Who can blame him? Certainly not me.
October 20 – Financial Times (Martin Arnold and Guy Chazan): “Jens Weidmann has decided to step down after a decade as head of Germany’s central bank, only weeks after the country’s general election and shortly before a crucial decision on the future of eurozone monetary policy. The president of the Bundesbank has been one of the most vocal critics of the ultra-loose monetary policy pursued by the European Central Bank, where he fought an often lonely battle against its bond buying and negative interest rate policies. The 53-year-old said… he was leaving for ‘personal reasons’. But colleagues said he was tired of opposing ECB policies and expected these frustrations to increase as the economy recovers, inflation rises and the ECB’s generous stimulus becomes harder to justify.”
Jens Weidmann fought the good fight – a superior intellectual warrior overwhelmed by the onslaught of rank inflationism. He is a statesman in an age of few, a too often lone voice for sanity in a world of monetary absurdity. The foundation of Weidmann’s analytical framework rests on the profound importance of two simple words (you won’t hear uttered by a U.S. central banker): “stable money.”
Weidmann’s plight is testament to why virtually every central banker falls in line. From the FT: “Labelled by former ECB president Mario Draghi as nein zu allem, no to everything, Weidmann articulated the view of monetary hawks…” While Weidmann resigns with scant fanfare, inflationist extraordinaire “Super Mario” governs as Italy’s Prime Minister. As for U.S. inflationism luminaries, while it’s unclear if Ben Bernanke still collects millions from lunch dates and appearances ($250k for 40 minutes in Abu Dhabi! ), collaborator Janet Yellen runs the U.S. Treasury.
I can only imagine how deeply frustrating the past decade has been for Weidmann. To know you’re right on such critical analysis, but to see it not matter - year after year. Fighting to safeguard humanity from The Scourge of Monetary Disorder and Inflationism, only to be designated the merciless villain. To repeatedly have no choice but to compromise, while recognizing that the slippery slope of inflationism ensures ever greater concessions culminating in future catastrophe. And to witness your analytical adversaries transformed into public heroes, understanding it’s all a sham – an Inflationary Mirage. With contemporary central banking now taking on water, I don’t fault Weidmann for jumping ship.
We should hope Weidmann continues to speak and write. We’ll need his deep insight and sound intellectual framework, especially when the loss of credibility leaves central bankers scrambling to resurrect more traditional doctrine and policies.
“The side effects of low interest rates. Research has found that risk-taking becomes more aggressive when central banks apply unconditional monetary accommodation in order to counter a correction of financial exaggeration, especially if monetary policy does not react symmetrically to the build-up of financial imbalances. In the end, putting too much weight on countering immediate risks to financial stability will create even greater risks to financial stability and price stability in the future.” Jens Weidmann: Economics Club of New York, April 23, 2012
“Central banks create money by granting commercial banks credit against collateral or by buying assets such as bonds. The financial power of a central bank is unlimited in principle; it does not have to acquire beforehand the money it lends or uses for payments, but can basically create it out of thin air. The printing of money is an appropriate image here; from an economic perspective, the printing press is not necessary, as the creation of money primarily shows up on the central bank’s balance sheet, on its accounts…
If central banks can potentially create an unlimited amount of money out of thin air, how can we ensure that money remains sufficiently scarce to preserve its value? Does this ability to create money more or less at will not create the temptation to take advantage of this instrument to create additional leeway short term, even at the risk of highly probable long-term damage? Yes, this temptation certainly does exist, and many in monetary history have succumbed to it. Taking a look back in time, this was often the reason for establishing a central bank: to provide those in power with free access to seemingly unlimited financial resources. However, such government interference in central banking, combined with the government’s large demand for funding, often led to a strong expansion in the volume of money in circulation, causing it to lose value through inflation. In light of this experience, central banks were subsequently established as independent institutions, with the mandate to safeguard the value of money, in order to explicitly keep the government from co-opting monetary policy.
The independence of central banks is an extraordinary privilege – it is, however, not an end in itself. Instead, its primary purpose is to use its credibility to ensure that monetary policy can focus unhindered on preserving the value of money. Independent monetary policy combined with policymakers with a well-functioning, stability-oriented compass are a necessary – but not a sufficient – condition for preserving the purchasing power of money as well as public confidence in it. Of course, it is important that central bankers, who are in charge of a public good – in this case, stable money – bolster public confidence by explaining their policies. The best protection against temptation in monetary policy is an enlightened and stability-oriented society.” Jens Weidmann: Money Creation and Responsibility, September 18, 2012
“The mandate to safeguard the value of money, in order to explicitly keep the government from co-opting monetary policy.” “The independence of central banks is an extraordinary privilege… its primary purpose is to use its credibility to ensure that monetary policy can focus unhindered on preserving the value of money.” “In the end, putting too much weight on countering immediate risks to financial stability will create even greater risks to financial stability and price stability in the future.” And from his resignation letter, “A stability-oriented monetary policy will only be possible in the long run if the framework of the monetary union ensures the unity of action and liability, monetary policy respects its narrow mandate and does not get caught in the wake of fiscal policy or the financial markets.” A True Central Banker.
In the euro zone, the U.S. and globally, monetary policy has ventured recklessly away from its narrow mandate and is today trapped in the wake of fiscal policy and financial market dictate. Surely Weidmann sees the writing on the wall – and it would be too much to endure operating in the type of crisis backdrop he has worked so diligently to guard against. As the President of Germany's Bundesbank, he understands that once the forces of monetary inflation have been unleashed, they become almost impossible to repress. Moreover, those seeking to ward off monetary disaster will be villainized and blamed for the bust. (On a personal basis, having warned for more than two decades of inflationism’s eventual peril, I dread the prospect of chronicling the unfolding debacle.)
October 22 – Bloomberg (Thomas Mulier): “Consumers around the world are about to get socked with even higher prices on everyday items, companies from food giant Unilever Plc to lubricant maker WD-40 Co. warned this week as they grapple with supply difficulties. The maker of Dove soap and Magnum ice-cream bars jacked up prices by more than 4% on average last quarter, the biggest jump since 2012, and signaled elevated pricing will continue into next year. A similar refrain came from Nestle SA, Procter & Gamble Co. and Danone SA, whose products dominate supermarket aisles and kitchen cupboards. ‘We’re in for at least another 12 months of inflationary pressures,’ Unilever CEO Alan Jope said… ‘We are in a once-in-two-decades inflationary environment.’”
U.S. society is receiving an education in rising prices. The New York Fed’s one-year inflation expectations reading rose to 5.3%, the high for data going back eight years. Excluding the summer of 2008, the University of Michigan one-year consumer inflation expectations (4.8%) were the highest since 1982. The five-year Treasury “break even” inflation rate this week jumped 15 bps (23bps in two weeks!), surpassing 2.9% for the first time in at least two decades.
Major U.S. equities indices this week rallied to all-time highs. Evergrande apparently made a delinquent bond payment thus, for now, avoiding default. Yet the air of unfolding global crisis remains. A three-percent Friday afternoon rally cut Brazilian equities losses for the week to 7.3%. Brazil’s currency sank 3.3%, increasing 2021 losses to 8.0%. Brazil’s local currency bond yields surged 78 bps to a near-five-year high 12.40%. Meanwhile, Turkey is stuck in their own political and monetary muck, with the lira’s 3.6% weekly drop boosting y-t-d losses to 22.6%. Turkish local currency yields jumped 70 bps to a near-five-year high 19.39%.
WTI crude’s 1.8% rise pushed 2021 gains to 73%. Fearing transitory is morphing into chronic inflation, global central bankers and bond markets are taking notice. Jumping another nine basis points to 2.12%, benchmark U.S. MBS yields are back to highs since March 2020. Also trading to pandemic highs, two-year Treasury yields rose six bps this week to 0.46%.
October 18 – Financial Times (Madison Darbyshire): “Nearly 900,000 individual accounts traded shares of GameStop in a single day after a 90-fold increase at the height of the ‘meme stock’ craze, according to a report by the US securities regulator. GameStop, a struggling video games retailer, became an emblem of the mania that gripped markets in January when its shares surged by 2,700% in less than three weeks. Individual traders organised on online message boards and collectively unleashed furious rallies in certain stocks. The US Securities and Exchange Commission studied the events and… released a report that offered a first glimpse into the true scale of the phenomenon. For GameStop, the number of individual accounts trading its shares rose from about 10,000 a day at the start of the year to nearly 900,000 at the peak on January 27.”
900,000 individual accounts trading GameStop in a single session. I’ll add this fun fact to my list of evidence of a full-fledged mania. As a mania, we should not expect the U.S. equities market to behave normally. Not that 2007 was normal, yet recall that stocks in October surged to record highs despite the faltering mortgage finance Bubble.
Buying every dip has been too easy. Ditto for squeezing the shorts. Yet the biggest fun and games are thriving throughout derivatives markets, where those buying protection repeatedly watch their hedges collapse in value. With yields rising and China’s Bubble faltering, there has been ample justification over recent weeks to hedge market risk. And when markets reverse higher, the unwind of hedges and bearish positions helps propel market rallies. In a historic speculative Bubble, shenanigans will work great until they don’t.
October 15 – CNN (Michelle Toh): “Evergrande's unraveling is still commanding global attention, but its troubles are part of a much bigger problem. For weeks, the ailing Chinese real estate conglomerate has made headlines as investors wait to see what will happen to its enormous mountain of debt. As the slow-moving crisis unfolds, analysts are pointing to a deeper underlying issue: China's property market is cooling off after years of oversupply… Mark Williams, chief Asia economist at Capital Economics, estimates that China still has about 30 million unsold properties, which could house 80 million people… On top of that, about 100 million properties have likely been bought but not occupied, which could accommodate roughly 260 million people, according to Capital Economics estimates. Such projects have attracted scrutiny for years, and even been dubbed China's ‘ghost towns.’”
I’m convinced China’s Bubble is a disaster in the making. Things will likely prove even worse than expected. According to Capital Economics, the number of unoccupied Chinese apartment units is up to 130 million – 30 million unsold and 100 million purchased but not occupied.
October 20 – Bloomberg: “China’s housing market slump has intensified in recent weeks as sales plunge and more developers default on their debt. Now the downturn has reached another milestone: home prices have begun falling for the first time in six years. The 0.08% drop in new-home prices across 70 cities in September may be small, but it poses a potentially big blow for an economy that counts on property-related industries for almost a quarter of output. Homebuyer sentiment is evaporating as a crisis at China Evergrande Group ripples through the industry… September is traditionally a peak season for the home market. Yet residential sales tumbled 17%, investments slid for the first time since early 2020, and the rate of failed land auctions climbed to the highest since at least 2018 -- potentially hurting local government coffers… The downturn has continued into this month. Existing-home sales plunged 63% from a year earlier in the first 17 days of October, according to a Nomura Holdings Inc. note…”
The key data point: Existing apartment sales were down 63% y-o-y during the first half of October. And nuggets from the Financial Times (see China Watch): “…A property sector that represents 29% of Chinese gross domestic product and is more than $5tn in debt. Some 41% of the Chinese banking system’s assets are associated with the property sector, and 78% of the invested wealth of urban Chinese is in housing.”
October 19 – Bloomberg: “China’s cash-strapped developers are becoming reluctant to bid for land during the nation’s property slump, threatening to undermine a $1 trillion revenue source for local governments and deepen the economic slowdown. About 27% of land parcels offered by local governments went unsold in September as no developer submitted bids -- the highest rate since at least 2018… Proceeds from land auctions across the country plunged 18% in August from a year earlier, the biggest decline in almost three years… Faced with weakening funding access and rising borrowing costs amid the deepening crisis at China Evergrande Group, many developers have been refraining from replenishing their land holdings. In one sign of how tight financing has become, the industry’s borrowings from banks dropped 8.4% last month, the most since 2016… ‘Developers are hoarding cash to avoid becoming the next Evergrande,’ said Larry Hu, head of China economics at Macquarie Securities Ltd. ‘The contagion risk is real.’”
The consensus view holds that the so-called “great financial crisis” could have been avoided, had only the Fed bailed out Lehman. Surely the great Beijing meritocracy is smart enough to avoid such a disastrous blunder. But I just don’t believe a Lehman bailout would have changed much. There was too much Bubble-related financial rot and economic maladjustment. Crisis was unavoidable, as it is today in China.’’
There’s always an ebb and flow to Crisis Dynamics. Especially in major Bubbles, the specter of devastating collapse will have desperate policymakers employing extraordinary measures to hold crisis at bay. There will be relief rallies, along with bouts of optimism that government efforts are working to resolve systemic fragilities. Short squeezes and the unwind of hedges temporarily bolster market confidence.
Over time, however, fundamental deterioration takes an increasing toll – chipping away at increasingly fragile confidence. At some point, with the catalyst clear only in hindsight, there is a flash realization that the authorities do not, in fact, have the situation under control: “Lehman Moment.”
China’s faltering Bubble creates a unique situation. Beijing has enormous resources available to deploy. They can withhold information from their citizens. They can obfuscate and manipulate. They will initially ring-fence their banking system.
But I am skeptical they can sustain ridiculously overvalued apartments often of suspect quality. And it will be impossible to suppress news of sinking apartment prices. Word will travel quickly for subject matter of such keen national interest. How owners of depreciating apartments react is a huge unknown. Will millions of units hit the market, with panicked sellers willing to accept steep discounts? Will owners of unoccupied apartments mail keys to their banks and stop making payments? National protests and resulting government crackdowns? Darkening public moods for apartment speculation, the economy, the communist party and the world?
I am also skeptical that, short of stringent capital controls, Beijing will be able to suppress financial outflows. And as Crisis Dynamics unfold, Beijing will be challenged to control de-risking/deleveraging dynamics. How much speculative leverage has accumulated over this incredible cycle remains the $64 TN question.
But we’re so early in the process, and it’s not fruitful to jump too far forward. After trading to 75% earlier in the week, Evergrande bond yields dropped to 67.4% after holding default at bay. An index of Chinese high-yield dollar bond yields dropped from 20% to 17.8%, after beginning September at 12%. China’s sovereign CDS fell from 49 to 46.5 bps, with most Chinese bank CDS also declining moderately.
Despite the modest Chinese Credit relief rally and record U.S. stock prices, an index of Emerging Market CDS ended the week higher. Brazil's sovereign CDS surged 34 bps to a 13-month high 236 bps. Turkish CDS jumped 11 to 470 bps, the high since March. And local currency bond yields continue their upward march, with yields rising 28 bps in Russia (high since March ’20), 13 bps in the Czech Republic (high since 2012), 10 bps in South Africa (17-month high), 10 bps in Mexico (high since March ’20), and eight bps in Poland (high since May ‘19). Despite ongoing “developed” central bank QE liquidity injections, global financial conditions have begun to tighten. The extraordinary confluence of surging inflation, spooked central bankers and a faltering Chinese Bubble creates momentous risks for a highly levered world.
October 20 – Financial Times (Martin Arnold and Guy Chazan): “Jens Weidmann has decided to step down after a decade as head of Germany’s central bank, only weeks after the country’s general election and shortly before a crucial decision on the future of eurozone monetary policy. The president of the Bundesbank has been one of the most vocal critics of the ultra-loose monetary policy pursued by the European Central Bank, where he fought an often lonely battle against its bond buying and negative interest rate policies. The 53-year-old said… he was leaving for ‘personal reasons’. But colleagues said he was tired of opposing ECB policies and expected these frustrations to increase as the economy recovers, inflation rises and the ECB’s generous stimulus becomes harder to justify.”
Jens Weidmann fought the good fight – a superior intellectual warrior overwhelmed by the onslaught of rank inflationism. He is a statesman in an age of few, a too often lone voice for sanity in a world of monetary absurdity. The foundation of Weidmann’s analytical framework rests on the profound importance of two simple words (you won’t hear uttered by a U.S. central banker): “stable money.”
Weidmann’s plight is testament to why virtually every central banker falls in line. From the FT: “Labelled by former ECB president Mario Draghi as nein zu allem, no to everything, Weidmann articulated the view of monetary hawks…” While Weidmann resigns with scant fanfare, inflationist extraordinaire “Super Mario” governs as Italy’s Prime Minister. As for U.S. inflationism luminaries, while it’s unclear if Ben Bernanke still collects millions from lunch dates and appearances ($250k for 40 minutes in Abu Dhabi! ), collaborator Janet Yellen runs the U.S. Treasury.
I can only imagine how deeply frustrating the past decade has been for Weidmann. To know you’re right on such critical analysis, but to see it not matter - year after year. Fighting to safeguard humanity from The Scourge of Monetary Disorder and Inflationism, only to be designated the merciless villain. To repeatedly have no choice but to compromise, while recognizing that the slippery slope of inflationism ensures ever greater concessions culminating in future catastrophe. And to witness your analytical adversaries transformed into public heroes, understanding it’s all a sham – an Inflationary Mirage. With contemporary central banking now taking on water, I don’t fault Weidmann for jumping ship.
We should hope Weidmann continues to speak and write. We’ll need his deep insight and sound intellectual framework, especially when the loss of credibility leaves central bankers scrambling to resurrect more traditional doctrine and policies.
“The side effects of low interest rates. Research has found that risk-taking becomes more aggressive when central banks apply unconditional monetary accommodation in order to counter a correction of financial exaggeration, especially if monetary policy does not react symmetrically to the build-up of financial imbalances. In the end, putting too much weight on countering immediate risks to financial stability will create even greater risks to financial stability and price stability in the future.” Jens Weidmann: Economics Club of New York, April 23, 2012
“Central banks create money by granting commercial banks credit against collateral or by buying assets such as bonds. The financial power of a central bank is unlimited in principle; it does not have to acquire beforehand the money it lends or uses for payments, but can basically create it out of thin air. The printing of money is an appropriate image here; from an economic perspective, the printing press is not necessary, as the creation of money primarily shows up on the central bank’s balance sheet, on its accounts…
If central banks can potentially create an unlimited amount of money out of thin air, how can we ensure that money remains sufficiently scarce to preserve its value? Does this ability to create money more or less at will not create the temptation to take advantage of this instrument to create additional leeway short term, even at the risk of highly probable long-term damage? Yes, this temptation certainly does exist, and many in monetary history have succumbed to it. Taking a look back in time, this was often the reason for establishing a central bank: to provide those in power with free access to seemingly unlimited financial resources. However, such government interference in central banking, combined with the government’s large demand for funding, often led to a strong expansion in the volume of money in circulation, causing it to lose value through inflation. In light of this experience, central banks were subsequently established as independent institutions, with the mandate to safeguard the value of money, in order to explicitly keep the government from co-opting monetary policy.
