to end 2007. It’s worth noting Agency and Treasury Securities comprised 73% of total NFD growth over the past two years (6.761/9.230).

Led by unmatched Treasury and Agency issuance, Total Debt Securities rose $1.212 TN, or 9.2% annualized, during Q4 to a record $53.920 TN. Total Securities surged $6.499 TN during 2020, ending the year at a record 248% of GDP (up from 204% to end ’07).

Total Equities surged $8.092 TN during Q4 to a record $64.503 TN, with a stunning nine-month gain of $21.474 TN. Gaining $9.878 TN for the year, Total Equities ended 2020 at a record 308% of GDP. This compares to previous cycle peaks 187% at Q3 2007 and 210% during Q1 2000. It’s worth adding that Equities-to-GDP reached a high of 71% in September 1987, fell to a post-crash low of 54%, and did not surpass the ’87 peak until Q4 1991 (77%).

Total (Debt and Equities) Securities surged $9.303 TN during Q4 to a record $118.422 TN. Total Securities gained $16.378 TN, or 16.0%, during 2020, surpassing 2019’s record $13.191 TN increase. Total Securities ended 2020 at a record 566% of GDP. This was up greatly from previous cycle peaks 387% during Q3 2007 and 368% back in Q1 2000. For additional perspective, Total Securities-to-GDP ended the eighties at 194% and the seventies at 148%.

Inflating securities values continue to inflate Household Net Worth. And while headlines and articles refer to “household wealth,” it’s important to distinguish between real economic wealth and perceived wealth generated from massive monetary inflation and market Bubbles.

Household Assets surged $7.223 TN during Q4 to a record $147.211 TN. And with Liabilities increasing “only” $297 billion (to a record $17.057 TN), Household Net Worth surged $6.925 TN to a record $130.155 TN. For the year, Household Assets inflated $12.587 TN and Liabilities rose $652 billion, with Net Worth surging $11.935 TN. This annual gain was second only to 2019’s record $12.702 TN surge (that crushed 2013’s previous high $8.712 TN). Household Net Worth inflated an unparalleled $24.637 TN, or 23%, over two years, ending 2020 at a record 622% of GDP. This was up from 485% to end 2007; 448% at the end of 1999; and 378% to conclude the eighties.

Household holdings of Financial Assets surged $6.185 TN, or 25% annualized, during Q4 to a record $104.570 TN (2020 gain $9.867 TN). Financial Assets-to-GDP ended the year at 499%, up from 2007’s 374%; 1999’s 357%; and 267% to end the eighties. Total Equities (Corp Equities and Mutual Funds) jumped $4.165 TN during Q4 to a record $34.994 TN, with a one-year gain of $5.084 TN, or 16.4%. Total Equities surged $9.364 TN, or 35.2%, over the past three years. For comparison, Total Equities inflated $5.037 TN during the three-year Bubble period 1997 to 1999. Household Total Equities holdings ended 2020 at a record 172% of GDP. This compares to previous cycle peaks 104% during Q2 2007 and 115% for Q1 2000. Total Equities-to-GDP ended the eighties at 47%.

Reminiscent of the mortgage finance Bubble period, Household Real Estate holdings gained $915 billion during Q4, surpassing the previous record $852 billion increase back in Q3 2005. For 2020, Real Estate inflated $2.267 TN (strongest annual gain since 2005’s $3.122 TN) to a record $35.789 TN. Real Estate as a percentage of GDP jumped to 171%, up from trough 2011’s 129% to the highest reading since 2007’s 178%.

The Federal Reserve’s Balance Sheet (Assets) jumped $197 billion during Q4 to a record $7.600 TN. For the year, Fed Assets inflated an unprecedented $3.220 TN, easily surpassing the previous record $1.319 TN gain from the 2008 crisis response. The Fed’s Balance Sheet has now inflated $6.648 TN, or 700%, since the end of 2007, rising from 7% of GDP to 36%. During 2020, the Fed purchased $2.677 TN of Treasuries, more than doubling its holdings to $5.218 TN. The Fed bought no Agency securities until 2008, and after last year’s $677 addition it held $2.148 TN at the end of the year.

The inflating Federal Reserve Balance Sheet continues to fuel a corresponding inflation within the banking system. Bank (Private Depository Institutions) Assets jumped $554 billion, or 9.7% annualized, during Q4 to a record $23.454 TN. Assets surged $3.402 TN, or 17%, during 2020, dwarfing 2008’s previous record $1.249 TN increase. The Asset “Reserves at the Fed” rose $252 billion during Q4 to a record $2.995 TN, with a one-year gain of $1.446 TN.

Banking system Debt Securities holdings rose $274 billion during Q4 to a record $5.790 TN, with Agency/MBS Securities surging an unprecedented $279 billion, or 36% annualized. Agency/MBS holdings jumped $740 billion during the year, or 28%, to $3.375 TN. This was more than three-times 2019’s record $189 billion increase. Annual purchases had averaged $104 billion over the previous decade. Treasury holdings increased only $17 billion during Q4 to a record $1.204 TN, though Treasuries expanded a record $325 billion, or 37%, for the year (up 63% in two years).

As new QE-generated Federal Reserve “IOUs” (“reserves”) are funneled to the banking system in exchange for deposits, the upshot has been an unprecedented expansion in Bank Deposit Liabilities. Total (Checking and Time & Savings) Deposits jumped $651 billion during Q4 to $18.866 TN. For 2020, Total Deposits surged an unprecedented $3.344 TN, or 21.5% (vs. 2020’s $3.220 TN gain in Fed Assets). The previous record annual gain in Bank Deposit growth was 2019’s $855 billion. Deposit growth had averaged $597 billion annually over the previous decade (Total Deposits up 122% since 2007). Total Bank Deposits as a percentage of GDP in one year jumped from 72% to a record 90%. Bank Deposits-to-GDP ended 2007 at 59% and the nineties at 48%.

Lending was traditionally fundamental to the business of banking. Loans declined $68 billion during the quarter to $12.092 TN. For 2020, Loans expanded $365 billion, or 3.1%. Loans ended the seventies at 73% of Bank Assets. This ratio then dropped to 68% by the end of the eighties, 65% to end the nineties and 58% by 2010. Loans-to-Bank Assets fell to 52% to end 2020.

And while bank lending to the real economy may be rather stagnant, the same cannot be said for Broker/Dealer lending into the securities markets. Broker/Dealer Loans expanded a record $100 billion, or 84% annualized, during Q4 to a record $574 billion. For 2020, Broker/Dealer Loans surged a record $164 billion, or 40%. This compares to previous cycle peak growth of $79 billion in 2006 and $75 billion in Bubble year 1999.

Total Broker/Dealer Assets jumped $168 billion, or 19% annualized, during Q4 to a record $3.676 TN. Assets increased $207 billion, or 6.0%, for the year. Repo Assets gained $43 billion during the quarter to $1.322 TN.

