Weekly Commentary: Made the Decision

Bubbles are sustained only by ever increasing amounts of Credit.

The most pernicious Bubbles are those fueled by “money” – perceived safe and liquid Credit instruments.

Bubbles are mechanisms of wealth redistribution and destruction.

Structural impairment caused by Bubble excess escalates over the life of the boom.

The pain and dislocation unleashed during the bust is proportional to the excesses of the preceding boom.

Though we’re in uncharted waters when it comes to global Bubble Dynamics, I’ll suggest that geopolitical risks expand exponentially over time.

My thesis holds that 2022 is a pivotal year for a historic multi-decade Bubble period. On multiple fronts, things have come to a head. Today, more than ever, historical context is invaluable for making sense of current developments, while also recognizing the dynamics behind unfolding instability, turmoil and Crisis Dynamics.

In the nine quarters beginning Q3 2019, outstanding Treasury debt expanded $6.4 TN, or 36%, to a record $24.3 TN. Treasury debt has increased 300% since 2007. Since September 2019, Non-Financial Debt has expanded an unprecedented $10.4 TN, or 20%. Federal Reserve Assets surged $5.14 TN in 127 weeks to $8.911 TN, having now inflated almost 10-fold since 2007.

In China, Aggregate Financing surged $12.4 TN since July 2019, or 33%, to surpass $50 TN. Since 2007, Chinese Bank Assets have expanded from $6.9 TN to $54.3 TN, or 684%. China’s M2 “money” supply inflated $7.54 TN, or 25%, since September 2019 to a record $38.3 TN.

Led by the U.S. and China, the entire world succumbed to reckless “money” and Credit growth without precedent. End-of-cycle “blow-off” excess sustained myriad Bubbles, but at tremendous cost. Securities speculative Bubbles morphed into precarious manias. Mal-investment spun completely out of control. Structural maladjustment ran deep and wide, both within real economies and market structures. Powerful inflationary dynamics escaped asset markets to jolt consumer and producer prices. Moreover, the forces of wealth inequality were dramatically energized, within nations and between them.

Annual U.S. CPI has exceeded 7% for the first time since 1982. Short-term rates remain near zero, and the Fed has yet to conclude this round of QE. China is in the initial phase of a historic real estate (chiefly apartment) bust. Beijing’s most recent effort to slow Credit growth was, once again, scuttled. China has significantly escalated pressure on Taiwan, while moving to shore up its dominance in the South China Sea. Russia has reportedly massed a force of 190,000 around Ukraine, the largest European military mobilization since WWII. China and Russia are moving aggressively to galvanize their anti-U.S. global sphere of influence. Here at home, a deeply divided nation sinks deeper into a muck of anxiety, acrimony, vitriol and hostility. In short, years of mismanagement and resulting Monetary Disorder are coming home to roost – Big Time.

Severe banking system impairment in the early nineties emboldened the Greenspan Fed to accommodate a boom in non-bank Credit and leveraged speculation. With Greenspan rate policies backstopping the markets and GSE balance sheets operating quasi-central bank liquidity operations, Bubble Dynamics gathered powerful momentum.

Following 1999’s manic blow-off excess, I thought the Bubble had burst in 2000. I had to reverse course in 2002, warning that Fed reflationary policies were unleashing a “mortgage finance Bubble”. The “Moneyness of Credit” – the transformation of Trillions of risky loans into perceived safe and liquid AAA securities – was instrumental in, at the time, unparalleled Credit and risk-intermediation excesses.

I thought the bubble had burst in 2008. I reversed course (again) in 2009, warning of an unfolding “global government finance Bubble” – the “Granddaddy of all Bubbles.” The so-called “Great Financial Crisis” (GFC) gave cover to a perilous – and fateful - escalation of government inflationism.

I feared QE – the wholesale inflation of central bank Credit – would prove a slippery slope. In the markets, Bernanke’s coercion of savers into risk assets created a dynamic whereby the markets would become only more integral to system financial conditions, perceived wealth and economic performance. I worried about a “moneyness of risk assets” dynamic that would see the Fed entrapped in market liquidity and price backstopping operations, crystallizing the already dangerous market misperception that securities entail minimal risk. Stock prices always rise over time, with occasional downdrafts sure to induce Federal Reserve reflationary measures.

While memories have faded, mortgage finance Bubble consequences were horrible, levying a steep cost on our social wellbeing. From my analytical perspective, the global government finance Bubble created a whole new level of risk. For one, it unleashed capricious inflationary forces globally. Importantly, the custodian of the world’s reverse currency succumbing to rank inflationism (central bank Credit and government debt) freed nations everywhere to do the same.

Post-GFC reflationary measures opened the monetary floodgates. I don’t see how China’s incredible Bubble is sustained without U.S. QE, massive federal deficits, and ongoing Bubble excess. China’s international reserve holdings inflated from about $200 billion to $1.5 TN during the mortgage finance Bubble period, only to then rise parabolically to a high of $4.0 TN in 2014 (as the Fed ratcheted up QE2). Massive reserves, with enormous and unending trade surpluses with the U.S., empowered China to recklessly inflate Credit without the traditional risk of currency instability.  Extraordinary unfettered Credit.

During a Bubble’s upswing, perceptions hold that the pie is getting bigger. The forces of cooperation, coordination and integration hold sway. But eventually, the reality of wealth inequities is unmasked. Stagnation and fear of a shriveling pie foment animosity, disintegration and conflict.