The independence of central banks is an extraordinary privilege – it is, however, not an end in itself. Instead, its primary purpose is to use its credibility to ensure that monetary policy can focus unhindered on preserving the value of money. Independent monetary policy combined with policymakers with a well-functioning, stability-oriented compass are a necessary – but not a sufficient – condition for preserving the purchasing power of money as well as public confidence in it. Of course, it is important that central bankers, who are in charge of a public good – in this case, stable money – bolster public confidence by explaining their policies. The best protection against temptation in monetary policy is an enlightened and stability-oriented society.” Jens Weidmann: Money Creation and Responsibility, September 18, 2012
“The mandate to safeguard the value of money, in order to explicitly keep the government from co-opting monetary policy.” “The independence of central banks is an extraordinary privilege… its primary purpose is to use its credibility to ensure that monetary policy can focus unhindered on preserving the value of money.” “In the end, putting too much weight on countering immediate risks to financial stability will create even greater risks to financial stability and price stability in the future.” And from his resignation letter, “A stability-oriented monetary policy will only be possible in the long run if the framework of the monetary union ensures the unity of action and liability, monetary policy respects its narrow mandate and does not get caught in the wake of fiscal policy or the financial markets.” A True Central Banker.
In the euro zone, the U.S. and globally, monetary policy has ventured recklessly away from its narrow mandate and is today trapped in the wake of fiscal policy and financial market dictate. Surely Weidmann sees the writing on the wall – and it would be too much to endure operating in the type of crisis backdrop he has worked so diligently to guard against. As the President of Germany's Bundesbank, he understands that once the forces of monetary inflation have been unleashed, they become almost impossible to repress. Moreover, those seeking to ward off monetary disaster will be villainized and blamed for the bust. (On a personal basis, having warned for more than two decades of inflationism’s eventual peril, I dread the prospect of chronicling the unfolding debacle.)
October 22 – Bloomberg (Thomas Mulier): “Consumers around the world are about to get socked with even higher prices on everyday items, companies from food giant Unilever Plc to lubricant maker WD-40 Co. warned this week as they grapple with supply difficulties. The maker of Dove soap and Magnum ice-cream bars jacked up prices by more than 4% on average last quarter, the biggest jump since 2012, and signaled elevated pricing will continue into next year. A similar refrain came from Nestle SA, Procter & Gamble Co. and Danone SA, whose products dominate supermarket aisles and kitchen cupboards. ‘We’re in for at least another 12 months of inflationary pressures,’ Unilever CEO Alan Jope said… ‘We are in a once-in-two-decades inflationary environment.’”
U.S. society is receiving an education in rising prices. The New York Fed’s one-year inflation expectations reading rose to 5.3%, the high for data going back eight years. Excluding the summer of 2008, the University of Michigan one-year consumer inflation expectations (4.8%) were the highest since 1982. The five-year Treasury “break even” inflation rate this week jumped 15 bps (23bps in two weeks!), surpassing 2.9% for the first time in at least two decades.
Major U.S. equities indices this week rallied to all-time highs. Evergrande apparently made a delinquent bond payment thus, for now, avoiding default. Yet the air of unfolding global crisis remains. A three-percent Friday afternoon rally cut Brazilian equities losses for the week to 7.3%. Brazil’s currency sank 3.3%, increasing 2021 losses to 8.0%. Brazil’s local currency bond yields surged 78 bps to a near-five-year high 12.40%. Meanwhile, Turkey is stuck in their own political and monetary muck, with the lira’s 3.6% weekly drop boosting y-t-d losses to 22.6%. Turkish local currency yields jumped 70 bps to a near-five-year high 19.39%.
WTI crude’s 1.8% rise pushed 2021 gains to 73%. Fearing transitory is morphing into chronic inflation, global central bankers and bond markets are taking notice. Jumping another nine basis points to 2.12%, benchmark U.S. MBS yields are back to highs since March 2020. Also trading to pandemic highs, two-year Treasury yields rose six bps this week to 0.46%.
October 18 – Financial Times (Madison Darbyshire): “Nearly 900,000 individual accounts traded shares of GameStop in a single day after a 90-fold increase at the height of the ‘meme stock’ craze, according to a report by the US securities regulator. GameStop, a struggling video games retailer, became an emblem of the mania that gripped markets in January when its shares surged by 2,700% in less than three weeks. Individual traders organised on online message boards and collectively unleashed furious rallies in certain stocks. The US Securities and Exchange Commission studied the events and… released a report that offered a first glimpse into the true scale of the phenomenon. For GameStop, the number of individual accounts trading its shares rose from about 10,000 a day at the start of the year to nearly 900,000 at the peak on January 27.”
900,000 individual accounts trading GameStop in a single session. I’ll add this fun fact to my list of evidence of a full-fledged mania. As a mania, we should not expect the U.S. equities market to behave normally. Not that 2007 was normal, yet recall that stocks in October surged to record highs despite the faltering mortgage finance Bubble.
Buying every dip has been too easy. Ditto for squeezing the shorts. Yet the biggest fun and games are thriving throughout derivatives markets, where those buying protection repeatedly watch their hedges collapse in value. With yields rising and China’s Bubble faltering, there has been ample justification over recent weeks to hedge market risk. And when markets reverse higher, the unwind of hedges and bearish positions helps propel market rallies. In a historic speculative Bubble, shenanigans will work great until they don’t.
October 15 – CNN (Michelle Toh): “Evergrande's unraveling is still commanding global attention, but its troubles are part of a much bigger problem. For weeks, the ailing Chinese real estate conglomerate has made headlines as investors wait to see what will happen to its enormous mountain of debt. As the slow-moving crisis unfolds, analysts are pointing to a deeper underlying issue: China's property market is cooling off after years of oversupply… Mark Williams, chief Asia economist at Capital Economics, estimates that China still has about 30 million unsold properties, which could house 80 million people… On top of that, about 100 million properties have likely been bought but not occupied, which could accommodate roughly 260 million people, according to Capital Economics estimates. Such projects have attracted scrutiny for years, and even been dubbed China's ‘ghost towns.’”
I’m convinced China’s Bubble is a disaster in the making. Things will likely prove even worse than expected. According to Capital Economics, the number of unoccupied Chinese apartment units is up to 130 million – 30 million unsold and 100 million purchased but not occupied.
October 20 – Bloomberg: “China’s housing market slump has intensified in recent weeks as sales plunge and more developers default on their debt. Now the downturn has reached another milestone: home prices have begun falling for the first time in six years. The 0.08% drop in new-home prices across 70 cities in September may be small, but it poses a potentially big blow for an economy that counts on property-related industries for almost a quarter of output. Homebuyer sentiment is evaporating as a crisis at China Evergrande Group ripples through the industry… September is traditionally a peak season for the home market. Yet residential sales tumbled 17%, investments slid for the first time since early 2020, and the rate of failed land auctions climbed to the highest since at least 2018 -- potentially hurting local government coffers… The downturn has continued into this month. Existing-home sales plunged 63% from a year earlier in the first 17 days of October, according to a Nomura Holdings Inc. note…”
The key data point: Existing apartment sales were down 63% y-o-y during the first half of October. And nuggets from the Financial Times (see China Watch): “…A property sector that represents 29% of Chinese gross domestic product and is more than $5tn in debt. Some 41% of the Chinese banking system’s assets are associated with the property sector, and 78% of the invested wealth of urban Chinese is in housing.”
October 19 – Bloomberg: “China’s cash-strapped developers are becoming reluctant to bid for land during the nation’s property slump, threatening to undermine a $1 trillion revenue source for local governments and deepen the economic slowdown. About 27% of land parcels offered by local governments went unsold in September as no developer submitted bids -- the highest rate since at least 2018… Proceeds from land auctions across the country plunged 18% in August from a year earlier, the biggest decline in almost three years… Faced with weakening funding access and rising borrowing costs amid the deepening crisis at China Evergrande Group, many developers have been refraining from replenishing their land holdings. In one sign of how tight financing has become, the industry’s borrowings from banks dropped 8.4% last month, the most since 2016… ‘Developers are hoarding cash to avoid becoming the next Evergrande,’ said Larry Hu, head of China economics at Macquarie Securities Ltd. ‘The contagion risk is real.’”
The consensus view holds that the so-called “great financial crisis” could have been avoided, had only the Fed bailed out Lehman. Surely the great Beijing meritocracy is smart enough to avoid such a disastrous blunder. But I just don’t believe a Lehman bailout would have changed much. There was too much Bubble-related financial rot and economic maladjustment. Crisis was unavoidable, as it is today in China.’’
There’s always an ebb and flow to Crisis Dynamics. Especially in major Bubbles, the specter of devastating collapse will have desperate policymakers employing extraordinary measures to hold crisis at bay. There will be relief rallies, along with bouts of optimism that government efforts are working to resolve systemic fragilities. Short squeezes and the unwind of hedges temporarily bolster market confidence.
Over time, however, fundamental deterioration takes an increasing toll – chipping away at increasingly fragile confidence. At some point, with the catalyst clear only in hindsight, there is a flash realization that the authorities do not, in fact, have the situation under control: “Lehman Moment.”
China’s faltering Bubble creates a unique situation. Beijing has enormous resources available to deploy. They can withhold information from their citizens. They can obfuscate and manipulate. They will initially ring-fence their banking system.
But I am skeptical they can sustain ridiculously overvalued apartments often of suspect quality. And it will be impossible to suppress news of sinking apartment prices. Word will travel quickly for subject matter of such keen national interest. How owners of depreciating apartments react is a huge unknown. Will millions of units hit the market, with panicked sellers willing to accept steep discounts? Will owners of unoccupied apartments mail keys to their banks and stop making payments? National protests and resulting government crackdowns? Darkening public moods for apartment speculation, the economy, the communist party and the world?
I am also skeptical that, short of stringent capital controls, Beijing will be able to suppress financial outflows. And as Crisis Dynamics unfold, Beijing will be challenged to control de-risking/deleveraging dynamics. How much speculative leverage has accumulated over this incredible cycle remains the $64 TN question.
But we’re so early in the process, and it’s not fruitful to jump too far forward. After trading to 75% earlier in the week, Evergrande bond yields dropped to 67.4% after holding default at bay. An index of Chinese high-yield dollar bond yields dropped from 20% to 17.8%, after beginning September at 12%. China’s sovereign CDS fell from 49 to 46.5 bps, with most Chinese bank CDS also declining moderately.
Despite the modest Chinese Credit relief rally and record U.S. stock prices, an index of Emerging Market CDS ended the week higher. Brazil's sovereign CDS surged 34 bps to a 13-month high 236 bps. Turkish CDS jumped 11 to 470 bps, the high since March. And local currency bond yields continue their upward march, with yields rising 28 bps in Russia (high since March ’20), 13 bps in the Czech Republic (high since 2012), 10 bps in South Africa (17-month high), 10 bps in Mexico (high since March ’20), and eight bps in Poland (high since May ‘19). Despite ongoing “developed” central bank QE liquidity injections, global financial conditions have begun to tighten. The extraordinary confluence of surging inflation, spooked central bankers and a faltering Chinese Bubble creates momentous risks for a highly levered world.
For the Week:
The S&P500 gained 1.6% (up 21.0% y-t-d), and the Dow rose 1.1% (up 16.6%). The Utilities jumped 2.5% (up 7.4%). The Banks surged 4.1% (up 45.7%), and the Broker/Dealers rose 1.7% (up 32.9%). The Transports advanced 3.8% (up 26.1%). The S&P 400 Midcaps jumped 1.8% (up 21.3%), and the small cap Russell 2000 gained 1.1% (up 16.0%). The Nasdaq100 increased 1.4% (up 16.0%). The Semiconductors rose 1.7% (up 20.6%). The Biotechs slipped 0.4% (down 2.2%). With bullion jumping $25, the HUI gold index gained 1.7% (down 13.3%).
Three-month Treasury bill rates ended the week at 0.05%. Two-year government yields jumped six bps to 0.455% (up 33bps y-t-d). Five-year T-note yields gained seven bps to 1.20% (up 83bps). Ten-year Treasury yields rose six bps to 1.63% (up 72bps). Long bond yields added three bps to 2.07% (up 42bps). Benchmark Fannie Mae MBS yields surged nine bps to 2.12% (up 77bps).
Greek 10-year yields jumped 12 bps to 1.03% (up 40bps y-t-d). Ten-year Portuguese yields gained six bps to 0.41% (up 38bps). Italian 10-year yields surged 13 bps to 1.00% (up 46bps). Spain's 10-year yields rose seven bps to 0.53% (up 48bps). German bund yields jumped six bps to negative 0.11% (up 46bps). French yields gained six bps to 0.23% (up 57bps). The French to German 10-year bond spread was unchanged at 34 bps. U.K. 10-year gilt yields rose four bps to 1.15% (up 95bps). U.K.'s FTSE equities index dipped 0.4% (up 11.5% y-t-d).
Japan's Nikkei Equities Index declined 0.9% (up 5.0% y-t-d). Japanese 10-year "JGB" yield added a basis point to 0.09% (up 8bps y-t-d). France's CAC40 was little changed (up 21.3%). The German DAX equities index dipped 0.3% (up 13.3%). Spain's IBEX 35 equities index fell 1.0% (up 10.3%). Italy's FTSE MIB index added 0.3% (up 19.5%). EM equities were mostly lower. Brazil's Bovespa index sank 7.3% (down 10.7%), and Mexico's Bolsa dropped 1.7% (up 17.8%). South Korea's Kospi index slipped 0.3% (up 4.6%). India's Sensex equities index declined 0.8% (up 27.4%). China's Shanghai Exchange increased 0.3% (up 3.2%). Turkey's Borsa Istanbul National 100 index surged 5.0% (up 0.2%). Russia's MICEX equities index fell 1.5% (up 27.6%).
Investment-grade bond funds saw inflows of $3.842 billion, and junk bond funds posted positive flows of $2.296 billion (from Lipper).
Federal Reserve Credit last week surged $85.3bn to a record $8.517 TN. Over the past 110 weeks, Fed Credit expanded $4.791 TN, or 129%. Fed Credit inflated $5.707 Trillion, or 203%, over the past 467 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week slipped $1.3bn to $3.482 TN. "Custody holdings" were up $79bn, or 2.3%, y-o-y.
Total money market fund assets declined $7bn to $4.518 TN. Total money funds increased $155bn y-o-y, or 3.5%.
Total Commercial Paper jumped $17.2bn to $1.190 TN. CP was up $216bn, or 22.2%, year-over-year.
Freddie Mac 30-year fixed mortgage rates rose four bps to a six-month high 3.09% (up 29bps y-o-y). Fifteen-year rates gained three bps to 2.33% (unchanged). Five-year hybrid ARM rates slipped a basis point to 2.54% (down 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.18% (up 9bps).
Currency Watch:
For the week, the U.S. Dollar Index declined 0.3% to 93.64 (up 4.1% y-t-d). For the week on the upside, the New Zealand dollar increased 1.3%, the Norwegian krone 0.8%, the Swiss franc 0.8%, the Mexican peso 0.7%, the Japanese yen 0.6%, the Australian dollar 0.6%, the Swedish krona 0.5%, the South Korean won 0.5%, and the euro 0.4%. For the week on the downside, the Brazilian real declined 3.3%, and the South African rand fell 1.5%. The Chinese renminbi gained 0.79% versus the dollar (up 2.23% y-t-d).
Commodities Watch:
October 18 – Bloomberg (Salma El Wardany): “OPEC and its allies once again failed to pump enough oil to meet their output targets, exacerbating the supply deficit as the world recovers from the coronavirus pandemic. OPEC+ cut its production 15% deeper than planned in September, compared with 16% in August and 9% in July… This reflects the inability of some members -- including Angola, Nigeria and Azerbaijan -- to raise output to agreed volumes due to a lack of investment, exploration and other issues.”
October 22 – Bloomberg (Devika Krishna Kumar): “Stockpiles at the biggest U.S. crude depot are quickly approaching critically low levels. The last time that happened, crude cost more than $100 a barrel. The storage tanks in Cushing, Oklahoma, require a minimum level of oil to maintain normal operations, which traders generally believe is around 20 million barrels. Unusually for this time of year, stockpiles declined more than 4 million barrels over the past two weeks to 31 million and are expected to keep dropping rapidly due to the world's insatiable demand for U.S. light sweet crude.”
October 19 – Bloomberg (Jack Farchy and Mark Burton): “Trafigura Group withdrew a significant proportion of copper that’s been pulled from London Metal Exchange warehouses, contributing to wild swings in prices, according to people familiar... The drawdown has made the trading house the talk of the copper market, helping to drive available stocks to the lowest since 1974 and pushing a key spread to the highest on record. It’s also helped to spur outright copper prices higher, with benchmark futures up about 13% since the start of the month… And the move comes against a backdrop of very low inventories globally.”
October 19 – Bloomberg (Joe Carroll): “U.S. propane prices are so high and supplies so scarce that the market appears headed for ‘armageddon’ during the depths of winter, according to… IHS Markit Ltd. Stockpiles of the key heating fuel and manufacturing feedstock in the world’s biggest economy probably have already topped out for the year and will be stretched as cold weather descends in coming weeks, Edgar Ang, an IHS analyst, said… Prices for the first quarter of 2022 are so far above later-dated supplies that ‘it may indicate players are preparing for propane-market armageddon,’ Ang said. Some regions may face outright shortages before the end of winter, he said.”
The Bloomberg Commodities Index declined 0.9% (up 32.9% y-t-d). Spot Gold rose $25 to $1,793 (down 5.6%). Silver surged 4.3% to $24.32 (down 7.9%). WTI crude gained $1.48 to $83.76 (up 73%). Gasoline slipped 0.2% (up 76%), and Natural Gas fell 2.4% (up 108%). Copper sank 4.9% (up 28%). Wheat jumped 3.0% (up 18%), and Corn rose 2.3% (up 11%). Bitcoin fell $630, or 1.0%, this week to $60,621 (up 109%).
Coronavirus Watch:
October 21 – CNBC (Holly Ellyatt): “A newly-discovered mutation of the delta variant is being investigated in the U.K. amid worries that it could make the virus even more transmissible and undermine Covid-19 vaccines further. Still, there are many unknowns surrounding this descendent or subtype of the delta variant — formally known as AY.4.2 — which some are dubbing the new ‘delta plus’ variant.”
October 19 – Yahoo Finance (Aarthi Swaminathan): “The coronavirus pandemic hit the education sector exceptionally hard, and college enrollments plunged in 2020 to the lowest level since 2007. According to… the U.S. Census Bureau…, enrollment in schools dropped by 2.9 million from 2019 to 2020 and colleges by 615,000. Enrollment among those aged 35 and below has also dipped to the lowest level in over 20 years, with community colleges leading the decline.”