And while on the subject of booming asset-based lending businesses, it’s worth noting total system Mortgage lending posted its strongest growth since the mortgage finance Bubble period. Total Mortgages increased $738 billion, or 4.6%, in 2020 to a record $16.783 TN. This was the largest rise since 2007’s $1.084 TN. Home Mortgages gained $477 billion to a record $11.666 TN, the biggest increase since ‘07’s $722 billion.

The Rest of World (ROW) category remains an intriguing facet of Bubble Analysis. ROW holdings of U.S. Financial Assets surged a record $3.317 TN, or 36% annualized, during Q4 to a record $40.352 TN. For all 2020, ROW holdings rose $5.584 TN, or 16.1%, surpassing 2019’s record $4.800 TN increase. Over two years, ROW holdings were up $11.169 TN, or 37%. After ending 2007 at $15.842 TN, ROW holdings have surged 192%. ROW holdings ended 2020 at 193% of GDP. This compares to 109% to end 2007; 76% at the end of the nineties; and 30% to wrap up the eighties.

The Q4 gain was led by a $1.612 TN increase in Total Equities holdings to a record $11.618 TN, with a one-year gain of $2.523 TN, or 28%. Debt Securities increased $186 billion during the quarter to a record $12.955 TN, led by a $171 billion increase in Corporate Bonds. For 2020, Debt Securities surged $884 billion, with Corporate Bonds gaining $501 billion.

It was a manic week for U.S. equities. The small cap Russell 2000’s 7.3% surge increased y-t-d gains to 19.1%. The Banks (KWB) jumped 4.3%, boosting 2021 gains to 26%. The Broker/Dealers surged 5.8%, the Midcaps 5.3% and even the Utilities jumped 4.5%. The Goldman Sachs Most Short Index surged 10.6%, increasing y-t-d gains to 40.4%.

Meanwhile, Treasury yields jumped to new one-year highs. Ten-year Treasury yields rose six bps to 1.63%. The five-year Treasury inflation “breakeven rate” surged another 10 bps to 2.58%, the high since July 2008. Examining Z.1 data, it’s surprising consumer price pressures have remained somewhat contained to this point (although significant Credit growth is being directed to the asset markets). But inflationary pressures are now mounting rapidly with Trillions more Credit – including unrelenting fiscal and monetary stimulus – in the offing.

The Facts support the view that a major bear market is unfolding in long-term Treasuries and fixed income securities.

For the Week:

The S&P500 jumped 2.6% (up 5.0% y-t-d), and the Dow surged 4.1% (up 7.1%). The Utilities rose 4.5% (down 1.5%). The Banks advanced 4.3% (up 26.0%), and the Broker/Dealers surged 5.8% (up 20.8%). The Transports gained 3.9% (up 13.2%). The S&P 400 Midcaps jumped 5.3% (up 14.7%), and the small cap Russell 2000 surged 7.3% (up 19.1%). The Nasdaq100 rallied 2.1% (up 0.4%). The Semiconductors recovered 1.5% (up 6.1%). The Biotechs increased 0.2% (down 3.5%). With bullion rising $26, the HUI gold index rallied 3.5% (down 9.5%).

Three-month Treasury bill rates ended the week at 0.02%. Two-year government yields added a basis point to 0.15% (up 3bps y-t-d). Five-year T-note yields rose four bps to 0.84% (up 48bps). Ten-year Treasury yields jumped six bps to 1.63% (up 71bps). Long bond yields rose eight bps to 2.38% (up 73bps). Benchmark Fannie Mae MBS yields surged nine bps to 1.97% (up 62bps).

Greek 10-year yields sank 14 bps to 0.82% (up 20bps y-t-d). Ten-year Portuguese yields dropped nine bps to 0.20% (up 17bps). Italian 10-year yields sank 13 bps to 0.62% (up 8bps). Spain's 10-year yields fell six bps to 0.33% (up 28bps). German bund yields were unchanged at negative 0.31% (up 26bps). French yields declined two bps to negative 0.07% (up 27bps). The French to German 10-year bond spread narrowed about two to 24 bps. U.K. 10-year gilt yields rose seven bps to 0.82% (up 63bps). U.K.'s FTSE equities index advanced 2.0% (up 4.7% y-t-d).

Japan's Nikkei Equities Index jumped 3.0% (up 8.3% y-t-d). Japanese 10-year "JGB" yields gained three bps to 0.12% (up 10bps y-t-d). France's CAC40 surged 4.6% (up 8.9%). The German DAX equities index rose 4.2% (up 5.7%). Spain's IBEX 35 equities index gained 4.3% (up 7.1%). Italy's FTSE MIB index surged 5.0% (up 8.5%). EM equities were mixed. Brazil's Bovespa index declined 1.0% (down 4.1%), while Mexico's Bolsa jumped 3.1% (up 8.4%). South Korea's Kospi index increased 0.9% (up 6.3%). India's Sensex equities index added 0.8% (up 6.4%). China's Shanghai Exchange fell 1.4% (down 0.6%). Turkey's Borsa Istanbul National 100 index rose 1.0% (up 5.5%). Russia's MICEX equities index surged 3.7% (up 7.6%).

Investment-grade bond funds saw inflows of $3.308 billion, while junk bond funds posted outflows of $5.331 billion (from Lipper).

Federal Reserve Credit last week expanded $24.2bn to $7.531 TN. Over the past year, Fed Credit expanded $3.309 TN, or 78.4%. Fed Credit inflated $4.720 Trillion, or 168%, over the past 435 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week surged $25.2bn to $3.570 TN. "Custody holdings" were up $130bn, or 3.8%, y-o-y.

Total money market fund assets gained $29.7bn to $4.392 TN. Total money funds surged $615bn y-o-y, or 16.3%.

Total Commercial Paper gained $11.9bn to $1.111 TN. CP was down $18bn, or 1.6%, year-over-year.

Freddie Mac 30-year fixed mortgage rates rose three bps to a seven-month high 3.05% (down 31bps y-o-y). Fifteen-year rates gained four bps to 2.38% (down 39bps). Five-year hybrid ARM rates increased four bps to 2.77% (down 24bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up three bps to 3.23% (down 74bps).

Currency Watch:

For the week, the U.S. dollar index declined 0.3% to 91.679 (up 2.0% y-t-d). For the week on the upside, the Mexican peso increased 3.0%, the South African rand 2.7%, the Brazilian real 2.3%, the Canadian dollar 1.5%, the Norwegian krone 1.4%, the Australian dollar 1.0%, the Swedish krona 0.7%, the British pound 0.6%, the euro 0.3%, and the New Zealand dollar 0.1%. For the week on the downside, the South Korean won declined 0.7%, the Japanese yen 0.7%, the Singapore dollar 0.2%, and the Swiss franc 0.1%. The Chinese renminbi declined 0.18% versus the dollar this week (up 0.29% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index was little changed (up 10.1% y-t-d). Spot Gold rallied 1.6% to $1,727 (down 9.0%). Silver recovered 2.7% to $25.919 (down 1.8%). WTI crude slipped 48 cents to $65.61 (up 35%). Gasoline rose another 4.1% (up 53%), while Natural Gas dropped 3.7% (up 2%). Copper gained 1.6% (up 18%). Wheat dropped 2.2% (unchanged). Corn fell 1.2% (up 11%). Bitcoin gained $7,913, or 16%, this week to $56,966 (up 96%).

Coronavirus Watch:

March 8 – Bloomberg (Jonathan Levin): “A highly infectious Covid-19 variant is circulating widely in Florida, prompting concern that a resurgence of the virus is possible in the state and beyond, even as cases and hospitalizations drop dramatically. In Florida, as elsewhere in the U.S., Covid cases, hospitalizations and deaths have dropped significantly… But conditions aren’t improving quite as quickly in the Sunshine State, at least in certain key categories. The per-capita rate of Covid-19 patients currently in Florida hospitals is now about 25% above the national average.”

March 11 – CNN (Flora Charner and Marcia Reverdosa): “A second wave of Covid-19 is ripping through Brazil, pushing hospitals and ICUs toward collapse and claiming record numbers of daily deaths. While a new variant of the coronavirus spreads throughout the country, many Brazilians continue to defy mask mandates mobility restrictions following the example of President Jair Bolsonaro, who recently said people need to ‘stop being sissies’ and ‘whining’ about the virus.”

Market Mania Watch:

March 11 – Financial Times (Chris Flood): “The exchange traded fund industry has made its fastest ever start to a year with a new record of $139.5bn in monthly inflows in February as investors, betting on a strong economic rebound in 2021, used ETFs to pour cash into equities… February’s record haul for the ETF industry was up 5.7% on the previous best month for new business at $132bn set as recently as November, according to ETFGI… Investors worldwide have allocated $222.5bn in new cash to ETFs in the first two months of 2021, more than double the same period last year..”

March 7 – Wall Street Journal (Andy Kessler): “Even after last week, it feels as if a lot of people think markets only go up. Buy the dip! Hold on for dear life! Feed the ducks when they’re quacking! Stocks. Bonds. SPACs. Real estate. Commodities. Crypto. $200,000 nonfungible tokens, known as NFTs, with clips of LeBron James. Even GameStop is flying again. The sentiment is: Assets go up; cash is for losers. That hasn’t been a bad bet. The March 2020 Covid insta-bear market quickly returned to an insta-bull market. So how do you know when to jump off the runaway train instead of being run over by one? I don’t think I’m breaking new ground when I suggest that markets do go down. A lot. I was somewhat new to Wall Street when the crash of 1987 took 22.6% out of the Dow Jones Industrial Average. In retrospect, that’s nothing. A partner at an old-line investment bank once told me that you haven’t seen a real bear market until you’ve lost 90% of your money.”

March 9 – Bloomberg (Cristin Flanagan): “While technology giants roared back in Tuesday’s big Nasdaq bounce, the euphoric sentiment was hardly confined to megacaps. Around the market, volume was erupting in tiny software and health-care companies that tempted retail day traders during the pandemic. More shares of Sundial Growers Inc. traded on the Nasdaq than those of tech bellwether Apple Inc., and Second Sight Medical Products Inc. wasn’t far behind. The pair were among the most-traded shares, just behind volume leader Exela Technologies Inc., a software services company that saw nearly 450 million shares trade hands intraday after a small contract win. The new crop of young daytraders that emerged during the pandemic is looking for new opportunities, especially in some typically thinly traded biotech and medical-device stocks.”

March 8 – Bloomberg (Heather Perlberg): “Whenever greed meets reality and giddy markets collapse, Wall Street pros usually admit that they sensed the end was coming. The warning signs were so familiar, they belatedly confess, that it was difficult to believe anyone could miss them. The chain of fools was running out. This can’t last. Today those sober words are being whispered again in American finance, this time about one of the biggest money-grabs in the business, SPACs. Who hasn’t heard about SPACs by now? Once dismissed as sketchy Wall Street arcana, these publicly traded shells are created for one purpose: to merge with real businesses that actually make money. Nowadays everyone who’s anyone seems to be doing one. Sports figures like Alex Rodriguez and Shaquille O’Neal; former House speaker Paul Ryan; Wall Street rainmakers like Michael Klein — the list runs on. The count from the past 15 months stretches to 474 SPACs. Together, they’ve raised $156 billion.”

March 10 – Bloomberg (Justina Lee): “The electric-vehicle craze is a classic sign of a ‘big market delusion’ that has entrapped investors throughout history, according to quant pioneer Rob Arnott. The 600% rally in a year that sent the combined value of eight manufacturers to $1 trillion is pricing every firm as a major winner in the clean-energy boom. Yet just as the once-highly valued PalmPilot lost in the smartphone revolution, not all of them will succeed in the EV age, the Research Affiliates chairman co-wrote in a new paper. ‘All of these companies are priced as if they are going to be huge winners, but they are competitors!’ Arnott said…”

March 11 – Bloomberg (James Tarmy): “On Thursday, a digital artwork less than a month old hammered for $60.25 million at Christie’s in New York, shattering every previous record set for the medium and pushing the NFT market into the price range of blue-chip masterworks. With buyer’s premium the total comes to $69 million. Everydays: the First 5,000 Days is a mosaic of every image that artist Mike Winkelmann, who goes by the name Beeple, has made since 2013. The artwork is attached to a non-fungible token (NFT), a digital certificate of authenticity that runs on blockchain technology. Unlike some of his other artworks, Everydays doesn’t come with anything physical (a box, a plaque) attached. Bidding opened at $100 on Feb. 25. ‘The first day of bidding was one of the most magical events in my auction career,’ says Noah Davis, a specialist at Christie’s who organized the sale. ‘I’ve never seen anything like it.’”

March 12 – Wall Street Journal (Kelly Crow and Caitlin Ostroff): “Christie’s said that a cryptocurrency investor based in Singapore called Metakovan won Beeple’s $69 million digital collage at auction—a sale that smashed records in markets for both art and nonfungible tokens, or NFTs. Metakovan’s identity couldn’t be determined, but he is widely known in cryptocurrency circles. A spokesman for him, who goes by Twobadour, confirmed the purchase…”

Market Instability Watch:

March 9 – Wall Street Journal (Julia-Ambra Verlaine and Sebastian Pellejero): “Investor bets on rising U.S. interest rates are testing the short-term cash markets that serve as the financial system’s plumbing. Hedge funds and other institutional investors are paying an annual rate of as much as 4% to borrow the most recent issue of the 10-year U.S. Treasury note in the market for repurchase agreements, or repos. These hedge funds and others want to borrow and sell the bonds now in a wager that they can buy them back later for less, as rising U.S. rates push bond prices lower. The 10-year Treasury yield settled at 1.594% Monday, its highest level in more than a year… Usually, those hedge funds, central banks and other institutions lending in the repo market receive both Treasurys, which function as collateral, and interest payments in exchange for providing overnight cash. Now they are paying to borrow Treasurys and part with cash. The inversion—which last reached these levels a decade ago—has caught traders and investors off guard.”