Market Mania Watch:
October 18 – CNBC (Robert Frank): “The wealthiest 10% of Americans now own 89% of all U.S. stocks held by households, a record high that highlights the stock market’s role in increasing wealth inequality. The top 1% gained more than $6.5 trillion in corporate equities and mutual fund wealth during the Covid-19 pandemic, while the bottom 90% added $1.2 trillion, according to… the Federal Reserve. The share of corporate equities and mutual funds owned by the top 10% reached the record high in the second quarter, while the bottom 90% of Americans held about 11% of individually held stocks, down from 12% before the pandemic… The total wealth of the top 1% now tops 32%, a record…. Nearly 70% of their wealth gains over the past year and a half — one of the fastest wealth booms in recent history — came from stocks. ‘The top 1% own a lot of stock, the rest of us own a little,’ said Steven Rosenthal, senior fellow, Urban-Brookings Tax Policy Center.”
October 16 – Wall Street Journal (Eliot Brown): “Archer Aviation Inc. is years from producing its only planned product, a four-passenger electric air taxi that the main U.S. regulator hasn’t yet certified. It hasn’t generated any revenue. Still, the co-founders of this three-year-old company got a huge payday last month, a $99 million special stock award that stands to quadruple if Archer hits other milestones… For years, Silicon Valley was known as a place where leaders often bucked American corporate customs when it came to pay. Rather than receiving large stock grants and salaries, company founders like Facebook Inc.’s Mark Zuckerberg and Amazon. com Inc.’s Jeff Bezos took little or nothing. Instead, they benefited from the rising value of stock they got by starting their companies. That philosophy has given way to a new trend: pay packages consisting of giant special stock awards. These make startup founders better compensated than CEOs who have taken the reins at some of the most valuable, established and profitable American corporations.”
October 15 – Financial Times (Mark Vandevelde): “From the top floors of a skyscraper that crowns the biggest New York office development since Rockefeller Center, a few hundred highly paid executives oversee one of the most pervasive enterprises that American capitalists have ever built. Less than half a century after it was started as a boutique investment vehicle run by two wealthy cousins, KKR has become a corporate behemoth. The firm’s $170bn lending arm manages as many assets as some regional banks, and that is just the start. If the mosaic of assets managed by the firm’s private markets division were folded into one entity and listed on the stock market, its market capitalisation could exceed $100bn — comparable to industrial giants such as General Electric, Lockheed Martin or 3M.”
October 21 – Bloomberg (Danielle Moran): “The pension fund for Houston’s firefighters is tip-toeing into cryptocurrency investing. The Houston Firefighters’ Relief and Retirement Fund, which has over $4 billion of assets, said it invested $25 million in Bitcoin and Ether through NYDIG, a Bitcoin-focused subsidiary of asset manager Stone Ridge. ‘I see this as another tool to manage my risk,’ said Ajit Singh, the chief investment officer for fund. ‘It has a positive expected return and it manages my risk. It has a low correlation to every other asset class.’”
October 19 – Bloomberg (Sabrina Willmer): “Apollo Global Management Inc. is seeking to almost double loan originations to $150 billion to capitalize on the fast-growing retirement services market. ‘We think this market dwarfs the alternatives market,’ Chief Executive Officer Marc Rowan said…, noting that it could be a $40 trillion opportunity. Helping drive this growth is a move by institutions to allocate a portion of their fixed income investments to private credit, he said.”
October 19 – Wall Street Journal (Joe Wallace): “Enthusiasm from individual traders is reshaping the market for nuclear fuel that generates a tenth of the world’s electricity and sending uranium-linked stocks higher. After languishing for a decade after the Fukushima disaster led Japan and Germany to close nuclear reactors, spot uranium prices have shot up to $47.10 a pound from $32.25 at the start of August… Behind the rally: a run-up in uranium prices driven by individual traders, who have flocked to a new trust that gives a cheap and easy way of betting on the nuclear-fuel market.”
October 20 – Bloomberg (Kamaron Leach): “Turns out, China’s tech crackdown is having few lasting effects on U.S. investor demand for the country’s megacap technology stocks. Since slumping to a low in mid-August, KraneShares CSI China Internet Fund (ticker KWEB) -- which holds shares of 53 U.S.-listed Chinese tech companies -- has jumped 21%. Cash flooding into the exchange-traded fund has helped buoy total assets to a record $8.1 billion…”
Market Instability Watch:
October 17 – Wall Street Journal (Gunjan Banerji): “A roaring trade in bullish crude-oil options says the 2021 energy rally is far from over. Traders once again are betting that the U.S. oil benchmark will surge above $100 a barrel, from a recent $82, as early as December. U.S. crude… is up 10% this month, and 70% this year, but it hasn’t hit $100 since the oil crash of 2014. Wagers across the Atlantic are even more aggressive. Some traders are betting Brent crude, the global benchmark, will hit a record high of $200 a barrel by December 2022…”
October 21 – Reuters (Ambar Warrick): “Turkey’s lira slumped to a record low on Thursday after the central bank cut interest rates by twice as much as expected, while most other emerging market currencies fell on concerns over rising global inflation. The lira dropped as much as 2.9% to a record low… after the central bank cut rates to 16% from 18%.”
Inflation Watch:
October 20 – CNBC (Weizhen Tan): “Retailers and manufacturers are overordering or placing orders too early amid panic over the massive supply chain crisis, and that’s making things much worse, those in the industry told CNBC. ‘Suddenly, retailers and manufacturers are overordering because of these supply chain issues, and that’s just leading to essentially an even worse scenario,’ Jonathan Savoir, CEO of supply chain technology firm Quincus told CNBC… Supply chains everywhere have been hit by massive disruptions this year, from container shortages to floods and Covid infections setting off port closures. That’s gotten worse because demand is rocketing…”
October 21 – Reuters (Siddharth Cavale and Anthony Deutsch): “For central bankers wrestling with the question of whether inflationary pressures are transitory, industry chiefs around the world have a clear message: prices are only going higher. Shortages of workers, fuel, cargo ships, semiconductors and building materials as the global economy bounces back after pandemic lockdowns have companies from electric car makers to chocolatiers scrambling to keep a lid on costs. Some of the world's biggest brands are now passing on higher prices to consumers and are warning any policymakers sitting on the inflationary fence that things are going to get worse. ‘We expect inflation to be higher next year than this year,’ said Graeme Pitkethly, finance chief at Unilever, which says its products, from Dove soap to Ben & Jerry's ice cream to Persil washing powder, are used by 2.5 billion people every day. Unilever raised prices 4.1% in the third quarter and said they would go up again by at least that in the final three months of 2021, and might accelerate even more next year.”
October 19 – Wall Street Journal (Sharon Terlep): “Procter & Gamble Co. said that it expects solid sales and profit growth over the next nine months, even as costs for everything from warehouse space to raw materials rise faster than the consumer-products company expected. From furniture makers to grocers, the world’s biggest companies are using their deep pockets, sprawling global operations and commanding market share to insulate themselves from the global supply-chain meltdown. They are also flexing their pricing power, taking advantage of consumers’ willingness to pay up for higher-end products. P&G, maker of Tide detergent and Crest toothpaste, said… it will start charging more for razors and certain beauty and oral care products, price increases that come in addition to earlier moves to start charging more for staples from diapers to toilet paper.”
October 19 – CNBC (Diana Olick): “Demand for single-family rental homes is showing no sign of easing up, and that is pushing rents through the roof, especially for the highest-priced properties. As a result, investors are now flooding into the market again, after falling back a bit during the first year of the Covid pandemic. Nationally, rents rose 9.3% in August, year over year…, according to CoreLogic. For the first time since before the pandemic hit, all major metropolitan housing markets covered by CoreLogic showed positive rent growth. Miami led the way with a 21% gain, followed by Phoenix at 19% and Las Vegas at 15%. ‘Converging economic trends are driving a surge in single-family rent prices, and consumer confidence has driven an uptick in demand for both renters and buyers,’ Molly Boesel, economist at CoreLogic, said... ‘The ongoing preference toward more living space — and slim for-sale inventory — is forcing would-be buyers back into renting, putting significant strain on the single-family rental market.’”
October 20 – Wall Street Journal (Carol Ryan): “Confident consumers have swallowed higher supermarket prices so far this year, but the risk of indigestion is growing. For companies that make staple goods, asking for more money is delicate. On Wednesday, the world’s biggest food company Nestlé said sales increased by an impressive 6.5% in the third quarter compared with the same period last year. Demand for its products is strong and Nestlé has been able to pass on the higher cost of inputs such as plastic and transport to shoppers, a sign of healthy pricing power…. Dannon yogurt-maker Danone said… its input costs will be 8% higher this year… Inflation is now so hot that staples companies feel they have no option but to pass it on.”
October 19 – Wall Street Journal (Carol Ryan): “No matter the mode of transport, moving goods from A to B has become more expensive. The quirks of consumer companies’ supply chains mean they won’t all be equally hit. Demand for consumer products has been unusually strong since countries began to reopen their economies. This has put pressure on global transport routes and increased the cost of logistics. In the first quarter of 2020, a company could ship goods by sea for $1,600 per 40-foot equivalent unit, or roughly one large shipping container. By September 2021, the bill had climbed to $10,200, Bernstein analysis shows. Air and road travel is also pricier, as there are fewer jets in the skies and transport firms are struggling to hire drivers. Europe is short of approximately 400,000 truckers, according to Transport Intelligence estimates. A similar shortage in the U.S. pushed spot rates for dry trucks up 13% on the year by the third quarter.”
October 21 – Bloomberg (Elizabeth Stanton): “Bond traders are boosting expectations for U.S. inflation to levels not seen in over a decade amid concern supply-chain bottlenecks and resurgent consumer demand will keep lifting the cost of goods and services. The breakeven rate for five-year Treasury inflation-protected securities surged Thursday to the highest since the maturity was reintroduced in 2004. The move was particularly striking as it coincided with the biggest-ever auction of the tenor.”
Biden Administration Watch:
October 22 – Financial Times (James Politi, Demetri Sevastopulo and Andy Bounds): “President Joe Biden vowed to defend Taiwan from Chinese military action, in comments that contradicted US policy to maintain an ambiguous stance over whether it would come to its rescue. Asked whether the US military would defend the country in the event of a Chinese attack, the president said: ‘Yes, we have a commitment to do that.’ Biden made the comments during a wide-ranging CNN town hall… They appeared to upend a decades-long policy of ‘strategic ambiguity’, under which the US refuses to say whether it would defend it from a Chinese attack. The policy is designed to discourage Taipei from declaring independence and to give Beijing pause about taking military action to seize the country, which it views as Chinese territory.”
October 18 – Associated Press (Jonathan Lemire and Zeke Miller): “President Joe Biden is entering a crucial two weeks for his ambitious agenda, racing to conclude contentious congressional negotiations ahead of both domestic deadlines and a chance to showcase his administration’s accomplishments on a global stage. Biden and his fellow Democrats are struggling to bridge intraparty divides by month’s end to pass a bipartisan infrastructure bill and a larger social services package. The president hopes to nail down both before Air Force One lifts off for Europe on Oct. 28 for a pair of world leader summits, including the most ambitious climate change meeting in years. But that goal has been jeopardized by fractures among Democrats, imperiling the fate of promised sweeping new efforts to grapple with climate change.”
October 16 – Wall Street Journal (Richard Rubin and Ken Thomas): “Many Democrats are willing—even eager—to enact tax increases on high-income households and big businesses and campaign on them in next year’s midterm elections, embracing a stance that the party has struggled with in the past. Although Democrats’ slim majorities have forced them to abandon some of their most sweeping tax proposals, President Biden and congressional Democrats are still seeking to raise about $2 trillion over a decade from businesses and high-income households. Democrats say their focus on the top tier of households would help combat growing wealth inequality. The money would help pay for the healthcare, education and climate-change programs…”
October 18 – Reuters (Daphne Psaledakis and Matt Spetalnick): “President Joe Biden's administration… announced a set of recommendations to revamp its use of economic sanctions to make them a more effective tool of U.S. foreign policy but warned that more had to be done to protect against the threat posed by the rise of cryptocurrencies. Following a broad review launched shortly after Biden took office…, the U.S. Treasury Department unveiled a revised framework intended to take a more surgical approach to sanctions instead of the blunt-force method favored by his predecessor, Donald Trump. The Treasury warned that countries reducing the use of the U.S. dollar and exposure to the U.S. financial system could erode the effectiveness of sanctions, while digital currencies and other technological innovations also pose a risk to the tool's success.”
Federal Reserve Watch:
October 19 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell, during his August speech at the annual Jackson Hole symposium, laid out five reasons supporting his view that the current run of high inflation will go away. So far, they aren’t holding up very well. In fact, there are weaknesses in each of the five planks that, if not thwarting it altogether, at least undermine the Fed’s inflation position and give markets and consumers plenty to watch… Powell’s five-point inflation checklist goes like this: Lack of broad-based pressures; lower moves in high-inflation items; low wage pressures; tepid inflation expectations, and long-lasting forces that have kept inflation low globally.”
October 21 – New York Times (Jeanna Smialek): “On March 23 last year, as the Federal Reserve was taking extraordinary steps to shore up financial markets at the onset of the pandemic, the central bank’s ethics office in Washington sent out a warning. Officials might want to avoid unnecessary trading for a few months as the Fed dived deeper into markets, the Board of Governors’ ethics unit suggested in an email, a message that was passed along to regional bank presidents by their own ethics officers. The guidance came just as the Fed was unveiling a sweeping rescue package aimed at backstopping or rescuing markets, including those for corporate bonds and midsize-business debt. It appears to have been heeded: Most regional presidents and governors of the Fed did not engage in active trading in April, based on their disclosures.”
October 19 – Bloomberg (Edward Bolingbroke): “Compared with the rest of the world’s central banks, the market’s timetable for when the Federal Reserve will start raising interest rates looks positively subdued. Most others, with the exception of the European Central Bank, are expected to move at a far speedier pace. U.S. traders are now pricing a full rate hike into the Fed’s September policy meeting next year. But by that time, New Zealand’s central bank would have hiked five times, Canada’s three times and England’s four times, according to the interest-rate swaps market.”
October 19 – Financial Times (Howard Schneider and Ann Saphir): “If inflation keeps rising at its current pace in coming months rather than subsiding as expected, Federal Reserve policymakers may need to adopt ‘a more aggressive policy response’ next year, Fed Governor Christopher Waller said… For now, Waller said… he continues to believes the economy has seen the worst of the most recent coronavirus wave, that labor and other supply shortages will ease over time and that ‘the escalation of inflation will be transitory,’ with price increases moving back to the Fed's 2% goal next year. That would mean any increase to the Fed's key policy interest rate from its current near-zero level ‘is still some time off,’ he said…”
October 20 – Bloomberg (Steve Matthews): “Federal Reserve Governor Randal Quarles said he favors an initial move to slow monetary stimulus next month and is concerned by a broadening of inflationary pressures that could require a policy response. ‘I would support a decision at our November meeting to start reducing these purchases,’ he said… to a Milken Institute conference in Los Angeles, referring to the central bank’s bond-buying program, which is currently running at $120 billion a month… ‘There is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments,’ he said.”
October 18 – Bloomberg (Steve Matthews): “The Federal Reserve’s army of more than 400 Ph.D. economists has a message on inflation for policy makers and the American public: Chill out. While some officials are publicly anxious about rising prices and Wall Street has ramped up its forecasts, the Fed’s staff in Washington predicts inflation will be back under 2% in 2022… As well as being below the FOMC’s long-term 2% target, it’s less than half the 4.3% pace that the Fed’s preferred measure of price pressures recorded in the year through August. ‘You should take it very seriously,’ said Claudia Sahm, a former Fed economist and senior fellow at the Jain Family Institute. ‘It doesn’t mean it’s right, but you have the top forecasters in the world’ preparing the numbers. ‘Looking over time, there is no forecasting shop that can come even close to the board’s analysis of the near-term economy.’”
U.S. Bubble Watch:
October 20 – Reuters (Ann Saphir and Lindsay Dunsmuir): “U.S. employers reported significant increases in prices and wages even as economic growth decelerated to a ‘modest to moderate’ pace in September and early October, the Federal Reserve said… Employment increased, though labor growth was dampened by a low supply of workers, despite wage increases designed to attract new hires and keep existing employees, the report said. Most districts reported ‘significantly elevated prices,’ with some expecting prices to stay high or increase further, and others expecting inflation to moderate. ‘Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand,’ the Fed districts reported… Companies in most districts were feeling price and wage pressures from supply chain bottlenecks as well as from labor constraints. The Philadelphia Fed reported on one firm that was offering as much as ‘$90,000 for a second-year CPA position that might have commanded $65,000 before the pandemic.’ The Cleveland Fed said nearly 60% of its contacts reported raising wages recently…”
October 21 – CNBC (Jeff Cox): “Weekly jobless claims hit another pandemic-era low last week as the elimination of enhanced benefits sent fewer people to the unemployment line. First-time filings for unemployment insurance totaled 290,000 for the week ended Oct. 16, down 6,000 from the previous period… This was the second week in a row that claims ran below 300,000.”
October 18 – Associated Press: “Farmers and Deere & Co. suppliers are worried about what the strike at the tractor maker’s factories will mean for their livelihoods. More than 10,000 Deere employees went on strike last week at 14 Deere factories in Illinois, Iowa, Kansas, Colorado and Georgia after the United Auto Workers union rejected a contract offer. The longer the strike continues, the greater the impact will be on the communities around the plants. ‘If this gets sorted out in a couple of days, great,’ Brian Jones, who farms in central Iowa, told the Des Moines Register. ‘But if it drags out for weeks, you start to get a little concerned about things.’”
October 18 – Reuters (Ben Klayman): “Thousands of workers remain on strike across the United States demanding higher pay and better conditions despite Hollywood make-up artists and camera operators reaching a deal over the weekend to avoid a walkout, and the tight jobs market has only emboldened them. Kevin Bradshaw is an employee at Kellogg Co's cereal plant in Memphis…, where most of North America's Frosted Flakes are made. He feels anything but great about cuts to healthcare coverage, retirement benefits and vacation time that union officials say the company is pushing for from about 1,400 workers on strike since Oct. 5 at plants in Michigan, Nebraska, Pennsylvania and Tennessee. ‘Enough is enough,’ said Bradshaw, vice president of Bakery, Confectionary, Tobacco Workers and Grain Millers International Union Local 252G... ‘We can't afford to keep giving away things to a company that financially has made record-breaking returns.’”
October 16 – CNN (Chris Isidore): “Workers are saying enough is enough. And many of them are either hitting the picket lines or quitting their jobs as a result. The changing dynamics of the US labor market, which has put employees rather than employers in the driver's seat in a way not seen for decades, is allowing unions to flex their muscle… The overwhelming majority of strikers and potential strikers are doing so for the first time in their careers. Many say they are driven not just by wages or benefits. They say they are striking, or planning to strike, in a bid to do their jobs the way they believe they should be done, and to gain basic improvements in the quality of their lives… One of the main issues running through many of these strikes, or looming strikes, is workers' anger.”