March 8 – Bloomberg (Vildana Hajric and Lu Wang): “One of the best manifestations of the rotation from formerly high-flying growth stocks to value shares can be seen in the divergence of the Nasdaq 100 from the Dow Jones Industrial Average. As the 125-year-old benchmark climbed to another intraday record, the Nasdaq 100 slumped to a level traditionally seen as a correction. It’s the first time since 1993 that the Dow rose and closed within 1% of a record, while the tech-heavy gauge was down more than 10% from its high.”

March 12 – Bloomberg (Elena Popina): “A year after the crash, March is proving to be another brutal month for investor nerves. The Nasdaq 100 Index has moved at least 1% in either direction on eight of March’s 10 trading days, a string not seen since the depths of the pandemic-fueled bear market a year ago.”

March 10 – Bloomberg (Lu Wang and Melissa Karsh): “The recent rally in the Nasdaq 100 has been referred to as an oversold bounce aided by a drop in bond yields. Beneath the surface, however, the surge was largely driven by hedge funds who were forced to pare their bearish bets to limit losses… While those funds were net buyers of stocks for a fifth straight day, short covering outpaced long sales by a ratio of 4 to 1 on Tuesday, according… Goldman Sachs…”

Inflation Watch:

March 10 – Associated Press (Martin Crutsinger): “The U.S. government’s budget deficit through February hit an all-time high of $l.05 trillion for the first five months of this budget year… The… October through February deficit was 68% larger than the $624.5 billion deficit recorded during the same period last year. It easily surpassed the previous five-month deficit of $652 billion set in 2010 when the government was spending to try to lift the country out of the deep recession caused by the 2008 financial crisis. The Congressional Budget Office has projected that the deficit for the budget year that ends on Sept. 30 will be $2.3 trillion. However, that estimate does not include the cost of President Joe Biden’s $1.9 trillion COVID relief measure…”

March 10 – Reuters (Lucia Mutikani): “U.S. consumer prices increased solidly in February, with households paying more for gasoline, but underlying inflation remained tepid amid weak demand for services like airline travel and hotel accommodation… The consumer price index increased 0.4% last month after rising 0.3% in January. A 6.4% advance in gasoline prices accounted for more than half of the gain in the CPI. In the 12 months through February, the CPI shot up 1.7%, the largest rise since February 2020… Gasoline prices surged 7.4% gain in January. Food prices climbed 0.2% last month, with the cost of food consumed at home gaining 0.3%.”

March 12 – Associated Press (Martin Crutsinger): “Rising wholesale prices moderated a bit in February after a record jump in January, with both months beset by rising energy prices. The… producer price index… increased by 0.5% last month following a record jump of 1.3% the month before. Price increases slowed despite a 6% surge in energy last month, which followed a 5.1% jump in January… Over the past year, wholesale prices are up 2.8%, above the Federal Reserve’s 2% goal for inflation, while core inflation, which excludes volatile food and energy costs, was up a modest 0.2% in February and 2.5% over the past year.”

March 12 – Bloomberg (Marcy Nicholson): “Soaring lumber prices and chronic shortages are prompting key U.S. housing industry participants to call on the Biden administration to find remedies that’ll boost wood production. Thirty-seven organizations are calling for the ‘immediate attention’ of U.S. Department of Commerce Secretary Gina Raimondo to address ‘skyrocketing’ lumber prices and supply constraints they say endanger economic recovery and housing affordability.”

March 11 – New York Times (Clifford Krauss): “Even as oil and gasoline prices rise, industry executives are resisting their usual impulse to pump more oil out of the ground, which could keep energy prices moving up as the economy recovers. The oil industry is predictably cyclical: When oil prices climb, producers race to drill — until the world is swimming in petroleum and prices fall. Then, energy companies that overextended themselves tumble into bankruptcy. That wash-rinse-repeat cycle has played out repeatedly over the last century, three times in the last 14 years alone. But, at least for the moment, oil and gas companies are not following those old stage directions… Gas prices have risen about 35 cents a gallon on average over the last month, according to the AAA motor club, and could reach $4 a gallon in some states by summer.”

March 12 – Reuters (Zandi Shabalala): “Demand and prices for battery material cobalt are soaring as electric vehicles stream out of showrooms in China and Europe… The price of the metal stands at $53,000 per tonne, up 65% this year and around its highest since December 2018, having been as low as $25,000 in 2019 due to a global market surplus.”

March 11 – Reuters (Jamie McGeever): “Annual inflation in Brazil rose above 5% in February for the first time in four years, official figures showed on Thursday, above analysts’ expectations and almost certainly setting the seal on an interest rate hike next week.”

Biden Administration Watch:

March 12 – CNBC (Jacob Pramuk): “President Joe Biden signed the $1.9 trillion coronavirus relief package… as Washington moves to send fresh aid this month. With his signature, the president checks off his first priority in the White House… The plan will send direct payments of up to $1,400 to most Americans. Direct deposits will start hitting Americans’ bank accounts as soon as this weekend… The bill will also extend a $300 per week unemployment insurance boost until Sept. 6 and expand the child tax credit for a year. It will also put nearly $20 billion into Covid-19 vaccinations, $25 billion into rental and utility assistance, and $350 billion into state, local and tribal relief.”

March 9 – Reuters (David Lawder): “The U.S. Treasury will work to quickly distribute $350 billion in aid to state and local governments from President Joe Biden’s coronavirus stimulus bill, Treasury Secretary Janet Yellen said…, adding that it should bring ‘some measure of prosperity’ after the pandemic ends. ‘In the coming days our Treasury team is going to work to get this aid out in the quickest way possible, and the one that produces the greatest economic impact,’ Yellen said…”

March 10 – Financial Times (Courtney Weaver): “Now that Congress has passed Joe Biden’s $1.9tn US stimulus bill, the administration and its Democratic allies are gearing up for their next big legislative priority: a multi-trillion-dollar infrastructure package. Some Democrats hope that a sweeping infrastructure bill will garner bipartisan support, unlike the stimulus package… But the administration could struggle to craft legislation designed to overhaul creaking bridges, roads and broadband networks that appeals to Republicans while also fulfilling Biden’s ambitions on clean energy and racial equity… ‘He wants to move as quickly as possible,’ Peter DeFazio, the Democratic chairman of the House committee on Transportation and Infrastructure, said after a meeting at the White House last week. ‘He wants it to be very big and he feels that this is the key to the recovery package.’ DeFazio has suggested that Congress could pass the infrastructure bill through a process known as reconciliation, the same manoeuvre it used to push the stimulus through the Senate without any Republican support.”

March 8 – Bloomberg (Mario Parker): “White House Senior Advisor Cedric Richmond left open the possibility that the Biden administration could seek passage of an infrastructure plan with only Democratic votes after the president drew criticism for a $1.9 trillion virus relief package that’s poised to pass along partisan lines. ‘We’re not going to try to go solo,’ Richmond… said… ‘We would hope that Republicans would come along with us and independents, but to the extent that we are required to go solo then we may have to do that, but that’s not our first choice.’”

March 8 – Bloomberg (Saleha Mohsin): “Treasury Secretary Janet Yellen dismissed fears that President Joe Biden’s $1.9 trillion pandemic-relief bill is so big that it will cause an inflation problem, as she seeks to push the recovery deeper into the U.S. labor market to address long-standing economic disparities. Yellen called the impact on women and minorities from Covid-19 ‘absolutely tragic.’ She has repeatedly rejected concerns that Biden’s stimulus is excessive given the economy’s signs of recovery, and that run-away inflation could damage the economy. ‘I really don’t think that’s going to happen,’ she said… Inflation before the pandemic ‘was too low rather than too high,’ she noted. ‘If it turns out to be inflationary, there are tools to deal with that,’ she said…”

Federal Reserve Watch:

March 9 – Bloomberg (Jesse Hamilton and Alexandra Harris): “Thanks to the pandemic, U.S. banks won a long-sought regulatory break that let them expand their balance sheets by as much as $600 billion without adhering to profit-denting safeguards. Now, firms are frantically lobbying to extend that relief before it expires at month’s end. The reprieve from what’s known as the supplementary leverage ratio -- granted a year ago as Covid-19 rocked markets and the economy -- gave lenders free rein to load up on Treasuries and deposits, while avoiding a requirement that they hold more capital as a buffer against losses. The Federal Reserve and other agencies eased the rules because they said they wanted excess capital deployed to struggling businesses and households.”

March 8 – Reuters (Pete Schroeder): “The Federal Reserve announced… it was extending by three months to June 30 an emergency liquidity facility meant to help lenders extend relief to small businesses under the Paycheck Protection Program. …The Fed said three other emergency facilities -- the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility -- would expire as scheduled on March 31.”

U.S. Bubble Watch:

March 11 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for jobless benefits dropped to a four-month low last week…, putting the labor market recovery back on track. Initial claims for state unemployment benefits decreased 42,000 to a seasonally adjusted 712,000 for the week ended March 6, the lowest level since early November.”

March 8 – Politico (Katy O’Donnell): “The booming housing market helped stave off economic collapse in 2020. But soaring prices are starting to worry policymakers, who fear the market could lock a generation of would-be buyers out of homeownership. Home prices in January… were up 14% over the same month the previous year, while sales jumped 24%, despite an unemployment rate that was almost twice as high. Demand for existing homes is so strong that the average residence is on the market for just three weeks, and inventory is at a record low after seeing its steepest drop last year since the data was first tracked in 1999.”

March 10 – CNBC (Diana Olick): “The recent sharp rise in interest rates is now taking a toll on mortgage refinance demand, as the number of borrowers who could benefit shrinks. Applications to refinance a home loan fell 5% last week compared with the previous week, according to the Mortgage Bankers Association… They were also 43% lower compared with the same week one year ago… Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, rose 7% for the week but were just 2% higher than the same week one year ago.”

March 11 – Wall Street Journal (Orla McCaffrey): “Americans extracted more cash from their homes through cash-out refinancings in 2020 than in any year since the financial crisis. U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to… Freddie Mac. It was a blockbuster year for mortgage originations in general as well: Lenders churned out more mortgages than ever in 2020, fueled by about $2.8 trillion in refis, according to… Black Knight Inc.”

March 9 – Reuters (Lucia Mutikani): “Nearly a third of U.S. households receiving unemployment benefits are struggling to cover routine expenses such as food, housing and medical treatment, according a survey published by the Commerce Department’s Census Bureau…”

March 10 – Bloomberg (Ben Stupples and Tom Maloney): “Roblox Corp.’s users can create virtual worlds to fend off zombies or scuba dive for hidden treasure, with makers of the most popular games earning enough to become millionaires. Roblox co-founder David Baszucki -- known on the site as ‘builderman’ -- has made the most from the online gaming platform. His stake in the company is now worth about $4.6 billion after the company’s shares soared more than 50% in their first day of trading.”

March 9 – Dow Jones (Katherine Clarke): “A sprawling oceanfront Florida compound -- one of the most expensive real-estate listings in the country -- has sold for roughly $94 million, about six years after it first came on the market… The property, owned by the Ziff family, first listed for just under $200 million in 2015, but was more recently listed for $115 million.”

March 10 – Bloomberg (John Gittelsohn): “A massive Los Angeles hilltop mansion with an asking price once touted at $500 million now faces a notice of default. An $82.5 million loan for ‘The One,’ a 100,000-square-foot (9,300-square-meter) home built by developer and film producer Nile Niami, is delinquent, according to Don Hankey, who advanced the money in 2018 and filed the default notice. The debt on the property, which has yet to go on the market, has climbed to $110 million, with unpaid interest, he said.”

Fixed Income Watch:

March 11 – Bloomberg (Scott Moritz): “Verizon Communications Inc. made an $8.2 billion payment to the U.S. Treasury Wednesday and expects to go to the debt market to help finance the remaining $36 billion due this month for airwaves that the phone giant needs to accelerate growth. ‘We expect to access the public debt market as soon as possible, assuming favorable conditions,’ Chief Financial Officer Matt Ellis said… Verizon raised $12 billion in a bond sale in November and has set up a $25 billion bank facility to help cover the largest splurge of airwaves ever.”

March 10 – Bloomberg (Jack Pitcher): “Investment-grade companies steered clear of the bond market on Wednesday, halting issuance plans after a slew of borrowers were forced to pay some of the heftiest premiums in months to sell debt. Two companies had been considering high-grade sales after the release of inflation data Wednesday morning…, but they ultimately stood down.”