October 18 – Wall Street Journal (Jesse Newman): “Union leaders are pressing to increase their ranks and secure gains for their members as workers demand more from their employers and companies struggle with labor shortages and snarled supply chains. A walkout by production workers for farm and construction machinery company Deere & Co. that began Thursday followed recent stoppages at snack producer Mondelez International Inc., commercial truck maker Volvo and breakfast-cereal giant Kellogg Co. Labor leaders elsewhere this year have worked to unionize Starbucks Corp. baristas and Amazon.com Inc. warehouse workers… Union officials said workers are motivated by lingering frustration over their hours, pay and concerns for their health as some have held front-line jobs through the Covid-19 pandemic. Employees this year have pushed for higher wages, expanded benefits, safer workplaces and added staffing.”
October 18 – Reuters (Lucia Mutikani): “Production at U.S. factories fell by the most in seven months in September as an ongoing global shortage of semiconductors depressed motor vehicle output, further evidence that supply constraints were hampering economic growth… The report… followed on the heels of data last week showing a solid rise in inflation in September. Though retail sales rose last month, that reflected higher prices for motor vehicles. ‘While the hurricane disruption and weather effects will fade, labor and product shortages are still worsening, which will continue to weigh on manufacturing output over the coming months and quarters,’ said Michael Pearce, a senior U.S. economist at Capital Economics…”
October 21 – Bloomberg (Josh Wingrove, Jill R Shah, and Brendan Case): “U.S. ports are full of goods, U.S. yards and warehouses are full of goods, hardly anyone wants to drive a truck to pick up and deliver those goods and those who do sit waiting in lines, often unpaid. And Americans continue to buy more stuff from abroad than ever. A supply-chain crunch that stretches from overseas manufacturers into American ports and retail stores threatens the U.S. holiday shopping season. President Joe Biden and his administration have been working for months to smooth out bottlenecks, but his power to influence what is almost entirely a private-sector problem is limited.”
October 19 – Bloomberg (Brendan Case, Leslie Patton, and Kim Chipman): “In Denver, public-school children are facing shortages of milk. In Chicago, a local market is running short of canned goods and boxed items. But there’s plenty of food. There just isn’t always enough processing and transportation capacity to meet rising demand as the economy revs up. More than a year and a half after the coronavirus pandemic upended daily life, the supply of basic goods at U.S. grocery stores and restaurants is once again falling victim to intermittent shortages and delays. ‘I never imagined that we’d be here in October 2021 talking about supply-chain problems, but it’s a reality,’ said Vivek Sankaran, chief executive officer of Albertsons Cos., who echoed the laments of other retailers. ‘Any given day, you’re going to have something missing in our stores, and it’s across categories.’”
October 21 – Bloomberg (Olivia Rockeman): “Nearly half of New York manufacturers and one-third of services firms expect supply-chain challenges to worsen in the month ahead, according to a survey from the Federal Reserve Bank of New York. Moreover, less than 10% of businesses expect the supply of materials to improve in the next month, with the outlook particularly pessimistic among firms in the manufacturing, construction, retail, transportation and warehousing, and leisure and hospitality industries…”
October 19 – CNN (Vanessa Yurkevich): “The trucking industry is short 80,000 drivers, a record high, Chris Spear, President and CEO of the American Trucking Associations, tells CNN. That's a 30% increase from before the pandemic… ‘That's a pretty big spike,’ Spear added. Many drivers are retiring, dropping out of the industry. Increased consumer demand, prompting a need for more drivers, also plays a big role in the shortfall. This comes at a time when US ports are backlogged -- primarily because there are few trucks and drivers to pick up cargo -- creating a supply chain slowdown.”
October 20 – CNBC (Diana Olick): “Climbing mortgage interest rates caused another drop in mortgage demand for both refinances and home purchases. Total application volume fell 6.3% last week compared with the previous week… Mortgage applications to purchase a home dropped 5% for the week and were 12% lower year over year.”
October 19 – Reuters (Lucia Mutikani): “U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labor, supporting expectations that economic growth slowed sharply in the third quarter… Housing starts dropped 1.6% to a seasonally adjusted annual rate of 1.555 million units last month, the lowest level since April. Data for August was revised down to a rate of 1.580 million units from the previously reported 1.615 million units… Prices for copper, another essential material in home building, have soared more than 16% since the end of September, buoyed by decades-low supplies.”
October 19 – Bloomberg (Jordan Yadoo): “Homebuilders appear to be taking longer than ever to get from start to finish. The number of houses in the U.S. that remain under construction exceeded the number of those completed by the most on record in September… It’s the fourth month in a row that so-called completions have lagged… The number of houses under construction rose 1.3% to a rate of 1.43 million units, the highest since 1974. Completions fell 4.6% to a rate of 1.24 million units, the lowest since August 2020…”
October 18 – CNBC (Diana Olick): “The nation’s homebuilders aren’t seeing any relief from supply chain issues that have slowed construction recently, but high buyer demand appears to be making up for it. Builder confidence in the single-family home construction market rose 4 points to 80 in October on the National Association of Home Builders/Wells Fargo Housing Market Index. That is still down from 85 in October 2020 and from the record high 90 in November of last year. Anything above 50 is considered positive. ‘Although demand and home sales remain strong, builders continue to grapple with ongoing supply chain disruptions and labor shortages that are delaying completion times and putting upward pressure on building material and home prices,’ said NAHB Chairman Chuck Fowke… Of the index’s three components, current sales conditions rose 5 points to 87. Sales expectations in the next six months increased 3 points to 84 and buyer traffic climbed 4 points to 65. The biggest concern for builders now is affordability, as they raise prices to meet the rising costs of land, labor and materials.”
October 19 – Bloomberg (Simon Casey): “Banks are gradually offering more credit to U.S. shale oil and natural gas producers as the industry recovers from last year’s contraction and energy prices rally. So-called borrowing bases will increase as much as 20% during the imminent round of talks between drillers and lenders, according to most respondents in a survey conducted by law firm Haynes & Boone LLP. The findings indicate a continued improvement after the dire conditions experienced in the oil and gas sector last year, when the pandemic and global gluts led to a slump in energy prices and prompted banks to cut back on lending.”
October 18 – Bloomberg (Patrick Clark): “Zillow Group Inc.’s decision to stop pursuing new home purchases comes as the U.S. housing market appears to be cooling off slightly, showcasing the challenges for an emerging high-tech spin on home-flipping. The online listing giant has been buying and selling thousands of homes in recent months through its iBuying program, which depends on the company’s ability to use number-crunching software to predict where home prices are going. The company blamed its decision to stop new acquisitions for the rest of the year on the labor shortages roiling the U.S. economy.”
Fixed-Income Bubble Watch:
October 19 – Bloomberg (Finbarr Flynn): “Global bond investors face an old enemy -- inflation -- and the universe of fixed-income assets doesn’t look to offer much in the way of shelter. U.S. Treasuries, European sovereigns, U.K. gilts and emerging-market credit are all set to lose money over the 12 months through September as dwindling coupons provide little cushion against rising yields… Adding to the potentially toxic environment for bonds is the prospect of major central banks unwinding debt purchases and raising interest rates. Government and corporate bonds globally have already lost 4.4% this year, the biggest decline for any similar period since 2005…”
October 18 – Bloomberg (Jack Pitcher): “Goldman Sachs… tapped the U.S. investment-grade bond market with a $9 billion sale, joining peers Bank of America Corp. and Morgan Stanley in selling new debt after reporting strong third-quarter results.”
China Watch:
October 15 – Financial Times (Kevin Rudd): “Since coming to power, Chinese president Xi Jinping has had to deal with three overriding priorities. First, a domestic economy that is both slowing and increasingly unequal. Second, an adversarial geopolitical environment, resulting largely from Xi’s own quest to change the regional and global status quo. And, finally and most importantly, making sure he secures a third term at the Chinese Communist party’s key 20th Party Congress next year. Enter Evergrande and its growing list of missed bond payments. This behemoth, with $300bn in leverage, lies at the centre of a property sector that represents 29% of Chinese gross domestic product and is more than $5tn in debt. Some 41% of the Chinese banking system’s assets are associated with the property sector, and 78% of the invested wealth of urban Chinese is in housing. Given the millions of creditors, shareholders, bondholders and (unbuilt) apartment owners, Evergrande has become a problem for Xi politically, economically and globally.”
October 19 – South China Morning Post (Orange Wang): “A worse-than-expected third quarter economic performance for China has indicated there could be more pain ahead in the final three months of the year, while stoking fears of ‘stagflation’, analysts say. On Monday, new data from the National Bureau of Statistics showed China’s gross domestic product (GDP) for the three months ending September grew by 4.9% from a year ago, missing market expectations of 5% growth and well below the 7.9% gain seen in the second quarter and the blistering 18.3% expansion between January and March.”
October 17 – Bloomberg: “China’s residential property slump dragged on last month as the debt crisis at China Evergrande Group spread to other developers, keeping buyers away. Home sales by value tumbled 16.9% in September from a year earlier, following a 19.7% drop in August… Real estate investment slid for the first time since the onset of the coronavirus shut swathes of the economy at the start of last year, down 3.5% from a year earlier… ‘No one is buying new properties because they are getting afraid,’ Helen Qiao, chief Greater China economist at Bank of America Corp, said... ‘So we could see further downside on the economy.’”
October 19 – Bloomberg: “China’s property and construction industries contracted in the third quarter for the first time since the start of the pandemic, weighed by a slump in real estate. Output in the real-estate industry, a mainstay of the economy as its activities supports sectors from furniture to commodities, shrank 1.6% from a year ago… The sector grew 7.1% in the three months through June and this contraction is the first since the first quarter of 2020. The construction industry’s output fell by 1.8%, also its first decline since the pandemic. Before the pandemic, that sector had never contracted in data back to 1992.”
October 18 – Bloomberg (Sofia Horta e Costa): “For months in the runup to the 2008 financial crisis, banking heavyweights from Federal Reserve Chair Ben Bernanke on down said the turmoil in subprime mortgages would be ‘contained.’ That phrase is now making a comeback in Beijing as regulators try to reassure markets that the world’s second-largest economy can weather the crisis at China Evergrande Group. Investors are hoping Chinese policy makers prove more adept at ringfencing the damage than their Wall Street counterparts were. People’s Bank of China Governor Yi Gang said… that authorities ‘can contain the Evergrande risk’ even as the embattled developer ‘casts a little bit of concern.’ Another PBOC official called the situation ‘controllable’ at a news briefing…, echoing statements from several of the country’s largest lenders in recent weeks.”
October 17 – Bloomberg: “China’s housing slump and electricity shortages dragged down economic growth last quarter, with signs there will be more pain to come as the country heads into winter and property curbs remain. Gross domestic product expanded 4.9% from a year earlier…, down from 7.9% in the previous quarter, and largely in line with economists’ projections. Beijing has signaled it’s not rushing to stimulate the economy, suggesting growth may continue to slow in the coming months.”
October 18 – Reuters (Muyu Xu and Oksana Kobzeva, Jason Hovet): “China's power shortages hit growth in the world's second biggest economy, threatening more pain for global supply chains, while Europe's gas squeeze looked set to continue as Russia's Gazprom showed no sign of hiking exports to the region in October. Coal, oil and gas prices have all rocketed higher in recent weeks hammering utilities and consumers from Beijing to Brussels, raising inflationary pressures and putting at risk a global recovery from the COVID-19 pandemic. The red-hot market underscores the scale of the task facing world leaders, who are under pressure to map out plans to wean their economies off fossil fuels in preparation for COP26 summit climate talks that start on Oct. 31. Europe, which relies on Russia for 35% of its gas supplies, has seen its benchmark gas price rise more than 350% this year.”
October 17 – Reuters (Liangping Gao and Ryan Woo): “China's September new construction starts slumped for a sixth straight month, the longest spate of monthly declines since 2015, as cash-strapped developers put a pause on projects in the wake of tighter regulations on borrowing. New construction starts in September fell 13.54% from a year earlier, the third month of double-digit declines… That marks the longest downtrend since declines in March-August 2015, the last property malaise.”
October 22 – Bloomberg: “China Evergrande Group made an interest payment on a dollar bond ahead of a Saturday deadline, sending the embattled developer’s stock and bonds higher. The company wired the $83.5 million payment and bondholders will receive the funds before Saturday… A 30-day grace period for the bond coupon would have expired on Saturday after the firm missed the original payment date… The payment offers some temporary relief for the world’s most indebted developer, giving it more time to sell assets and raise cash to pay creditors and suppliers. The reprieve may be short-lived however, with more than $300 billion in liabilities still to be paid, analysts said.”
October 20 – Bloomberg (Sofia Horta e Costa): “China Evergrande Group terminated discussions to sell its property-management arm, a deal that would have given the cash-strapped developer a major cash infusion as it faces impending debt payments. Evergrande requested that its long-halted shares resume trading on Thursday and said that it ended talks last week to sell 50.1% of its stock in Evergrande Property Services Group Ltd. for about HK$20 billion ($2.6bn).”
October 20 – Bloomberg: “China Evergrande Group scrapped talks to offload a stake in its property-management arm and said real estate sales plunged about 97% during peak home-buying season, worsening its liquidity crisis on the eve of a dollar-bond deadline that could tip the company into default. In statements to the Hong Kong exchange late Wednesday, Evergrande added that it had made no further progress on asset sales and may not be able to meet its financial obligations.”
October 19 – Financial Times: “Sinic Holdings has added to a growing list of defaults across China’s contracting real estate sector as markets braced for a deadline this weekend for developer Evergrande to settle interest payments on its offshore bonds. Hong Kong-listed Sinic defaulted on $246m of bonds that were due to mature on Monday… and adding to a $206m default from luxury developer Fantasia Holdings this month. Borrowing costs on Asia’s bond market for riskier corporate issuers have soared in the weeks since Evergrande, the world’s most indebted property developer, missed bond payments in late September and ignited fears globally over a slowdown in China’s real estate sector.”
October 20 – Bloomberg: “Chinese property firm Kaisa Group Holdings Ltd. fell further in a volatile credit market after it earlier canceled meetings with some investors that had been scheduled to take place this week… The firm is China’s 26th biggest property developer by contracted sales as of August, considerably smaller than Evergrande which ranks 3rd. Still, it has about $11.6 billion in outstanding offshore bonds just over half that of Evergrande’s.”
October 21 – Reuters (Samuel Shen, Marc Jones and Clare Jim): “Numbers don't lie, you just need to be looking at the right ones. That's the problem for investors searching for the next trouble spot in the Chinese real estate sector as industry giant China Evergrande Group lumbers towards what is expected to be the country's largest-ever corporate default. The figures on the books sometimes don't tell the full story. Since Beijing started clamping down on corporate debt in 2017, many real estate developers have turned to off-balance-sheet vehicles to borrow money and skirt regulatory scrutiny, analysts and lawyers say. Joint ventures are a popular choice because, unless a company holds a controlling interest in one, it can keep details of it and the debt it acquires off its balance sheet. ‘Nearly every developer has borrowings in disguise. The sector's debt problem is worse than what you see,’ said He Siwei, attorney at Hui Ye Law Firm. Chinese developers owed 33.5 trillion yuan ($5.24 trillion) through various channels at the end of June, Nomura estimates…, adding ‘there are definitely other obscure financing channels yet to be covered.’ Private bonds issued by shell companies in offshore locations have emerged as a new concern.”
October 21 – CNBC (Yen Nee Lee): “China’s real estate sector has to be ‘substantially smaller’ to keep the overall economy healthy and stable, said a top expert on the Chinese housing market. ‘We have too big of a risk in the sector. We built too much housing, so the stabilization first has to come [from] trimming the sector,’ Li Gan, an economics professor at Texas A&M University, told CNBC… Gan estimated that about 20% of China’s housing stock is vacant as buyers rack up second and third properties as investments. Even then, developers continue to build millions of new units each year, he said.”
October 21 – Bloomberg: “China’s local governments are struggling to find good infrastructure projects to invest in this year, meaning there’s less spending to support the economy just as growth is slowing. Tighter controls over how local governments spend their money has resulted in a dearth of good investments, with cities and provinces slowing down their borrowing this year. About 1.15 trillion yuan ($180bn) of this year’s 3.65 trillion yuan special bond quota was still unused as of Oct. 21…”
October 18 – Bloomberg: “Chinese President Xi Jinping took a big gamble shaking up key industries ahead of a political gathering that could decide whether he rules the country indefinitely. Now he’s starting to hit the brakes. In recent weeks Chinese authorities have moved to soften sweeping policies designed to make the economy less dependent on debt, monopolies and fossil fuels. While Beijing’s edicts chastened China’s corporate elites, they also began showing signs of hitting ordinary citizens with higher power bills, lost savings and… potentially fewer jobs. Premier Li Keqiang expressed caution a week ago, saying China needed to rethink the pace of the country’s energy transition as a power crisis threatened to keep factories in the dark and homes without heat during the winter.”
October 20 – Financial Times (Edward White): “China’s internet watchdog has said articles from Caixin, one of the most prominent and trusted Chinese business publications, can no longer be republished by online news services, in the latest blow to journalism and free speech in the country. The Cyberspace Administration of China (CAC) removed Caixin from a list of more than 1,300 media sources approved for domestic republishing. China’s media landscape is facing immense pressure as the Chinese Communist party, under President Xi Jinping, redoubles efforts to control access to information in the world’s most populous country.”
October 19 – New York Times (Vivian Wang): “As China Evergrande Group teeters on the edge of collapse, videos of protesting home buyers have flooded social media. Online government message boards teem with complaints and pleas for intervention to save the huge property developer. The hashtag ‘What does Evergrande mean for the real estate market?’ has been viewed more than 160 million times on one platform. But if trouble threatens for China’s economy, you wouldn’t know it from reading the country’s front pages. The name ‘Evergrande’ has barely been mentioned by top state-run news outlets in recent weeks, even as the company’s uncertain fate has rattled global financial markets. Coverage of its recent troubles has been concentrated in a handful of business publications.”
Central Banker Watch:
October 20 – Reuters (Frank Siebelt and Francesco Canepa): “Bundesbank chief Jens Weidmann, who… announced his decision to stand down more than five years early, led a decade-long fight inside the European Central Bank against the easy-money policies espoused by successive ECB presidents. Back in 2012, the German central bank chief was the lone dissenter when the ECB unveiled plans to help countries in distress after the global financial crisis, saying they were ‘tantamount to financing governments by printing banknotes’. In July, he was among a handful of policymakers who opposed the ECB’s pledge to keep interest rates at record lows until inflation stabilises at 2% as part of efforts to stimulate a euro zone recovery after pandemic lockdowns.”