March 9 – Bloomberg (Lisa Lee): “Investors are piling into the U.S. collateralized loan obligation market as inflation concerns and surging long-end Treasury yields fuel greater interest in floating-rate assets. Collateral managers priced $16 billion of new deals in February and refinanced or reset another $22 billion, a record monthly tally…”

China Watch:

March 9 – Bloomberg (Richard Frost): “A world-beating rally in Chinese stocks has turned into the biggest rout globally, shocking investors with the severity of its reversal and evading state efforts to slow the pace of losses. In just 14 trading days, the nation’s benchmark CSI 300 Index has plummeted 14% from a 13-year high. That compares with a 2.2% drop by the MSCI All-Country World Index. The plunge has wiped out more than $1.3 trillion of value and hammered the holdings of retail investors who piled in at the peak…”

March 8 – Bloomberg (Sofia Horta e Costa): “The bearish mood prevailing in China’s stock market is proving a match even for state-backed funds, and casting a cloud over the Communist Party’s biggest annual political event. The CSI 300 Index closed about 2.2% lower despite evidence that state-backed funds had intervened to shore up the market in morning trading. The news earlier helped the gauge erase losses of as much as 3.2%, before declines resumed in the afternoon… The funds, known as China’s ‘national team,’ had stepped in order to ensure stability during the National People’s Congress in Beijing, according to people familiar…”

March 9 – Bloomberg: “China’s central bank will take measures to prevent systemic financial risks from building in the economy as the recovery takes hold, Deputy Governor Chen Yulu said. Laying out priorities for the next five years, Chen said the People’s Bank of China will improve its macro-prudential assessment framework and strengthen supervision of ‘systemically important’ institutions, businesses and infrastructure. ‘The priority of the work is to build a systemic financial risk prevention and control system,’ Chen said… ‘We will further require shareholders, various creditors and local governments to implement their responsibilities, and work with financial regulatory authorities to maintain the bottom line of avoiding systemic financial risks.’”

March 6 – Reuters (Stella Qiu, Ryan Woo and Colin Qian): “China’s February exports grew at a record pace from a year earlier when COVID-19 battered the world’s second-biggest economy…, while imports rose less sharply. Exports in dollar terms skyrocketed 154.9% in February compared with a year earlier, while imports gained 17.3%, the most since October 2018… In the January-February period, exports jumped 60.6% from a year earlier, when lockdowns to contain the pandemic paralysed the country’s economic activity. That exceeded the forecast of… a 38.9% surge.”

March 9 – Bloomberg: “China’s producer prices rose at the fastest pace in more than two years in February, joining more expensive oil, computer chip shortages and soaring shipping costs as tailwinds for global inflation pressures. The Chinese producer price index rose 1.7% from a year earlier…, stronger than… forecasts for a 1.5% increase and up from 0.3% in January. Consumer prices fell 0.2% last month from a year earlier, slightly better than a projected 0.3% decline.”

March 9 – Bloomberg: “China’s car sales surged last month from a year earlier, yet February’s jump paints a false picture with demand broadly flat over 2019… Retail sales of cars, sport utility vehicles and multipurpose vehicles totaled 1.19 million units… Compared with February 2019, sales edged up by about only 2%.”

March 10 – New York Times (Paul Mozur and Steven Lee Myers): “China is freeing up tens of billions of dollars for its tech industry to borrow. It is cataloging the sectors where the United States or others could cut off access to crucial technologies. And when its leaders released their most important economic plans last week, they laid out their ambitions to become an innovation superpower beholden to none. Anticipating efforts by the Biden administration to continue to challenge China’s technological rise, the country’s leaders are accelerating plans to go it alone, seeking to address vulnerabilities in the country’s economy that could thwart its ambitions in a wide range of industries, from smartphones to jet engines.”

March 6 – Reuters (Hallie Gu, Yingzhi Yang, and Ryan Woo): “China’s foreign exchange reserves fell less than expected in February…The country’s foreign exchange reserves, the world’s largest, fell $5.677 billion to $3.205 trillion last month, compared with $3.200 trillion tipped in a Reuters poll of analysts and $3.211 trillion in January.”

March 9 – Bloomberg: “China’s stock rout turned so extreme that state-backed funds intervened to calm the market on Tuesday, but authorities appeared to make it somewhat difficult to find out what happened on the mainland. On Weibo, the Twitter-like platform with about half a billion active users, a search for Chinese equivalent of ‘stock market’ generated no posts on its web version on Wednesday, suggesting the phrase had been censored. Users could still post using the term, and the mobile version showed some results if hashtags weren’t included. Searches for words that mean ‘plunge,’ ‘A-shares’ and ‘stocks’ were successful in the morning.”

March 12 – Bloomberg: “Pony Ma’s Tencent Holdings Ltd. has been put on notice. Asia’s largest conglomerate was censured by China’s antitrust watchdog on Friday as Beijing expands a crackdown that began with Jack Ma’s online empire. The token fine is just the beginning. China’s top financial regulators see Tencent as the next target for increased supervision after the clamp down on Jack Ma’s Ant Group Co., according to people with knowledge of their thinking. Like Ant, Tencent will probably be required to establish a financial holding company to include its banking, insurance and payments services… The two firms will set a precedent for other fintech players on complying with tougher regulations, the people added.”

Global Bubble Watch:

March 9 – Bloomberg (Christopher Anstey, Enda Curran and Rich Miller): “The U.S. and China are pursuing divergent economic policies in the aftermath of the coronavirus recession in a role reversal from last time the world economy was recovering from a shock. One of the takeaways from the annual National People’s Congress under way in Beijing is a conservative growth goal, with a tighter fiscal-deficit target and restrained monetary settings. That’s a big contrast with Washington… The widening policy divergence is putting strains on exchange rates and could potentially reshape global capital flows. It stems, in part, from different policy lessons from the 2007-09 crisis. A stunted and choppy U.S. recovery left key Democrats concluding it’s vital to ‘go big’ on stimulus and keep it flowing. For monetary policy the moral was: ‘Don’t hold back’ and ‘don’t stop until the job is done,’ Federal Reserve Chair Jerome Powell said last week. China’s leaders have a different take. A massive unleashing of credit growth back then led to unused infrastructure, ghost towns, excess industrial capacity and an overhang of debt.”

March 6 – New York Times (Peter S. Goodman, Alexandra Stevenson, Niraj Chokshi and Michael Corkery): “Off the coast of Los Angeles, more than two dozen container ships filled with exercise bikes, electronics and other highly sought imports have been idling for as long as two weeks. In Kansas City, farmers are struggling to ship soybeans to buyers in Asia. In China, furniture destined for North America piles up on factory floors. Around the planet, the pandemic has disrupted trade to an extraordinary degree, driving up the cost of shipping goods… The virus has thrown off the choreography of moving cargo from one continent to another… ‘I’ve never seen anything like this,’ said Lars Mikael Jensen, head of Global Ocean Network at A.P. Moller-Maersk, the world’s largest shipping company. ‘All the links in the supply chain are stretched. The ships, the trucks, the warehouses.’”

March 9 – Financial Times (Cheng Ting-Fang and Lauly Li): “Taiwan’s tech manufacturers fear their output is under threat from the island’s worst drought in decades, risking more turmoil for global supply chains already strained by shortages of semiconductors and other key components. Taiwan’s government further tightened water use at the end of February in several cities that are home to a cluster of important manufacturers. Plants in Taoyuan, Taichung, Hsinchu and Miaoli were asked to cut consumption by up to 11%, on top of a 7% cut requested in January. Manufacturers in the cities of Chiayi and Tainan — where Taiwan Semiconductor Manufacturing Company, the world’s biggest contract chipmaker, builds iPhone processors — were asked to reduce water use by 7% from February 25.”

March 8 – Wall Street Journal (Julie Steinberg, Duncan Mavin and Patricia Kowsmann): “Greensill Capital filed for insolvency protection Monday, days after regulators took over its banking unit and Credit Suisse Group AG froze investment funds that were critical to the startup’s operations. The unwinding has rippled to holders of the Credit Suisse funds, German municipalities that deposited money with Greensill’s bank, and a high-profile duo of venture-capital investors. Greensill specialized in supply-chain finance, a type of short-term cash advance to companies to stretch out the time they have to pay their bills. The firm was once worth $4 billion…”

March 10 – Bloomberg (Eddie Spence and Luca Casiraghi): “Sanjeev Gupta’s GFG Alliance has hired PJT Partners Inc. and Alvarez & Marsal Inc. as advisers to help it secure its future following the collapse of its biggest lender, according to people familiar... PJT Partners, an investment bank spun off from Blackstone Group Inc., will advise GFG on finding ways to plug the financing gap left by the insolvency of Lex Greensill’s eponymous firm… The first task for GFG and the advisers will be to secure a debt standstill on the $5 billion it owes Greensill and funds that bought its financial products, according to a person familiar...”

March 11 – Reuters (Oliver Hirt and Brenna Hughes Neghaiwi): “Credit Suisse has frozen four funds in its asset management unit that had invested in its supply chain finance strategy as it grapples with the fallout from the collapse of $10.1 billion worth of funds linked to British financial services firm Greensill Capital. Switzerland’s second-biggest lender is facing questions from regulators and insurers as it contends with the insolvency of Greensill, for which it acted as a key source of funding.”

March 10 – Bloomberg (David Ramli and David Scanlan): “Two of the world’s largest sovereign wealth funds say investors should expect much lower returns going forward in part because the typical balanced portfolio of 60/40 stocks and bonds no longer works as well in the current rate environment. Singapore’s GIC Pte and Australia’s Future Fund said global investors have relied on the bond market to simultaneously juice returns for decades, while adding a buffer to their portfolio against equity market risks. Those days are gone with yields largely rising.”

Central Bank Watch:

March 9 – Reuters (Swati Pandey): “Australia’s central bank chief… rebuffed market talk of rate hikes, saying it will take at least until 2024 to reach full employment even as the economy was now within ‘striking distance’ of its pre-pandemic output. Australia’s A$2 trillion ($1.5 trillion) economy expanded by a larger-than-expected 3.1% in the December quarter… Job growth has been sturdy while retail sales are going strong too. ‘These better-than-expected outcomes are very welcome news,’ the Reserve Bank of Australia’s (RBA) governor, Philip Lowe, said…”

Europe Watch:

March 11 – Financial Times (Martin Arnold): “The European Central Bank has said it will accelerate the pace of its bond buying over the next three months in response to the eurozone’s rising borrowing costs and faltering economic recovery from the coronavirus pandemic. In its latest monetary policy decision…, the central bank kept its policies unchanged, but said: ‘Based on a joint assessment of financing conditions and the inflation outlook, the governing council expects purchases under the [pandemic emergency purchase programme] over the next quarter to be conducted at a significantly higher pace than during the first months of this year.’ The recent sell-off in bond markets risks hampering the single currency bloc’s already-stuttering recovery by pushing up the cost of finance for businesses and households, economists have warned.”

EM Watch:

March 10 – Financial Times (Bryan Harris and Michael Pooler): “Brazil’s former president Luiz Inácio Lula da Silva returned to the political fray after the annulment of his corruption convictions, as he launched a blistering attack on Jair Bolsonaro over the incumbent leader’s handling of the Covid-19 pandemic and the economy. ‘[Bolsonaro] does not know what it is to be president… He does not take care of the economy, jobs, salaries, health, the environment, education,’ said Lula da Silva, an iconic figure of the Brazilian left who was president between 2003 and 2010. Lula da Silva also made clear his intention to return to politics but without committing to challenging Bolsonaro in next year’s presidential polls. ‘My mother taught me ‘always fight’,’ said Lula da Silva…”

March 9 – Reuters (Jamie McGeever): “Brazil’s financial markets were already shaky from a worsening fiscal outlook, political logjam and a devastating second wave of COVID-19 before Monday’s bombshell that leftist ex-President Luiz Inacio Lula da Silva could contest next year’s presidential election. They have now been rocked to their foundations - even if the October 2022 vote remains far on the horizon. The prospect of political polarization between Lula and right-wing President Jair Bolsonaro, leading to looser fiscal policy pledges from the two likely candidates and the stalling of the government’s market-friendly economic reform agenda - with all the implications that has for monetary policy - have many investors gasping for air.”

March 10 – Bloomberg (Subhadip Sircar): “The global economic recovery is fueling speculation central banks will soon be shifting into tightening mode -- nowhere more so than India. Five-year interest-rate swaps jumped 63 bps in February, the biggest advance since the 2013 taper tantrum… Swap rates signal India will see the most rapid tightening of any nation in Asia, according to Standard Chartered Plc. Fears of a resurgence in inflation driven by rising oil prices is adding to the speculation.”

Japan Watch:

March 10 – Wall Street Journal (Yasufumi Saito, Rosa de Acosta and Dylan Moriarty): “In the decade since the strongest earthquake in Japan’s history triggered a 32-foot tsunami that slammed into the eastern coastline, the cleanup effort has become one of the world’s most expensive, costing some $300 billion so far… The world’s worst nuclear accident since Chernobyl unfolded as three reactors at the Fukushima Daiichi power plant melted down. The country expanded the reconstruction budget four times in 10 years and has laid out the equivalent of $2,400 for every person in Japan to revive Tohoku, the northeastern region hit by the tsunami, and mitigate radiation at the nuclear plant. Even as seawalls rise and homes are rebuilt, many people haven't returned.”