October 17 – Reuters (William Schomberg): “Bank of England Governor Andrew Bailey sent a fresh signal… that the British central bank is gearing up to raise interest rates for the first time since the onset of the coronavirus crisis as inflation risks mount. Bailey said he continued to believe that the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer, raising the risk of higher inflation expectations. ‘Monetary policy cannot solve supply-side problems - but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,’ Bailey said… ‘And that's why we at the Bank of England have signalled, and this is another such signal, that we will have to act,’ he said. ‘But of course that action comes in our monetary policy meetings.’”
October 18 – Bloomberg (David Goodman): “The Bank of England may be on course to unleash the most aggressive monetary tightening cycle this century just months after the U.K. emerged from the Covid-19 recession, if investor bets are to be believed. Following a rapid jump in bets on BOE action…, pricing currently implies officials will raise interest rates to 1.25% by the end of 2022 -- 115 bps above the current level. The total impact is even higher. Under guidance released in August, the central bank could stop reinvesting bonds held under its quantitative easing program once borrowing costs reach 0.5%, if economic circumstances allow. That level is currently priced in for December.”
October 20 – Bloomberg (Marton Eder): “Investors hunting for returns in an era of low interest rates risk causing a financial crisis down the road, according to European Central Bank Governing Council member Robert Holzmann. In a speech…, the governor of Austria’s central bank said officials should be wary of the side effects of the unconventional measures enacted to support the economy during the pandemic… ‘The problem we are faced with now is that financial market participants searching for yield in the current low interest rate environment could also be taking – and are, to some extent, already taking – higher risks,’ Holzmann said. ‘Such behavior could sow the seeds of future financial crises.’”
Global Bubble Watch:
October 19 – Associated Press (David McHugh, Colleen Barry, Joe McDonald and Tatiana Pollastri): “Power shortages are turning out streetlights and shutting down factories in China. The poor in Brazil are choosing between paying for food or electricity. German corn and wheat farmers can’t find fertilizer, made using natural gas. And fears are rising that Europe will have to ration electricity if it’s a cold winter. The world is gripped by an energy crunch — a fierce squeeze on some of the key markets for natural gas, oil and other fuels that keep the global economy running and the lights and heat on in homes. Heading into winter, that has meant higher utility bills, more expensive products and growing concern about how energy-consuming Europe and China will recover from the COVID-19 pandemic. Rising energy costs are another pressure point on businesses and consumers already feeling the pinch of higher prices from supply chain and labor constraints.”
October 20 – Financial Times (Delphine Strauss): “From striking refuse collectors in Brighton on England’s south coast to the thousands of employees who have walked out at US tractor maker John Deere, wage disputes are becoming a flashpoint for investors and policymakers as developed economies recover from the pandemic. Emboldened by staff shortages, rising energy prices and living costs, employees are increasingly butting heads with their employers over salaries. One of Germany’s biggest trade unions this month asked for an inflation-busting 5.3% pay rise. Some worry growing wage pressures could unleash a 1970s-style inflationary spiral that prompts interest rate increases that undercut frothy stock markets. As the IMF warned last week, central banks need to be ‘very, very vigilant’ of rising energy and other costs feeding into higher wages and core prices.”
October 20 – Wall Street Journal (Greg Ip): “Nothing embodied the promise of globalization more than the humble supply chain. Thanks to the integration of production across and within borders, consumers have come to expect infinite variety, instantly available. That is now under siege. The supply-chain crisis of 2021 is fueling the retreat from globalization, much as the global financial crisis of 2008 did.”
October 19 – Bloomberg: “Chinese authorities are imposing new hurdles for fertilizer exporters amid growing concerns over surging power prices and food production, a move that could worsen a global price shock and food inflation. Some Chinese fertilizer cargoes ready to be shipped are being held up by local authorities for additional checks or to obtain new export certificates… The supplies will either end up being sold on the domestic market or face delays in being exported, said the people… The increased scrutiny comes as global fertilizers costs have soared to new records, spurred by energy crises in Europe and China as coal and natural gas are important feedstocks. The cost increase comes at a particularly worrying time, with global food prices hitting a 10-year high.”
October 20 – Bloomberg (Shelly Hagan): “Inflation exceeded the Bank of Canada’s control range for a sixth straight month, worsened by supply chain bottlenecks that are proving stubbornly persistent. The consumer price index rose 4.4% in September from a year earlier… That’s the highest reading since February 2003…”
October 17 – Bloomberg (Matthew Brockett): “New Zealand inflation surged at the fastest pace in 10 years in the third quarter, reinforcing bets that the central bank will keep raising interest rates. The currency rose and bond yields climbed to the highest level in almost three years after data showed the annual inflation rate jumped to 4.9% from 3.3% in the second quarter. Economists had forecast 4.2%. Consumer prices advanced 2.2% from three months earlier…”
October 19 – Financial Times (Neil Hume): “The world’s largest carmakers could face a potentially crippling shortage of aluminium, as China’s power crisis threatens supplies of a key component used to make the lightweight metal. Magnesium is an essential raw material for the production of aluminium alloys, which are used in everything from gearboxes, to steering columns, seat frames and fuel tank covers. Owing to production curbs in China, which has a near monopoly on the magnesium market, stockpiles of the metal are running dangerously low across Europe.”
EM Watch:
October 22 – Bloomberg (Martha Beck and Vinícius Andrade): “The rout in Brazilian markets deepened Friday after key members of the economic team left in protest over plans to boost welfare spending that will break a key fiscal rule seen as essential to keeping investor confidence in the country. The real fell 1%, extending its losses this week to 4.5%. Stocks dropped as much as 4.2%, pushing the decline since Monday to more than 9% and set to enter a bear market. The slump is adding pressure on the central bank to raise rates more aggressively to tame inflation…”
October 19 – Reuters (Marcela Ayres and Jose De Castro): “Brazil's government canceled an announcement for a generous new welfare program on Thursday, after a central bank currency intervention failed to calm market concerns about looser government spending ahead of next year's election. President Jair Bolsonaro, who has seen his poll numbers fall over his mishandling of the pandemic, a weak economy and rising inflation, summoned ministers for a 5 p.m. announcement of the new welfare program… But just minutes before the official release of the expanded welfare plan, which had spooked investors and deepened real losses against the dollar , the event was suspended…”
October 20 – Associated Press (Debora Alvares and Diane Jeantet): “A Brazilian Senate report recommended… pursuing crimes against humanity and other charges against President Jair Bolsonaro for allegedly bungling Brazil’s response to COVID-19 and contributing to the country having the world’s second-highest pandemic death toll. Sen. Renan Calheiros presented the proposal to a committee of colleagues that has spent six months investigating the Brazilian government’s management of the pandemic. The decision on whether to file most of the charges would be up to Brazil’s prosecutor-general, a Bolsonaro appointee and ally.”
October 20 – Reuters (Daren Butler): “President Tayyip Erdogan has wheeled a trolley around one of the new grocery stores he hopes will bring Turkey’s ‘exorbitant’ prices under control, but his unorthodox effort to combat inflation is failing to impress shoppers and retailers. Accompanied by his wife and daughter, Erdogan went shopping near his Istanbul home…, telling assembled media that the expanding chain of Agricultural Credit Cooperatives will help curb price rises. Frustrated by inflation running near 20% and sliding opinion polls ahead of elections set for 2023, Erdogan has instructed the retail chain to open 1,000 stores to provide cheap, quality products and ‘balance the market’.”
October 19 – Bloomberg (Selcuk Gokoluk): “The lira’s slump this month threatens to derail a rally in Turkish corporate bonds that’s handed investors some of the richest returns in emerging markets. The debt, offering returns of 4.4% in 2021, was the second-worst performer in developing nations after President Recep Tayyip Erdogan sacked three central bankers last week. As the lira tumbled, the average yield on Turkish company bonds surged to 4.87%, close to a six-month high.”
October 21 – Bloomberg (Ken Parks): “Paraguay’s central bank surprised economists by delivering its biggest interest rate increase in a decade as rising prices for food and imported fuel push inflation well above target. The central bank’s board unanimously voted to tighten by 125 basis points to push its key rate to 2.75%.”
Europe Watch:
October 21 – Bloomberg (Ewa Krukowska): “Soaring energy prices are exacerbating divisions in the European Union as national leaders brace for heated talks about how to protect the most vulnerable and avoid a backlash against the bloc’s ambitious climate change plan. The unprecedented spike in power and gas prices is the first topic for EU leaders in their two-day summit starting Thursday in Brussels, but the bloc’s ability to act is extremely limited. Most countries have already cut taxes or approved subsidies to help households and companies, and there are few remaining tools that are technically possible and politically palatable.”
October 19 – CNBC (Sam Meredith): “Russia has opted against sending more natural gas supplies to Europe, curbing hopes that Moscow may ease its grip on the market shortly after President Vladimir Putin said the country would be prepared to help. Highly anticipated auction results on Monday showed Russia’s state gas giant Gazprom had not booked additional gas transit capacity for November either through the Ukrainian pipeline system or lines into western Europe via Poland.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 18 – CNBC (Yen Nee Lee): “China may have to set aside its ambitious plans to cut carbon emissions — at least in the short term — in order to tide over its worsening power crisis, said analysts. ‘Like other markets in Asia and Europe, China must perform a balancing act between the immediate need to keep the lights on — via more coal — and showing its commitment to increasingly ambitious decarbonisation targets,’ said Gavin Thompson, Asia-Pacific vice chair at energy consultancy Wood Mackenzie. ‘But the short-term reality is that China and many others have little choice but to increase coal consumption to meet power demand,’ Thomson wrote…”
October 18 – Wall Street Journal (Matthew Dalton): “At a July global climate gathering in London, South African environment minister Barbara Creecy presented the world’s wealthiest countries with a bill: more than $750 billion annually to pay for poorer nations to shift away from fossil fuels and protect themselves from global warming. The number was met with silence from U.S. Climate Envoy John Kerry, according to Zaheer Fakir, an adviser to Ms. Creecy. Other Western officials said they weren’t ready to discuss such a huge sum. For decades, Western countries responsible for the bulk of greenhouse-gas emissions have pledged to pay to bring poorer nations along with them in what is expected to be a very expensive global energy transition. But they have yet to fully deliver on that promise. Now the price of the developing world’s cooperation is going up.”
October 18 – Los Angeles Times (Laura Anaya-Morga): “In a year of both extreme heat and extreme drought, California has reported its driest water year in terms of precipitation in a century, and experts fear the coming 12 months could be even worse. The Western Regional Climate Center added average precipitation that had been reported at each of its stations and calculated that a total of 11.87 inches of rain and snow fell in California in the 2021 water year. That's half of what experts deem average during a water year in California: about 23.58 inches.”
October 16 – Wall Street Journal (Katherine Blunt): “California is racing to secure large amounts of power in the next few years to make up for the impending closure of fossil-fuel power plants and a nuclear facility that provides nearly 10% of the electricity generated in the state. The California Public Utilities Commission has ordered utilities to buy an unprecedented amount of renewable energy and battery storage as the state phases out four natural-gas-fired power plants and retires Diablo Canyon, the state’s last nuclear plant, starting in 2024. While the companies are moving quickly to contract for power, the California Energy Commission and the state’s grid operator have recently expressed concern that the purchases may not be enough to prevent electricity shortages in coming summers.”
October 20 – Reuters (Daniela Desantis): “The giant Itaipu hydroelectric power plant, wedged between Paraguay and Brazil on the Parana River, is facing an energy crunch amid record low river and rainfall levels that experts say could last into next year. The Itaipu dam, which supplies around 10% of the energy consumed in Brazil and 86% of that used in landlocked Paraguay, has recorded its lowest output since the hydroelectric plant began operating at full capacity in 2005. Downstream, the Argentine-Paraguayan Yacyreta plant produced half the normal level of energy in September…”
Leveraged Speculation Watch:
October 20 – Bloomberg (Patrick McHale): “Paul Tudor Jones, CEO of Tudor Investment Corp., tells CNBC that inflation is the single biggest threat to the economy. Says it’s clear that there is a structural issue in the labor force that won’t be solved by zero interest rates and quantitative easing. The inflation genie is out of the bottle and we run the risk of returning to the 1970s… Calls this probably the most inappropriate monetary policy in his lifetime, says Jerome Powell may not be the best person to run the Fed right now.”
Geopolitical Watch:
October 17 – Reuters (Ryan Woo, Ben Blanchard and Idrees Ali): “The Chinese military… condemned the United States and Canada for each sending a warship through the Taiwan Strait last week, saying they were threatening peace and stability in the region… China sent around 150 aircraft into the zone over a four-day period beginning on Oct. 1 in a further heightening of tension between Beijing and Taipei that has sparked concern internationally. The U.S. military said the Arleigh Burke-class guided missile destroyer USS Dewey sailed through the narrow waterway that separates Taiwan from its giant neighbour China along with the Canadian frigate HMCS Winnipeg…”
October 21 – CNBC (Robin Emmott): “NATO defence ministers agreed a new master plan on Thursday to defend against any potential Russian attack on multiple fronts, reaffirming the alliance's core goal of deterring Moscow despite a growing focus on China. The confidential strategy aims to prepare for any simultaneous attack in the Baltic and Black Sea regions that could include nuclear weapons, hacking of computer networks and assaults from space.”
October 18 – Bloomberg (Brendan Scott, Jon Herskovitz, and Kari Soo Lindberg): “China’s reported launch of a hypersonic missile into orbit has raised concerns that U.S. rivals are quickly neutralizing the Pentagon’s missile defenses even as it invests tens of billions of dollars in upgrades. In a test two months ago, the Chinese military sent a nuclear-capable missile into low-orbit space and around the globe before cruising down to its target, the Financial Times reported… Although the weapon missed its mark by about two dozen miles, the paper said, the technology, once perfected, could be used to send nuclear warheads over the South Pole and around American anti-missile systems in the northern hemisphere.”
October 19 – Reuters (Kiyoshi Takenaka): “A group of 10 naval vessels from China and Russia sailed through a strait separating Japan's main island and its northern island of Hokkaido…, the Japanese government said, adding that it is closely watching such activities. It was the first time Japan has confirmed the passage of Chinese and Russian naval vessels sailing together through the Tsugaru Strait, which separates the Sea of Japan from the Pacific. While the strait is regarded as international waters, Japan's ties with China have long been plagued by conflicting claims over a group of tiny East China Sea islets. Tokyo has a territorial dispute with Moscow, as well.”
October 19 – Reuters (Hyonhee Shin and Josh Smith): “North Korea test-fired a new, smaller ballistic missile from a submarine, state media confirmed…, a move that analysts said could be aimed at more quickly fielding an operational missile submarine… The White House urged North Korea to refrain from further ‘provocations’…”
The S&P500 gained 1.6% (up 21.0% y-t-d), and the Dow rose 1.1% (up 16.6%). The Utilities jumped 2.5% (up 7.4%). The Banks surged 4.1% (up 45.7%), and the Broker/Dealers rose 1.7% (up 32.9%). The Transports advanced 3.8% (up 26.1%). The S&P 400 Midcaps jumped 1.8% (up 21.3%), and the small cap Russell 2000 gained 1.1% (up 16.0%). The Nasdaq100 increased 1.4% (up 16.0%). The Semiconductors rose 1.7% (up 20.6%). The Biotechs slipped 0.4% (down 2.2%). With bullion jumping $25, the HUI gold index gained 1.7% (down 13.3%).
Three-month Treasury bill rates ended the week at 0.05%. Two-year government yields jumped six bps to 0.455% (up 33bps y-t-d). Five-year T-note yields gained seven bps to 1.20% (up 83bps). Ten-year Treasury yields rose six bps to 1.63% (up 72bps). Long bond yields added three bps to 2.07% (up 42bps). Benchmark Fannie Mae MBS yields surged nine bps to 2.12% (up 77bps).
Greek 10-year yields jumped 12 bps to 1.03% (up 40bps y-t-d). Ten-year Portuguese yields gained six bps to 0.41% (up 38bps). Italian 10-year yields surged 13 bps to 1.00% (up 46bps). Spain's 10-year yields rose seven bps to 0.53% (up 48bps). German bund yields jumped six bps to negative 0.11% (up 46bps). French yields gained six bps to 0.23% (up 57bps). The French to German 10-year bond spread was unchanged at 34 bps. U.K. 10-year gilt yields rose four bps to 1.15% (up 95bps). U.K.'s FTSE equities index dipped 0.4% (up 11.5% y-t-d).
Japan's Nikkei Equities Index declined 0.9% (up 5.0% y-t-d). Japanese 10-year "JGB" yield added a basis point to 0.09% (up 8bps y-t-d). France's CAC40 was little changed (up 21.3%). The German DAX equities index dipped 0.3% (up 13.3%). Spain's IBEX 35 equities index fell 1.0% (up 10.3%). Italy's FTSE MIB index added 0.3% (up 19.5%). EM equities were mostly lower. Brazil's Bovespa index sank 7.3% (down 10.7%), and Mexico's Bolsa dropped 1.7% (up 17.8%). South Korea's Kospi index slipped 0.3% (up 4.6%). India's Sensex equities index declined 0.8% (up 27.4%). China's Shanghai Exchange increased 0.3% (up 3.2%). Turkey's Borsa Istanbul National 100 index surged 5.0% (up 0.2%). Russia's MICEX equities index fell 1.5% (up 27.6%).
Investment-grade bond funds saw inflows of $3.842 billion, and junk bond funds posted positive flows of $2.296 billion (from Lipper).
Federal Reserve Credit last week surged $85.3bn to a record $8.517 TN. Over the past 110 weeks, Fed Credit expanded $4.791 TN, or 129%. Fed Credit inflated $5.707 Trillion, or 203%, over the past 467 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week slipped $1.3bn to $3.482 TN. "Custody holdings" were up $79bn, or 2.3%, y-o-y.
Total money market fund assets declined $7bn to $4.518 TN. Total money funds increased $155bn y-o-y, or 3.5%.
Total Commercial Paper jumped $17.2bn to $1.190 TN. CP was up $216bn, or 22.2%, year-over-year.
Freddie Mac 30-year fixed mortgage rates rose four bps to a six-month high 3.09% (up 29bps y-o-y). Fifteen-year rates gained three bps to 2.33% (unchanged). Five-year hybrid ARM rates slipped a basis point to 2.54% (down 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.18% (up 9bps).
Currency Watch:
For the week, the U.S. Dollar Index declined 0.3% to 93.64 (up 4.1% y-t-d). For the week on the upside, the New Zealand dollar increased 1.3%, the Norwegian krone 0.8%, the Swiss franc 0.8%, the Mexican peso 0.7%, the Japanese yen 0.6%, the Australian dollar 0.6%, the Swedish krona 0.5%, the South Korean won 0.5%, and the euro 0.4%. For the week on the downside, the Brazilian real declined 3.3%, and the South African rand fell 1.5%. The Chinese renminbi gained 0.79% versus the dollar (up 2.23% y-t-d).
Commodities Watch:
October 18 – Bloomberg (Salma El Wardany): “OPEC and its allies once again failed to pump enough oil to meet their output targets, exacerbating the supply deficit as the world recovers from the coronavirus pandemic. OPEC+ cut its production 15% deeper than planned in September, compared with 16% in August and 9% in July… This reflects the inability of some members -- including Angola, Nigeria and Azerbaijan -- to raise output to agreed volumes due to a lack of investment, exploration and other issues.”
October 22 – Bloomberg (Devika Krishna Kumar): “Stockpiles at the biggest U.S. crude depot are quickly approaching critically low levels. The last time that happened, crude cost more than $100 a barrel. The storage tanks in Cushing, Oklahoma, require a minimum level of oil to maintain normal operations, which traders generally believe is around 20 million barrels. Unusually for this time of year, stockpiles declined more than 4 million barrels over the past two weeks to 31 million and are expected to keep dropping rapidly due to the world's insatiable demand for U.S. light sweet crude.”
October 19 – Bloomberg (Jack Farchy and Mark Burton): “Trafigura Group withdrew a significant proportion of copper that’s been pulled from London Metal Exchange warehouses, contributing to wild swings in prices, according to people familiar... The drawdown has made the trading house the talk of the copper market, helping to drive available stocks to the lowest since 1974 and pushing a key spread to the highest on record. It’s also helped to spur outright copper prices higher, with benchmark futures up about 13% since the start of the month… And the move comes against a backdrop of very low inventories globally.”
October 19 – Bloomberg (Joe Carroll): “U.S. propane prices are so high and supplies so scarce that the market appears headed for ‘armageddon’ during the depths of winter, according to… IHS Markit Ltd. Stockpiles of the key heating fuel and manufacturing feedstock in the world’s biggest economy probably have already topped out for the year and will be stretched as cold weather descends in coming weeks, Edgar Ang, an IHS analyst, said… Prices for the first quarter of 2022 are so far above later-dated supplies that ‘it may indicate players are preparing for propane-market armageddon,’ Ang said. Some regions may face outright shortages before the end of winter, he said.”
The Bloomberg Commodities Index declined 0.9% (up 32.9% y-t-d). Spot Gold rose $25 to $1,793 (down 5.6%). Silver surged 4.3% to $24.32 (down 7.9%). WTI crude gained $1.48 to $83.76 (up 73%). Gasoline slipped 0.2% (up 76%), and Natural Gas fell 2.4% (up 108%). Copper sank 4.9% (up 28%). Wheat jumped 3.0% (up 18%), and Corn rose 2.3% (up 11%). Bitcoin fell $630, or 1.0%, this week to $60,621 (up 109%).
Coronavirus Watch:
October 21 – CNBC (Holly Ellyatt): “A newly-discovered mutation of the delta variant is being investigated in the U.K. amid worries that it could make the virus even more transmissible and undermine Covid-19 vaccines further. Still, there are many unknowns surrounding this descendent or subtype of the delta variant — formally known as AY.4.2 — which some are dubbing the new ‘delta plus’ variant.”
October 19 – Yahoo Finance (Aarthi Swaminathan): “The coronavirus pandemic hit the education sector exceptionally hard, and college enrollments plunged in 2020 to the lowest level since 2007. According to… the U.S. Census Bureau…, enrollment in schools dropped by 2.9 million from 2019 to 2020 and colleges by 615,000. Enrollment among those aged 35 and below has also dipped to the lowest level in over 20 years, with community colleges leading the decline.”
Market Mania Watch:
October 18 – CNBC (Robert Frank): “The wealthiest 10% of Americans now own 89% of all U.S. stocks held by households, a record high that highlights the stock market’s role in increasing wealth inequality. The top 1% gained more than $6.5 trillion in corporate equities and mutual fund wealth during the Covid-19 pandemic, while the bottom 90% added $1.2 trillion, according to… the Federal Reserve. The share of corporate equities and mutual funds owned by the top 10% reached the record high in the second quarter, while the bottom 90% of Americans held about 11% of individually held stocks, down from 12% before the pandemic… The total wealth of the top 1% now tops 32%, a record…. Nearly 70% of their wealth gains over the past year and a half — one of the fastest wealth booms in recent history — came from stocks. ‘The top 1% own a lot of stock, the rest of us own a little,’ said Steven Rosenthal, senior fellow, Urban-Brookings Tax Policy Center.”
October 16 – Wall Street Journal (Eliot Brown): “Archer Aviation Inc. is years from producing its only planned product, a four-passenger electric air taxi that the main U.S. regulator hasn’t yet certified. It hasn’t generated any revenue. Still, the co-founders of this three-year-old company got a huge payday last month, a $99 million special stock award that stands to quadruple if Archer hits other milestones… For years, Silicon Valley was known as a place where leaders often bucked American corporate customs when it came to pay. Rather than receiving large stock grants and salaries, company founders like Facebook Inc.’s Mark Zuckerberg and Amazon. com Inc.’s Jeff Bezos took little or nothing. Instead, they benefited from the rising value of stock they got by starting their companies. That philosophy has given way to a new trend: pay packages consisting of giant special stock awards. These make startup founders better compensated than CEOs who have taken the reins at some of the most valuable, established and profitable American corporations.”
October 15 – Financial Times (Mark Vandevelde): “From the top floors of a skyscraper that crowns the biggest New York office development since Rockefeller Center, a few hundred highly paid executives oversee one of the most pervasive enterprises that American capitalists have ever built. Less than half a century after it was started as a boutique investment vehicle run by two wealthy cousins, KKR has become a corporate behemoth. The firm’s $170bn lending arm manages as many assets as some regional banks, and that is just the start. If the mosaic of assets managed by the firm’s private markets division were folded into one entity and listed on the stock market, its market capitalisation could exceed $100bn — comparable to industrial giants such as General Electric, Lockheed Martin or 3M.”
October 21 – Bloomberg (Danielle Moran): “The pension fund for Houston’s firefighters is tip-toeing into cryptocurrency investing. The Houston Firefighters’ Relief and Retirement Fund, which has over $4 billion of assets, said it invested $25 million in Bitcoin and Ether through NYDIG, a Bitcoin-focused subsidiary of asset manager Stone Ridge. ‘I see this as another tool to manage my risk,’ said Ajit Singh, the chief investment officer for fund. ‘It has a positive expected return and it manages my risk. It has a low correlation to every other asset class.’”
October 19 – Bloomberg (Sabrina Willmer): “Apollo Global Management Inc. is seeking to almost double loan originations to $150 billion to capitalize on the fast-growing retirement services market. ‘We think this market dwarfs the alternatives market,’ Chief Executive Officer Marc Rowan said…, noting that it could be a $40 trillion opportunity. Helping drive this growth is a move by institutions to allocate a portion of their fixed income investments to private credit, he said.”
October 19 – Wall Street Journal (Joe Wallace): “Enthusiasm from individual traders is reshaping the market for nuclear fuel that generates a tenth of the world’s electricity and sending uranium-linked stocks higher. After languishing for a decade after the Fukushima disaster led Japan and Germany to close nuclear reactors, spot uranium prices have shot up to $47.10 a pound from $32.25 at the start of August… Behind the rally: a run-up in uranium prices driven by individual traders, who have flocked to a new trust that gives a cheap and easy way of betting on the nuclear-fuel market.”
October 20 – Bloomberg (Kamaron Leach): “Turns out, China’s tech crackdown is having few lasting effects on U.S. investor demand for the country’s megacap technology stocks. Since slumping to a low in mid-August, KraneShares CSI China Internet Fund (ticker KWEB) -- which holds shares of 53 U.S.-listed Chinese tech companies -- has jumped 21%. Cash flooding into the exchange-traded fund has helped buoy total assets to a record $8.1 billion…”
Market Instability Watch:
October 17 – Wall Street Journal (Gunjan Banerji): “A roaring trade in bullish crude-oil options says the 2021 energy rally is far from over. Traders once again are betting that the U.S. oil benchmark will surge above $100 a barrel, from a recent $82, as early as December. U.S. crude… is up 10% this month, and 70% this year, but it hasn’t hit $100 since the oil crash of 2014. Wagers across the Atlantic are even more aggressive. Some traders are betting Brent crude, the global benchmark, will hit a record high of $200 a barrel by December 2022…”
October 21 – Reuters (Ambar Warrick): “Turkey’s lira slumped to a record low on Thursday after the central bank cut interest rates by twice as much as expected, while most other emerging market currencies fell on concerns over rising global inflation. The lira dropped as much as 2.9% to a record low… after the central bank cut rates to 16% from 18%.”
Inflation Watch:
October 20 – CNBC (Weizhen Tan): “Retailers and manufacturers are overordering or placing orders too early amid panic over the massive supply chain crisis, and that’s making things much worse, those in the industry told CNBC. ‘Suddenly, retailers and manufacturers are overordering because of these supply chain issues, and that’s just leading to essentially an even worse scenario,’ Jonathan Savoir, CEO of supply chain technology firm Quincus told CNBC… Supply chains everywhere have been hit by massive disruptions this year, from container shortages to floods and Covid infections setting off port closures. That’s gotten worse because demand is rocketing…”
October 21 – Reuters (Siddharth Cavale and Anthony Deutsch): “For central bankers wrestling with the question of whether inflationary pressures are transitory, industry chiefs around the world have a clear message: prices are only going higher. Shortages of workers, fuel, cargo ships, semiconductors and building materials as the global economy bounces back after pandemic lockdowns have companies from electric car makers to chocolatiers scrambling to keep a lid on costs. Some of the world's biggest brands are now passing on higher prices to consumers and are warning any policymakers sitting on the inflationary fence that things are going to get worse. ‘We expect inflation to be higher next year than this year,’ said Graeme Pitkethly, finance chief at Unilever, which says its products, from Dove soap to Ben & Jerry's ice cream to Persil washing powder, are used by 2.5 billion people every day. Unilever raised prices 4.1% in the third quarter and said they would go up again by at least that in the final three months of 2021, and might accelerate even more next year.”
October 19 – Wall Street Journal (Sharon Terlep): “Procter & Gamble Co. said that it expects solid sales and profit growth over the next nine months, even as costs for everything from warehouse space to raw materials rise faster than the consumer-products company expected. From furniture makers to grocers, the world’s biggest companies are using their deep pockets, sprawling global operations and commanding market share to insulate themselves from the global supply-chain meltdown. They are also flexing their pricing power, taking advantage of consumers’ willingness to pay up for higher-end products. P&G, maker of Tide detergent and Crest toothpaste, said… it will start charging more for razors and certain beauty and oral care products, price increases that come in addition to earlier moves to start charging more for staples from diapers to toilet paper.”
October 19 – CNBC (Diana Olick): “Demand for single-family rental homes is showing no sign of easing up, and that is pushing rents through the roof, especially for the highest-priced properties. As a result, investors are now flooding into the market again, after falling back a bit during the first year of the Covid pandemic. Nationally, rents rose 9.3% in August, year over year…, according to CoreLogic. For the first time since before the pandemic hit, all major metropolitan housing markets covered by CoreLogic showed positive rent growth. Miami led the way with a 21% gain, followed by Phoenix at 19% and Las Vegas at 15%. ‘Converging economic trends are driving a surge in single-family rent prices, and consumer confidence has driven an uptick in demand for both renters and buyers,’ Molly Boesel, economist at CoreLogic, said... ‘The ongoing preference toward more living space — and slim for-sale inventory — is forcing would-be buyers back into renting, putting significant strain on the single-family rental market.’”
October 20 – Wall Street Journal (Carol Ryan): “Confident consumers have swallowed higher supermarket prices so far this year, but the risk of indigestion is growing. For companies that make staple goods, asking for more money is delicate. On Wednesday, the world’s biggest food company Nestlé said sales increased by an impressive 6.5% in the third quarter compared with the same period last year. Demand for its products is strong and Nestlé has been able to pass on the higher cost of inputs such as plastic and transport to shoppers, a sign of healthy pricing power…. Dannon yogurt-maker Danone said… its input costs will be 8% higher this year… Inflation is now so hot that staples companies feel they have no option but to pass it on.”
October 19 – Wall Street Journal (Carol Ryan): “No matter the mode of transport, moving goods from A to B has become more expensive. The quirks of consumer companies’ supply chains mean they won’t all be equally hit. Demand for consumer products has been unusually strong since countries began to reopen their economies. This has put pressure on global transport routes and increased the cost of logistics. In the first quarter of 2020, a company could ship goods by sea for $1,600 per 40-foot equivalent unit, or roughly one large shipping container. By September 2021, the bill had climbed to $10,200, Bernstein analysis shows. Air and road travel is also pricier, as there are fewer jets in the skies and transport firms are struggling to hire drivers. Europe is short of approximately 400,000 truckers, according to Transport Intelligence estimates. A similar shortage in the U.S. pushed spot rates for dry trucks up 13% on the year by the third quarter.”
October 21 – Bloomberg (Elizabeth Stanton): “Bond traders are boosting expectations for U.S. inflation to levels not seen in over a decade amid concern supply-chain bottlenecks and resurgent consumer demand will keep lifting the cost of goods and services. The breakeven rate for five-year Treasury inflation-protected securities surged Thursday to the highest since the maturity was reintroduced in 2004. The move was particularly striking as it coincided with the biggest-ever auction of the tenor.”
Biden Administration Watch:
October 22 – Financial Times (James Politi, Demetri Sevastopulo and Andy Bounds): “President Joe Biden vowed to defend Taiwan from Chinese military action, in comments that contradicted US policy to maintain an ambiguous stance over whether it would come to its rescue. Asked whether the US military would defend the country in the event of a Chinese attack, the president said: ‘Yes, we have a commitment to do that.’ Biden made the comments during a wide-ranging CNN town hall… They appeared to upend a decades-long policy of ‘strategic ambiguity’, under which the US refuses to say whether it would defend it from a Chinese attack. The policy is designed to discourage Taipei from declaring independence and to give Beijing pause about taking military action to seize the country, which it views as Chinese territory.”
October 18 – Associated Press (Jonathan Lemire and Zeke Miller): “President Joe Biden is entering a crucial two weeks for his ambitious agenda, racing to conclude contentious congressional negotiations ahead of both domestic deadlines and a chance to showcase his administration’s accomplishments on a global stage. Biden and his fellow Democrats are struggling to bridge intraparty divides by month’s end to pass a bipartisan infrastructure bill and a larger social services package. The president hopes to nail down both before Air Force One lifts off for Europe on Oct. 28 for a pair of world leader summits, including the most ambitious climate change meeting in years. But that goal has been jeopardized by fractures among Democrats, imperiling the fate of promised sweeping new efforts to grapple with climate change.”
October 16 – Wall Street Journal (Richard Rubin and Ken Thomas): “Many Democrats are willing—even eager—to enact tax increases on high-income households and big businesses and campaign on them in next year’s midterm elections, embracing a stance that the party has struggled with in the past. Although Democrats’ slim majorities have forced them to abandon some of their most sweeping tax proposals, President Biden and congressional Democrats are still seeking to raise about $2 trillion over a decade from businesses and high-income households. Democrats say their focus on the top tier of households would help combat growing wealth inequality. The money would help pay for the healthcare, education and climate-change programs…”
October 18 – Reuters (Daphne Psaledakis and Matt Spetalnick): “President Joe Biden's administration… announced a set of recommendations to revamp its use of economic sanctions to make them a more effective tool of U.S. foreign policy but warned that more had to be done to protect against the threat posed by the rise of cryptocurrencies. Following a broad review launched shortly after Biden took office…, the U.S. Treasury Department unveiled a revised framework intended to take a more surgical approach to sanctions instead of the blunt-force method favored by his predecessor, Donald Trump. The Treasury warned that countries reducing the use of the U.S. dollar and exposure to the U.S. financial system could erode the effectiveness of sanctions, while digital currencies and other technological innovations also pose a risk to the tool's success.”
Federal Reserve Watch:
October 19 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell, during his August speech at the annual Jackson Hole symposium, laid out five reasons supporting his view that the current run of high inflation will go away. So far, they aren’t holding up very well. In fact, there are weaknesses in each of the five planks that, if not thwarting it altogether, at least undermine the Fed’s inflation position and give markets and consumers plenty to watch… Powell’s five-point inflation checklist goes like this: Lack of broad-based pressures; lower moves in high-inflation items; low wage pressures; tepid inflation expectations, and long-lasting forces that have kept inflation low globally.”
October 21 – New York Times (Jeanna Smialek): “On March 23 last year, as the Federal Reserve was taking extraordinary steps to shore up financial markets at the onset of the pandemic, the central bank’s ethics office in Washington sent out a warning. Officials might want to avoid unnecessary trading for a few months as the Fed dived deeper into markets, the Board of Governors’ ethics unit suggested in an email, a message that was passed along to regional bank presidents by their own ethics officers. The guidance came just as the Fed was unveiling a sweeping rescue package aimed at backstopping or rescuing markets, including those for corporate bonds and midsize-business debt. It appears to have been heeded: Most regional presidents and governors of the Fed did not engage in active trading in April, based on their disclosures.”
October 19 – Bloomberg (Edward Bolingbroke): “Compared with the rest of the world’s central banks, the market’s timetable for when the Federal Reserve will start raising interest rates looks positively subdued. Most others, with the exception of the European Central Bank, are expected to move at a far speedier pace. U.S. traders are now pricing a full rate hike into the Fed’s September policy meeting next year. But by that time, New Zealand’s central bank would have hiked five times, Canada’s three times and England’s four times, according to the interest-rate swaps market.”
October 19 – Financial Times (Howard Schneider and Ann Saphir): “If inflation keeps rising at its current pace in coming months rather than subsiding as expected, Federal Reserve policymakers may need to adopt ‘a more aggressive policy response’ next year, Fed Governor Christopher Waller said… For now, Waller said… he continues to believes the economy has seen the worst of the most recent coronavirus wave, that labor and other supply shortages will ease over time and that ‘the escalation of inflation will be transitory,’ with price increases moving back to the Fed's 2% goal next year. That would mean any increase to the Fed's key policy interest rate from its current near-zero level ‘is still some time off,’ he said…”
October 20 – Bloomberg (Steve Matthews): “Federal Reserve Governor Randal Quarles said he favors an initial move to slow monetary stimulus next month and is concerned by a broadening of inflationary pressures that could require a policy response. ‘I would support a decision at our November meeting to start reducing these purchases,’ he said… to a Milken Institute conference in Los Angeles, referring to the central bank’s bond-buying program, which is currently running at $120 billion a month… ‘There is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments,’ he said.”