Leveraged Speculation Watch:

March 11 – Financial Times (Laurence Fletcher): “Chris Rokos and Jeffrey Talpins are among high-profile hedge fund managers who were wrongfooted when rising inflation expectations jolted equity and bond markets last month. Government bonds and mega-cap technology stocks have tumbled in recent weeks as investors have rapidly shifted away from positions seen as good bets during the pandemic-driven economic downturn. Many have moved into lowly valued stocks likely to prosper as growth and inflation return, and that rotation of positioning has hit some of last year’s top performing managers.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 9 – New York Times (Andrew Ross Sorkin): “‘Bitcoin uses more electricity per transaction than any other method known to mankind, and so it’s not a great climate thing.’ That was what Bill Gates recently told me. At a time when companies and investors increasingly say they are focused on climate and sustainability issues, some of them may be about to collide with the reality of another financial trend, one currently worth about $1 trillion: Bitcoin. The cryptocurrency has become inescapable, with big companies like Tesla and individual investors alike rushing to stock up on the digital token. But depending on which study you read, the annual carbon emissions from the electricity required to mine Bitcoin and process its transactions are equal to the amount emitted by all of New Zealand. Or Argentina.”

March 6 – Wall Street Journal (Robert McMillan and Dustin Volz): “A cyberattack on Microsoft Corp.’s Exchange email software is believed to have infected tens of thousands of businesses, government offices and schools in the U.S., according to people briefed on the matter. Many of those victims of the attack, which Microsoft has said was carried out by a network of suspected Chinese hackers, appear to be small businesses and state and local governments… Tens of thousands of customers appear to have been affected, but that number could be larger, the people said. It could be higher than 250,000, one person said.”

March 10 – Wall Street Journal (Dustin Volz and Robert McMillan): “U.S. lawmakers and security experts are voicing concern that foreign governments are staging cyberattacks using servers in the U.S., in an apparent effort to avoid detection by America’s principal cyberintelligence organization, the National Security Agency. When hackers recently targeted servers running Microsoft Corp.’s widely used Exchange software, they employed U.S.-based computers from at least four service providers to mount their attack… The attack that Microsoft disclosed last week affected at least tens of thousands of customers and has been linked by the software giant and other security researchers to China-based hackers.”

March 8 – Bloomberg (Laura Millan Lombrana): “Temperatures in the Arctic Ocean, an area that has a significant influence on the world’s weather, were much warmer last month than the average for the past two decades. Northeastern Canada and Greenland were also much warmer-than-average for February, according to… Europe’s Copernicus Climate Change Service. Scientists have linked this warming to extreme weather events elsewhere in the world, including the blast of cold air that swept out of Canada and deep into the U.S. south in the middle of last month, causing an energy crisis in Texas.”

March 9 – Wall Street Journal (Jim Carlton): “For the first time ever, rancher Jimmie Hughes saw all 15 of the ponds he keeps for his cattle dry up at the same time this year. Now, he and his co-workers are forced to haul tanks of water two hours over dusty, mountain roads to water their 300 cows. ‘It’s just a daily grind, we’re not making any money,’ the 50-year-old Mr. Hughes said… The Southwest is locked in drought again, prompting cutbacks to farms and ranches and putting renewed pressure on urban supplies. Extreme to exceptional drought is afflicting between 57% and 90% of the land in Colorado, New Mexico, Nevada, Utah and Arizona and is shriveling a snowpack that supplies water to 40 million people from Denver to Los Angeles…”

Geopolitical Watch:

March 7 – Financial Times (Demetri Sevastopulo and Amy Kazmin): “President Joe Biden is poised to hold the first ever quadrilateral US summit with the leaders of Japan, India and Australia, as the four countries step up co-operation in an effort to counter China’s influence in the Indo-Pacific… Choosing a ‘Quadrilateral Security Dialogue’ meeting for his first summit highlights his plan to reinvigorate the Quad as part of his China strategy. The Quad emerged in 2007 after the nations co-ordinated relief following the tsunami that devastated Indonesia in 2004. But it later became dormant, partly because of Indian and Australian concerns about provoking China.”

March 6 – Bloomberg (Hallie Gu, Yingzhi Yang, and Ryan Woo): “A top Chinese diplomat urged the U.S. to stop ‘crossing lines and playing with fire’ on Taiwan, as part of a broad series of warnings to President Joe Biden against meddling in Beijing’s affairs. Chinese Foreign Minister Wang Yi said… there was ‘no room for compromise or concessions’ in Beijing’s claim to sovereignty over the democratically ruled island. Wang’s response on Taiwan was one of several in which he hit out at the U.S. for ‘willfully interfering in other countries’ internal affairs in the name of democracy and human rights.’”

March 9 – AFP: “China… accused a top US commander of attempting to ‘hype up’ the threat of an invasion of Taiwan to inflate Washington's defence spend and justify its own military chicanery in Asia. The US' top military officer in Asia-Pacific, Admiral Philip Davidson… said China could invade Taiwan within the next six years… Democratic and self-ruled Taiwan lives under constant threat of invasion by authoritarian China, whose leaders view the island as part of their territory and which they have vowed to one day take back. ‘I worry that they’re (China) accelerating their ambitions to supplant the United States and our leadership role in the rules-based international order ... by 2050,’ Davidson said. ‘Taiwan is clearly one of their ambitions before that. And I think the threat is manifest during this decade, in fact, in the next six years,’ he told a US Senate committee.”

March 8 – Bloomberg: “China must boost military spending to prepare for a possible confrontation with the U.S., top generals said, in an unusual acknowledgment of the risk of a clash between the world’s two largest economies. The two generals -- members of the Central Military Commission led by President Xi Jinping -- made the comments during the annual national legislative session in Beijing. CMC Vice Chairman Xu Qiliang, China’s top uniformed officer, said the country needed to brace for a ‘Thucydides Trap,’ an inevitable conflict between a rising power and an established one. ‘Facing the ‘Thucydides Trap’ and border disturbances, the military must step up its efforts to improve its capabilities,’ Xu said... ‘The most important thing is internal unity and cohesion and improvement of overall capabilities. If you are strong, you will have long-term stability, as well as invincibility.’”

March 9 – South China Morning Post (Catherine Wong): “China’s military must be ‘prepared to respond’ to complex and difficult situations as the country grapples with security challenges, President Xi Jinping said... Xi… made the remarks at a panel discussion attended by armed forces representatives during the annual legislative sessions in Beijing. ‘The current security situation of our country is largely unstable and uncertain,’ Xi said. ‘The entire military must coordinate the relationship between capacity building and combat readiness, be prepared to respond to a variety of complex and difficult situations at any time, resolutely safeguard national sovereignty, security and development interests, and provide strong support for the comprehensive construction of a modern socialist state.’”

March 8 – Reuters: “The United States… expressed alarm at ‘genuine security threats’ to Saudi Arabia from Yemen’s Iran-aligned Houthis and elsewhere in the region after attacks on the heart of the Saudi oil industry, and it would look at improving support for Saudi defences. Earlier in the day, the U.S. Embassy in Riyadh said Washington was committed to defending Saudi following Sunday’s volley of drones and missiles, including one aimed at a Saudi facility vital to oil exports.”