October 18 – Bloomberg (Steve Matthews): “The Federal Reserve’s army of more than 400 Ph.D. economists has a message on inflation for policy makers and the American public: Chill out. While some officials are publicly anxious about rising prices and Wall Street has ramped up its forecasts, the Fed’s staff in Washington predicts inflation will be back under 2% in 2022… As well as being below the FOMC’s long-term 2% target, it’s less than half the 4.3% pace that the Fed’s preferred measure of price pressures recorded in the year through August. ‘You should take it very seriously,’ said Claudia Sahm, a former Fed economist and senior fellow at the Jain Family Institute. ‘It doesn’t mean it’s right, but you have the top forecasters in the world’ preparing the numbers. ‘Looking over time, there is no forecasting shop that can come even close to the board’s analysis of the near-term economy.’”
U.S. Bubble Watch:
October 20 – Reuters (Ann Saphir and Lindsay Dunsmuir): “U.S. employers reported significant increases in prices and wages even as economic growth decelerated to a ‘modest to moderate’ pace in September and early October, the Federal Reserve said… Employment increased, though labor growth was dampened by a low supply of workers, despite wage increases designed to attract new hires and keep existing employees, the report said. Most districts reported ‘significantly elevated prices,’ with some expecting prices to stay high or increase further, and others expecting inflation to moderate. ‘Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand,’ the Fed districts reported… Companies in most districts were feeling price and wage pressures from supply chain bottlenecks as well as from labor constraints. The Philadelphia Fed reported on one firm that was offering as much as ‘$90,000 for a second-year CPA position that might have commanded $65,000 before the pandemic.’ The Cleveland Fed said nearly 60% of its contacts reported raising wages recently…”
October 21 – CNBC (Jeff Cox): “Weekly jobless claims hit another pandemic-era low last week as the elimination of enhanced benefits sent fewer people to the unemployment line. First-time filings for unemployment insurance totaled 290,000 for the week ended Oct. 16, down 6,000 from the previous period… This was the second week in a row that claims ran below 300,000.”
October 18 – Associated Press: “Farmers and Deere & Co. suppliers are worried about what the strike at the tractor maker’s factories will mean for their livelihoods. More than 10,000 Deere employees went on strike last week at 14 Deere factories in Illinois, Iowa, Kansas, Colorado and Georgia after the United Auto Workers union rejected a contract offer. The longer the strike continues, the greater the impact will be on the communities around the plants. ‘If this gets sorted out in a couple of days, great,’ Brian Jones, who farms in central Iowa, told the Des Moines Register. ‘But if it drags out for weeks, you start to get a little concerned about things.’”
October 18 – Reuters (Ben Klayman): “Thousands of workers remain on strike across the United States demanding higher pay and better conditions despite Hollywood make-up artists and camera operators reaching a deal over the weekend to avoid a walkout, and the tight jobs market has only emboldened them. Kevin Bradshaw is an employee at Kellogg Co's cereal plant in Memphis…, where most of North America's Frosted Flakes are made. He feels anything but great about cuts to healthcare coverage, retirement benefits and vacation time that union officials say the company is pushing for from about 1,400 workers on strike since Oct. 5 at plants in Michigan, Nebraska, Pennsylvania and Tennessee. ‘Enough is enough,’ said Bradshaw, vice president of Bakery, Confectionary, Tobacco Workers and Grain Millers International Union Local 252G... ‘We can't afford to keep giving away things to a company that financially has made record-breaking returns.’”
October 16 – CNN (Chris Isidore): “Workers are saying enough is enough. And many of them are either hitting the picket lines or quitting their jobs as a result. The changing dynamics of the US labor market, which has put employees rather than employers in the driver's seat in a way not seen for decades, is allowing unions to flex their muscle… The overwhelming majority of strikers and potential strikers are doing so for the first time in their careers. Many say they are driven not just by wages or benefits. They say they are striking, or planning to strike, in a bid to do their jobs the way they believe they should be done, and to gain basic improvements in the quality of their lives… One of the main issues running through many of these strikes, or looming strikes, is workers' anger.”
October 18 – Wall Street Journal (Jesse Newman): “Union leaders are pressing to increase their ranks and secure gains for their members as workers demand more from their employers and companies struggle with labor shortages and snarled supply chains. A walkout by production workers for farm and construction machinery company Deere & Co. that began Thursday followed recent stoppages at snack producer Mondelez International Inc., commercial truck maker Volvo and breakfast-cereal giant Kellogg Co. Labor leaders elsewhere this year have worked to unionize Starbucks Corp. baristas and Amazon.com Inc. warehouse workers… Union officials said workers are motivated by lingering frustration over their hours, pay and concerns for their health as some have held front-line jobs through the Covid-19 pandemic. Employees this year have pushed for higher wages, expanded benefits, safer workplaces and added staffing.”
October 18 – Reuters (Lucia Mutikani): “Production at U.S. factories fell by the most in seven months in September as an ongoing global shortage of semiconductors depressed motor vehicle output, further evidence that supply constraints were hampering economic growth… The report… followed on the heels of data last week showing a solid rise in inflation in September. Though retail sales rose last month, that reflected higher prices for motor vehicles. ‘While the hurricane disruption and weather effects will fade, labor and product shortages are still worsening, which will continue to weigh on manufacturing output over the coming months and quarters,’ said Michael Pearce, a senior U.S. economist at Capital Economics…”
October 21 – Bloomberg (Josh Wingrove, Jill R Shah, and Brendan Case): “U.S. ports are full of goods, U.S. yards and warehouses are full of goods, hardly anyone wants to drive a truck to pick up and deliver those goods and those who do sit waiting in lines, often unpaid. And Americans continue to buy more stuff from abroad than ever. A supply-chain crunch that stretches from overseas manufacturers into American ports and retail stores threatens the U.S. holiday shopping season. President Joe Biden and his administration have been working for months to smooth out bottlenecks, but his power to influence what is almost entirely a private-sector problem is limited.”
October 19 – Bloomberg (Brendan Case, Leslie Patton, and Kim Chipman): “In Denver, public-school children are facing shortages of milk. In Chicago, a local market is running short of canned goods and boxed items. But there’s plenty of food. There just isn’t always enough processing and transportation capacity to meet rising demand as the economy revs up. More than a year and a half after the coronavirus pandemic upended daily life, the supply of basic goods at U.S. grocery stores and restaurants is once again falling victim to intermittent shortages and delays. ‘I never imagined that we’d be here in October 2021 talking about supply-chain problems, but it’s a reality,’ said Vivek Sankaran, chief executive officer of Albertsons Cos., who echoed the laments of other retailers. ‘Any given day, you’re going to have something missing in our stores, and it’s across categories.’”
October 21 – Bloomberg (Olivia Rockeman): “Nearly half of New York manufacturers and one-third of services firms expect supply-chain challenges to worsen in the month ahead, according to a survey from the Federal Reserve Bank of New York. Moreover, less than 10% of businesses expect the supply of materials to improve in the next month, with the outlook particularly pessimistic among firms in the manufacturing, construction, retail, transportation and warehousing, and leisure and hospitality industries…”
October 19 – CNN (Vanessa Yurkevich): “The trucking industry is short 80,000 drivers, a record high, Chris Spear, President and CEO of the American Trucking Associations, tells CNN. That's a 30% increase from before the pandemic… ‘That's a pretty big spike,’ Spear added. Many drivers are retiring, dropping out of the industry. Increased consumer demand, prompting a need for more drivers, also plays a big role in the shortfall. This comes at a time when US ports are backlogged -- primarily because there are few trucks and drivers to pick up cargo -- creating a supply chain slowdown.”
October 20 – CNBC (Diana Olick): “Climbing mortgage interest rates caused another drop in mortgage demand for both refinances and home purchases. Total application volume fell 6.3% last week compared with the previous week… Mortgage applications to purchase a home dropped 5% for the week and were 12% lower year over year.”
October 19 – Reuters (Lucia Mutikani): “U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labor, supporting expectations that economic growth slowed sharply in the third quarter… Housing starts dropped 1.6% to a seasonally adjusted annual rate of 1.555 million units last month, the lowest level since April. Data for August was revised down to a rate of 1.580 million units from the previously reported 1.615 million units… Prices for copper, another essential material in home building, have soared more than 16% since the end of September, buoyed by decades-low supplies.”
October 19 – Bloomberg (Jordan Yadoo): “Homebuilders appear to be taking longer than ever to get from start to finish. The number of houses in the U.S. that remain under construction exceeded the number of those completed by the most on record in September… It’s the fourth month in a row that so-called completions have lagged… The number of houses under construction rose 1.3% to a rate of 1.43 million units, the highest since 1974. Completions fell 4.6% to a rate of 1.24 million units, the lowest since August 2020…”
October 18 – CNBC (Diana Olick): “The nation’s homebuilders aren’t seeing any relief from supply chain issues that have slowed construction recently, but high buyer demand appears to be making up for it. Builder confidence in the single-family home construction market rose 4 points to 80 in October on the National Association of Home Builders/Wells Fargo Housing Market Index. That is still down from 85 in October 2020 and from the record high 90 in November of last year. Anything above 50 is considered positive. ‘Although demand and home sales remain strong, builders continue to grapple with ongoing supply chain disruptions and labor shortages that are delaying completion times and putting upward pressure on building material and home prices,’ said NAHB Chairman Chuck Fowke… Of the index’s three components, current sales conditions rose 5 points to 87. Sales expectations in the next six months increased 3 points to 84 and buyer traffic climbed 4 points to 65. The biggest concern for builders now is affordability, as they raise prices to meet the rising costs of land, labor and materials.”
October 19 – Bloomberg (Simon Casey): “Banks are gradually offering more credit to U.S. shale oil and natural gas producers as the industry recovers from last year’s contraction and energy prices rally. So-called borrowing bases will increase as much as 20% during the imminent round of talks between drillers and lenders, according to most respondents in a survey conducted by law firm Haynes & Boone LLP. The findings indicate a continued improvement after the dire conditions experienced in the oil and gas sector last year, when the pandemic and global gluts led to a slump in energy prices and prompted banks to cut back on lending.”
October 18 – Bloomberg (Patrick Clark): “Zillow Group Inc.’s decision to stop pursuing new home purchases comes as the U.S. housing market appears to be cooling off slightly, showcasing the challenges for an emerging high-tech spin on home-flipping. The online listing giant has been buying and selling thousands of homes in recent months through its iBuying program, which depends on the company’s ability to use number-crunching software to predict where home prices are going. The company blamed its decision to stop new acquisitions for the rest of the year on the labor shortages roiling the U.S. economy.”
Fixed-Income Bubble Watch:
October 19 – Bloomberg (Finbarr Flynn): “Global bond investors face an old enemy -- inflation -- and the universe of fixed-income assets doesn’t look to offer much in the way of shelter. U.S. Treasuries, European sovereigns, U.K. gilts and emerging-market credit are all set to lose money over the 12 months through September as dwindling coupons provide little cushion against rising yields… Adding to the potentially toxic environment for bonds is the prospect of major central banks unwinding debt purchases and raising interest rates. Government and corporate bonds globally have already lost 4.4% this year, the biggest decline for any similar period since 2005…”
October 18 – Bloomberg (Jack Pitcher): “Goldman Sachs… tapped the U.S. investment-grade bond market with a $9 billion sale, joining peers Bank of America Corp. and Morgan Stanley in selling new debt after reporting strong third-quarter results.”
China Watch:
October 15 – Financial Times (Kevin Rudd): “Since coming to power, Chinese president Xi Jinping has had to deal with three overriding priorities. First, a domestic economy that is both slowing and increasingly unequal. Second, an adversarial geopolitical environment, resulting largely from Xi’s own quest to change the regional and global status quo. And, finally and most importantly, making sure he secures a third term at the Chinese Communist party’s key 20th Party Congress next year. Enter Evergrande and its growing list of missed bond payments. This behemoth, with $300bn in leverage, lies at the centre of a property sector that represents 29% of Chinese gross domestic product and is more than $5tn in debt. Some 41% of the Chinese banking system’s assets are associated with the property sector, and 78% of the invested wealth of urban Chinese is in housing. Given the millions of creditors, shareholders, bondholders and (unbuilt) apartment owners, Evergrande has become a problem for Xi politically, economically and globally.”
October 19 – South China Morning Post (Orange Wang): “A worse-than-expected third quarter economic performance for China has indicated there could be more pain ahead in the final three months of the year, while stoking fears of ‘stagflation’, analysts say. On Monday, new data from the National Bureau of Statistics showed China’s gross domestic product (GDP) for the three months ending September grew by 4.9% from a year ago, missing market expectations of 5% growth and well below the 7.9% gain seen in the second quarter and the blistering 18.3% expansion between January and March.”
October 17 – Bloomberg: “China’s residential property slump dragged on last month as the debt crisis at China Evergrande Group spread to other developers, keeping buyers away. Home sales by value tumbled 16.9% in September from a year earlier, following a 19.7% drop in August… Real estate investment slid for the first time since the onset of the coronavirus shut swathes of the economy at the start of last year, down 3.5% from a year earlier… ‘No one is buying new properties because they are getting afraid,’ Helen Qiao, chief Greater China economist at Bank of America Corp, said... ‘So we could see further downside on the economy.’”
October 19 – Bloomberg: “China’s property and construction industries contracted in the third quarter for the first time since the start of the pandemic, weighed by a slump in real estate. Output in the real-estate industry, a mainstay of the economy as its activities supports sectors from furniture to commodities, shrank 1.6% from a year ago… The sector grew 7.1% in the three months through June and this contraction is the first since the first quarter of 2020. The construction industry’s output fell by 1.8%, also its first decline since the pandemic. Before the pandemic, that sector had never contracted in data back to 1992.”
October 18 – Bloomberg (Sofia Horta e Costa): “For months in the runup to the 2008 financial crisis, banking heavyweights from Federal Reserve Chair Ben Bernanke on down said the turmoil in subprime mortgages would be ‘contained.’ That phrase is now making a comeback in Beijing as regulators try to reassure markets that the world’s second-largest economy can weather the crisis at China Evergrande Group. Investors are hoping Chinese policy makers prove more adept at ringfencing the damage than their Wall Street counterparts were. People’s Bank of China Governor Yi Gang said… that authorities ‘can contain the Evergrande risk’ even as the embattled developer ‘casts a little bit of concern.’ Another PBOC official called the situation ‘controllable’ at a news briefing…, echoing statements from several of the country’s largest lenders in recent weeks.”
October 17 – Bloomberg: “China’s housing slump and electricity shortages dragged down economic growth last quarter, with signs there will be more pain to come as the country heads into winter and property curbs remain. Gross domestic product expanded 4.9% from a year earlier…, down from 7.9% in the previous quarter, and largely in line with economists’ projections. Beijing has signaled it’s not rushing to stimulate the economy, suggesting growth may continue to slow in the coming months.”
October 18 – Reuters (Muyu Xu and Oksana Kobzeva, Jason Hovet): “China's power shortages hit growth in the world's second biggest economy, threatening more pain for global supply chains, while Europe's gas squeeze looked set to continue as Russia's Gazprom showed no sign of hiking exports to the region in October. Coal, oil and gas prices have all rocketed higher in recent weeks hammering utilities and consumers from Beijing to Brussels, raising inflationary pressures and putting at risk a global recovery from the COVID-19 pandemic. The red-hot market underscores the scale of the task facing world leaders, who are under pressure to map out plans to wean their economies off fossil fuels in preparation for COP26 summit climate talks that start on Oct. 31. Europe, which relies on Russia for 35% of its gas supplies, has seen its benchmark gas price rise more than 350% this year.”
October 17 – Reuters (Liangping Gao and Ryan Woo): “China's September new construction starts slumped for a sixth straight month, the longest spate of monthly declines since 2015, as cash-strapped developers put a pause on projects in the wake of tighter regulations on borrowing. New construction starts in September fell 13.54% from a year earlier, the third month of double-digit declines… That marks the longest downtrend since declines in March-August 2015, the last property malaise.”
October 22 – Bloomberg: “China Evergrande Group made an interest payment on a dollar bond ahead of a Saturday deadline, sending the embattled developer’s stock and bonds higher. The company wired the $83.5 million payment and bondholders will receive the funds before Saturday… A 30-day grace period for the bond coupon would have expired on Saturday after the firm missed the original payment date… The payment offers some temporary relief for the world’s most indebted developer, giving it more time to sell assets and raise cash to pay creditors and suppliers. The reprieve may be short-lived however, with more than $300 billion in liabilities still to be paid, analysts said.”
October 20 – Bloomberg (Sofia Horta e Costa): “China Evergrande Group terminated discussions to sell its property-management arm, a deal that would have given the cash-strapped developer a major cash infusion as it faces impending debt payments. Evergrande requested that its long-halted shares resume trading on Thursday and said that it ended talks last week to sell 50.1% of its stock in Evergrande Property Services Group Ltd. for about HK$20 billion ($2.6bn).”
October 20 – Bloomberg: “China Evergrande Group scrapped talks to offload a stake in its property-management arm and said real estate sales plunged about 97% during peak home-buying season, worsening its liquidity crisis on the eve of a dollar-bond deadline that could tip the company into default. In statements to the Hong Kong exchange late Wednesday, Evergrande added that it had made no further progress on asset sales and may not be able to meet its financial obligations.”
October 19 – Financial Times: “Sinic Holdings has added to a growing list of defaults across China’s contracting real estate sector as markets braced for a deadline this weekend for developer Evergrande to settle interest payments on its offshore bonds. Hong Kong-listed Sinic defaulted on $246m of bonds that were due to mature on Monday… and adding to a $206m default from luxury developer Fantasia Holdings this month. Borrowing costs on Asia’s bond market for riskier corporate issuers have soared in the weeks since Evergrande, the world’s most indebted property developer, missed bond payments in late September and ignited fears globally over a slowdown in China’s real estate sector.”
October 20 – Bloomberg: “Chinese property firm Kaisa Group Holdings Ltd. fell further in a volatile credit market after it earlier canceled meetings with some investors that had been scheduled to take place this week… The firm is China’s 26th biggest property developer by contracted sales as of August, considerably smaller than Evergrande which ranks 3rd. Still, it has about $11.6 billion in outstanding offshore bonds just over half that of Evergrande’s.”
October 21 – Reuters (Samuel Shen, Marc Jones and Clare Jim): “Numbers don't lie, you just need to be looking at the right ones. That's the problem for investors searching for the next trouble spot in the Chinese real estate sector as industry giant China Evergrande Group lumbers towards what is expected to be the country's largest-ever corporate default. The figures on the books sometimes don't tell the full story. Since Beijing started clamping down on corporate debt in 2017, many real estate developers have turned to off-balance-sheet vehicles to borrow money and skirt regulatory scrutiny, analysts and lawyers say. Joint ventures are a popular choice because, unless a company holds a controlling interest in one, it can keep details of it and the debt it acquires off its balance sheet. ‘Nearly every developer has borrowings in disguise. The sector's debt problem is worse than what you see,’ said He Siwei, attorney at Hui Ye Law Firm. Chinese developers owed 33.5 trillion yuan ($5.24 trillion) through various channels at the end of June, Nomura estimates…, adding ‘there are definitely other obscure financing channels yet to be covered.’ Private bonds issued by shell companies in offshore locations have emerged as a new concern.”
October 21 – CNBC (Yen Nee Lee): “China’s real estate sector has to be ‘substantially smaller’ to keep the overall economy healthy and stable, said a top expert on the Chinese housing market. ‘We have too big of a risk in the sector. We built too much housing, so the stabilization first has to come [from] trimming the sector,’ Li Gan, an economics professor at Texas A&M University, told CNBC… Gan estimated that about 20% of China’s housing stock is vacant as buyers rack up second and third properties as investments. Even then, developers continue to build millions of new units each year, he said.”
October 21 – Bloomberg: “China’s local governments are struggling to find good infrastructure projects to invest in this year, meaning there’s less spending to support the economy just as growth is slowing. Tighter controls over how local governments spend their money has resulted in a dearth of good investments, with cities and provinces slowing down their borrowing this year. About 1.15 trillion yuan ($180bn) of this year’s 3.65 trillion yuan special bond quota was still unused as of Oct. 21…”
October 18 – Bloomberg: “Chinese President Xi Jinping took a big gamble shaking up key industries ahead of a political gathering that could decide whether he rules the country indefinitely. Now he’s starting to hit the brakes. In recent weeks Chinese authorities have moved to soften sweeping policies designed to make the economy less dependent on debt, monopolies and fossil fuels. While Beijing’s edicts chastened China’s corporate elites, they also began showing signs of hitting ordinary citizens with higher power bills, lost savings and… potentially fewer jobs. Premier Li Keqiang expressed caution a week ago, saying China needed to rethink the pace of the country’s energy transition as a power crisis threatened to keep factories in the dark and homes without heat during the winter.”
October 20 – Financial Times (Edward White): “China’s internet watchdog has said articles from Caixin, one of the most prominent and trusted Chinese business publications, can no longer be republished by online news services, in the latest blow to journalism and free speech in the country. The Cyberspace Administration of China (CAC) removed Caixin from a list of more than 1,300 media sources approved for domestic republishing. China’s media landscape is facing immense pressure as the Chinese Communist party, under President Xi Jinping, redoubles efforts to control access to information in the world’s most populous country.”
October 19 – New York Times (Vivian Wang): “As China Evergrande Group teeters on the edge of collapse, videos of protesting home buyers have flooded social media. Online government message boards teem with complaints and pleas for intervention to save the huge property developer. The hashtag ‘What does Evergrande mean for the real estate market?’ has been viewed more than 160 million times on one platform. But if trouble threatens for China’s economy, you wouldn’t know it from reading the country’s front pages. The name ‘Evergrande’ has barely been mentioned by top state-run news outlets in recent weeks, even as the company’s uncertain fate has rattled global financial markets. Coverage of its recent troubles has been concentrated in a handful of business publications.”
Central Banker Watch:
October 20 – Reuters (Frank Siebelt and Francesco Canepa): “Bundesbank chief Jens Weidmann, who… announced his decision to stand down more than five years early, led a decade-long fight inside the European Central Bank against the easy-money policies espoused by successive ECB presidents. Back in 2012, the German central bank chief was the lone dissenter when the ECB unveiled plans to help countries in distress after the global financial crisis, saying they were ‘tantamount to financing governments by printing banknotes’. In July, he was among a handful of policymakers who opposed the ECB’s pledge to keep interest rates at record lows until inflation stabilises at 2% as part of efforts to stimulate a euro zone recovery after pandemic lockdowns.”
October 17 – Reuters (William Schomberg): “Bank of England Governor Andrew Bailey sent a fresh signal… that the British central bank is gearing up to raise interest rates for the first time since the onset of the coronavirus crisis as inflation risks mount. Bailey said he continued to believe that the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer, raising the risk of higher inflation expectations. ‘Monetary policy cannot solve supply-side problems - but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,’ Bailey said… ‘And that's why we at the Bank of England have signalled, and this is another such signal, that we will have to act,’ he said. ‘But of course that action comes in our monetary policy meetings.’”
October 18 – Bloomberg (David Goodman): “The Bank of England may be on course to unleash the most aggressive monetary tightening cycle this century just months after the U.K. emerged from the Covid-19 recession, if investor bets are to be believed. Following a rapid jump in bets on BOE action…, pricing currently implies officials will raise interest rates to 1.25% by the end of 2022 -- 115 bps above the current level. The total impact is even higher. Under guidance released in August, the central bank could stop reinvesting bonds held under its quantitative easing program once borrowing costs reach 0.5%, if economic circumstances allow. That level is currently priced in for December.”
October 20 – Bloomberg (Marton Eder): “Investors hunting for returns in an era of low interest rates risk causing a financial crisis down the road, according to European Central Bank Governing Council member Robert Holzmann. In a speech…, the governor of Austria’s central bank said officials should be wary of the side effects of the unconventional measures enacted to support the economy during the pandemic… ‘The problem we are faced with now is that financial market participants searching for yield in the current low interest rate environment could also be taking – and are, to some extent, already taking – higher risks,’ Holzmann said. ‘Such behavior could sow the seeds of future financial crises.’”
Global Bubble Watch:
October 19 – Associated Press (David McHugh, Colleen Barry, Joe McDonald and Tatiana Pollastri): “Power shortages are turning out streetlights and shutting down factories in China. The poor in Brazil are choosing between paying for food or electricity. German corn and wheat farmers can’t find fertilizer, made using natural gas. And fears are rising that Europe will have to ration electricity if it’s a cold winter. The world is gripped by an energy crunch — a fierce squeeze on some of the key markets for natural gas, oil and other fuels that keep the global economy running and the lights and heat on in homes. Heading into winter, that has meant higher utility bills, more expensive products and growing concern about how energy-consuming Europe and China will recover from the COVID-19 pandemic. Rising energy costs are another pressure point on businesses and consumers already feeling the pinch of higher prices from supply chain and labor constraints.”
October 20 – Financial Times (Delphine Strauss): “From striking refuse collectors in Brighton on England’s south coast to the thousands of employees who have walked out at US tractor maker John Deere, wage disputes are becoming a flashpoint for investors and policymakers as developed economies recover from the pandemic. Emboldened by staff shortages, rising energy prices and living costs, employees are increasingly butting heads with their employers over salaries. One of Germany’s biggest trade unions this month asked for an inflation-busting 5.3% pay rise. Some worry growing wage pressures could unleash a 1970s-style inflationary spiral that prompts interest rate increases that undercut frothy stock markets. As the IMF warned last week, central banks need to be ‘very, very vigilant’ of rising energy and other costs feeding into higher wages and core prices.”
October 20 – Wall Street Journal (Greg Ip): “Nothing embodied the promise of globalization more than the humble supply chain. Thanks to the integration of production across and within borders, consumers have come to expect infinite variety, instantly available. That is now under siege. The supply-chain crisis of 2021 is fueling the retreat from globalization, much as the global financial crisis of 2008 did.”
October 19 – Bloomberg: “Chinese authorities are imposing new hurdles for fertilizer exporters amid growing concerns over surging power prices and food production, a move that could worsen a global price shock and food inflation. Some Chinese fertilizer cargoes ready to be shipped are being held up by local authorities for additional checks or to obtain new export certificates… The supplies will either end up being sold on the domestic market or face delays in being exported, said the people… The increased scrutiny comes as global fertilizers costs have soared to new records, spurred by energy crises in Europe and China as coal and natural gas are important feedstocks. The cost increase comes at a particularly worrying time, with global food prices hitting a 10-year high.”
October 20 – Bloomberg (Shelly Hagan): “Inflation exceeded the Bank of Canada’s control range for a sixth straight month, worsened by supply chain bottlenecks that are proving stubbornly persistent. The consumer price index rose 4.4% in September from a year earlier… That’s the highest reading since February 2003…”
October 17 – Bloomberg (Matthew Brockett): “New Zealand inflation surged at the fastest pace in 10 years in the third quarter, reinforcing bets that the central bank will keep raising interest rates. The currency rose and bond yields climbed to the highest level in almost three years after data showed the annual inflation rate jumped to 4.9% from 3.3% in the second quarter. Economists had forecast 4.2%. Consumer prices advanced 2.2% from three months earlier…”
October 19 – Financial Times (Neil Hume): “The world’s largest carmakers could face a potentially crippling shortage of aluminium, as China’s power crisis threatens supplies of a key component used to make the lightweight metal. Magnesium is an essential raw material for the production of aluminium alloys, which are used in everything from gearboxes, to steering columns, seat frames and fuel tank covers. Owing to production curbs in China, which has a near monopoly on the magnesium market, stockpiles of the metal are running dangerously low across Europe.”
EM Watch:
October 22 – Bloomberg (Martha Beck and Vinícius Andrade): “The rout in Brazilian markets deepened Friday after key members of the economic team left in protest over plans to boost welfare spending that will break a key fiscal rule seen as essential to keeping investor confidence in the country. The real fell 1%, extending its losses this week to 4.5%. Stocks dropped as much as 4.2%, pushing the decline since Monday to more than 9% and set to enter a bear market. The slump is adding pressure on the central bank to raise rates more aggressively to tame inflation…”
October 19 – Reuters (Marcela Ayres and Jose De Castro): “Brazil's government canceled an announcement for a generous new welfare program on Thursday, after a central bank currency intervention failed to calm market concerns about looser government spending ahead of next year's election. President Jair Bolsonaro, who has seen his poll numbers fall over his mishandling of the pandemic, a weak economy and rising inflation, summoned ministers for a 5 p.m. announcement of the new welfare program… But just minutes before the official release of the expanded welfare plan, which had spooked investors and deepened real losses against the dollar , the event was suspended…”
October 20 – Associated Press (Debora Alvares and Diane Jeantet): “A Brazilian Senate report recommended… pursuing crimes against humanity and other charges against President Jair Bolsonaro for allegedly bungling Brazil’s response to COVID-19 and contributing to the country having the world’s second-highest pandemic death toll. Sen. Renan Calheiros presented the proposal to a committee of colleagues that has spent six months investigating the Brazilian government’s management of the pandemic. The decision on whether to file most of the charges would be up to Brazil’s prosecutor-general, a Bolsonaro appointee and ally.”
October 20 – Reuters (Daren Butler): “President Tayyip Erdogan has wheeled a trolley around one of the new grocery stores he hopes will bring Turkey’s ‘exorbitant’ prices under control, but his unorthodox effort to combat inflation is failing to impress shoppers and retailers. Accompanied by his wife and daughter, Erdogan went shopping near his Istanbul home…, telling assembled media that the expanding chain of Agricultural Credit Cooperatives will help curb price rises. Frustrated by inflation running near 20% and sliding opinion polls ahead of elections set for 2023, Erdogan has instructed the retail chain to open 1,000 stores to provide cheap, quality products and ‘balance the market’.”
October 19 – Bloomberg (Selcuk Gokoluk): “The lira’s slump this month threatens to derail a rally in Turkish corporate bonds that’s handed investors some of the richest returns in emerging markets. The debt, offering returns of 4.4% in 2021, was the second-worst performer in developing nations after President Recep Tayyip Erdogan sacked three central bankers last week. As the lira tumbled, the average yield on Turkish company bonds surged to 4.87%, close to a six-month high.”
October 21 – Bloomberg (Ken Parks): “Paraguay’s central bank surprised economists by delivering its biggest interest rate increase in a decade as rising prices for food and imported fuel push inflation well above target. The central bank’s board unanimously voted to tighten by 125 basis points to push its key rate to 2.75%.”
Europe Watch:
October 21 – Bloomberg (Ewa Krukowska): “Soaring energy prices are exacerbating divisions in the European Union as national leaders brace for heated talks about how to protect the most vulnerable and avoid a backlash against the bloc’s ambitious climate change plan. The unprecedented spike in power and gas prices is the first topic for EU leaders in their two-day summit starting Thursday in Brussels, but the bloc’s ability to act is extremely limited. Most countries have already cut taxes or approved subsidies to help households and companies, and there are few remaining tools that are technically possible and politically palatable.”
October 19 – CNBC (Sam Meredith): “Russia has opted against sending more natural gas supplies to Europe, curbing hopes that Moscow may ease its grip on the market shortly after President Vladimir Putin said the country would be prepared to help. Highly anticipated auction results on Monday showed Russia’s state gas giant Gazprom had not booked additional gas transit capacity for November either through the Ukrainian pipeline system or lines into western Europe via Poland.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 18 – CNBC (Yen Nee Lee): “China may have to set aside its ambitious plans to cut carbon emissions — at least in the short term — in order to tide over its worsening power crisis, said analysts. ‘Like other markets in Asia and Europe, China must perform a balancing act between the immediate need to keep the lights on — via more coal — and showing its commitment to increasingly ambitious decarbonisation targets,’ said Gavin Thompson, Asia-Pacific vice chair at energy consultancy Wood Mackenzie. ‘But the short-term reality is that China and many others have little choice but to increase coal consumption to meet power demand,’ Thomson wrote…”
October 18 – Wall Street Journal (Matthew Dalton): “At a July global climate gathering in London, South African environment minister Barbara Creecy presented the world’s wealthiest countries with a bill: more than $750 billion annually to pay for poorer nations to shift away from fossil fuels and protect themselves from global warming. The number was met with silence from U.S. Climate Envoy John Kerry, according to Zaheer Fakir, an adviser to Ms. Creecy. Other Western officials said they weren’t ready to discuss such a huge sum. For decades, Western countries responsible for the bulk of greenhouse-gas emissions have pledged to pay to bring poorer nations along with them in what is expected to be a very expensive global energy transition. But they have yet to fully deliver on that promise. Now the price of the developing world’s cooperation is going up.”
October 18 – Los Angeles Times (Laura Anaya-Morga): “In a year of both extreme heat and extreme drought, California has reported its driest water year in terms of precipitation in a century, and experts fear the coming 12 months could be even worse. The Western Regional Climate Center added average precipitation that had been reported at each of its stations and calculated that a total of 11.87 inches of rain and snow fell in California in the 2021 water year. That's half of what experts deem average during a water year in California: about 23.58 inches.”
October 16 – Wall Street Journal (Katherine Blunt): “California is racing to secure large amounts of power in the next few years to make up for the impending closure of fossil-fuel power plants and a nuclear facility that provides nearly 10% of the electricity generated in the state. The California Public Utilities Commission has ordered utilities to buy an unprecedented amount of renewable energy and battery storage as the state phases out four natural-gas-fired power plants and retires Diablo Canyon, the state’s last nuclear plant, starting in 2024. While the companies are moving quickly to contract for power, the California Energy Commission and the state’s grid operator have recently expressed concern that the purchases may not be enough to prevent electricity shortages in coming summers.”
October 20 – Reuters (Daniela Desantis): “The giant Itaipu hydroelectric power plant, wedged between Paraguay and Brazil on the Parana River, is facing an energy crunch amid record low river and rainfall levels that experts say could last into next year. The Itaipu dam, which supplies around 10% of the energy consumed in Brazil and 86% of that used in landlocked Paraguay, has recorded its lowest output since the hydroelectric plant began operating at full capacity in 2005. Downstream, the Argentine-Paraguayan Yacyreta plant produced half the normal level of energy in September…”
Leveraged Speculation Watch:
October 20 – Bloomberg (Patrick McHale): “Paul Tudor Jones, CEO of Tudor Investment Corp., tells CNBC that inflation is the single biggest threat to the economy. Says it’s clear that there is a structural issue in the labor force that won’t be solved by zero interest rates and quantitative easing. The inflation genie is out of the bottle and we run the risk of returning to the 1970s… Calls this probably the most inappropriate monetary policy in his lifetime, says Jerome Powell may not be the best person to run the Fed right now.”
Geopolitical Watch:
October 17 – Reuters (Ryan Woo, Ben Blanchard and Idrees Ali): “The Chinese military… condemned the United States and Canada for each sending a warship through the Taiwan Strait last week, saying they were threatening peace and stability in the region… China sent around 150 aircraft into the zone over a four-day period beginning on Oct. 1 in a further heightening of tension between Beijing and Taipei that has sparked concern internationally. The U.S. military said the Arleigh Burke-class guided missile destroyer USS Dewey sailed through the narrow waterway that separates Taiwan from its giant neighbour China along with the Canadian frigate HMCS Winnipeg…”
October 21 – CNBC (Robin Emmott): “NATO defence ministers agreed a new master plan on Thursday to defend against any potential Russian attack on multiple fronts, reaffirming the alliance's core goal of deterring Moscow despite a growing focus on China. The confidential strategy aims to prepare for any simultaneous attack in the Baltic and Black Sea regions that could include nuclear weapons, hacking of computer networks and assaults from space.”
October 18 – Bloomberg (Brendan Scott, Jon Herskovitz, and Kari Soo Lindberg): “China’s reported launch of a hypersonic missile into orbit has raised concerns that U.S. rivals are quickly neutralizing the Pentagon’s missile defenses even as it invests tens of billions of dollars in upgrades. In a test two months ago, the Chinese military sent a nuclear-capable missile into low-orbit space and around the globe before cruising down to its target, the Financial Times reported… Although the weapon missed its mark by about two dozen miles, the paper said, the technology, once perfected, could be used to send nuclear warheads over the South Pole and around American anti-missile systems in the northern hemisphere.”
October 19 – Reuters (Kiyoshi Takenaka): “A group of 10 naval vessels from China and Russia sailed through a strait separating Japan's main island and its northern island of Hokkaido…, the Japanese government said, adding that it is closely watching such activities. It was the first time Japan has confirmed the passage of Chinese and Russian naval vessels sailing together through the Tsugaru Strait, which separates the Sea of Japan from the Pacific. While the strait is regarded as international waters, Japan's ties with China have long been plagued by conflicting claims over a group of tiny East China Sea islets. Tokyo has a territorial dispute with Moscow, as well.”
October 19 – Reuters (Hyonhee Shin and Josh Smith): “North Korea test-fired a new, smaller ballistic missile from a submarine, state media confirmed…, a move that analysts said could be aimed at more quickly fielding an operational missile submarine… The White House urged North Korea to refrain from further ‘provocations’…”