China doesn’t become so powerful – financially, economically, militarily, geopolitically – without the protracted U.S. (and then global) Bubble. For today’s heated global rivals, the days of cooperation are over. The enemy of my enemy is my friend. Hostile to a U.S. global order it views as deeply unjust and contra to its interests, Russia is jubilant over the opportunity to partner closely with a likeminded Beijing. Russia gains the security of a vast market for its energy resources outside of U.S. influence, while a military alliance creates the most powerful opposition to U.S. global dominance in decades. Without his harmonious partnership with Xi, Putin doesn’t take the risk of such a confrontational approach with Ukraine, the U.S. and NATO. Might the U.S. and its allies being bogged down with a war in Europe embolden Beijing’s Taiwan aspirations?

President Biden believes Putin has “Made the Decision” to invade Ukraine. The situation in eastern Ukraine is rapidly deteriorating. A car explosion at a government building. Gas pipelines bombed. Satellite imagery showing aggressive Russian military positioning along the Ukraine border – in Russia, Belarus and Crimea. Russian-supported separatists announcing plans to evacuate women and children to Russia. Aggressive cyberattacks.

While the administration stresses it’s not too late for diplomacy, the situation appears increasingly dire. U.S. intelligence believes Russia is now executing its plan of “false flag” attacks and provocations (i.e. accusations of Ukrainian genocide) that it will use as justification for an invasion. “Nearly half of Russian forces surrounding Ukraine are in attack position.” Defense Secretary Lloyd Austin: “I don’t believe it’s a bluff.”

To this point, it’s been easy to dismiss the risk of a full-scale invasion. Surely, Putin wouldn’t take the enormous risk associated with a full-blown war in Ukraine. “Crossing the Rubicon,” as they say. Ukraine is not a current threat to Russia, and there is little prospect for NATO membership anytime soon. It has been reasonable to assume that Putin was playing hardball to extract concessions from the U.S. and NATO. Yet it’s been confounding. Putin’s proposals have been nonstarters – and he can’t be surprised by the West’s refusal to play ball (be blackmailed).

Putin has been excoriating U.S policy for a number of years now. If Russian forces cross the Pripyat River in a move on Kyiv, I’ll see this aggression as much an attack on the U.S. global order as on Ukraine. According to Putin’s thinking, the U.S. has repeatedly trampled over his red lines. Rants on NATO expansion, U.S.-sponsored “colored revolutions,” meddling in others domestic affairs in pursuit of U.S. global interests, unilateral economic sanctions, U.S. dominance of global finance along with international organizations, and so on.

Putin has surely been conceptualizing his counteroffensive for years. Perhaps he waited for President Trump to leave the White House. Or he needed to ensure his military and technology were up to the challenge. Surely, he wanted to cement his relationship with chairman Xi and China. Is it possible he’s been waiting patiently for years for this moment? To us Western thinkers, only “Vlad the mad” would execute such an irrational invasion. Especially at this critical juncture, his calculation might be that the West has so much more to lose than Russia.

Additional corroboration this week of global Bubbles at the precipice. The Nasdaq100’s 1.7% decline pushed y-t-d losses to 14.2%, supporting the thesis of a deflating U.S. “tech” Bubble. Ten-year Treasury yields traded up to 2.06% Wednesday, with stress continuing to build in U.S. corporate Credit. U.S. bank stocks were hit 3.0% this week, and bank CDS prices continue their upward march. And the Fed has yet to even end QE or move off the “zero bound”.  The Bloomberg Commodity Index's 1.6% advance pushed y-t-d gains to 12.6%.  Gold this week traded above $1,900, as Hard Assets outperform financial assets.

Chinese Bubble developments this week were no less ominous. A Friday Bloomberg headline: “Crisis in China’s Property Industry Deepens With No End in Sight.” And Thursday: “China Builders Miss More Deadlines as Yango Fails to Pay Coupons.” “Chinese high-yield dollar bonds fall 1-3 cents on the dollar Thursday…, putting them on track for a fourth day of declines.” One cannot overstate the significance of the ongoing spectacular collapse of China’s massive (and massively levered) developer industry.

From the nineties “tech” Bubble to the grander “mortgage finance” Bubble to the unbelievably colossal and historic “global government finance” Bubble. Bubble inflation not only made it to every nook and cranny across the global landscape. Wild excess went to the very foundation of global finance – central bank Credit and government debt. This is it. Nearing the end of the road. There’s no fledging Bubble waiting to heroically save the day this time around.

Moreover, the amount of monetary inflation necessary to sustain aged financial and economic Bubbles has fueled dangerous inflationary dynamics. The Fed and global central bank community are being forced into action, with the tightening of finance necessary to rein in inflation placing myriad Bubbles in danger. There is today acute fragility throughout global finance. “Money” and Credit have been severely degraded. Financial manias and speculative leverage have destabilized markets and economies virtually across the board. Gross inequities have destabilized societies and international relationships. In sum, the existing global order appears one serious catalyst away from a megaquake.

If Putin is determined to wreak havoc, his timing couldn’t be more perfect. And while Beijing today confronts extreme Bubble risks, perhaps it views its now well-tested “zero tolerance” authoritarian capabilities as ensuring the hardened Chinese will weather the cyclone better than its flabby and fractious American adversary.

Hopefully cooler heads prevail. I will gladly admit to being snared by “false flags” and a false alarm. But I know I’m not alone on this. I’ve been fearing escalating tensions with team Russia and China. And from my analytical perspective, these are not coincidences: Out of control monetary inflation, runaway Bubbles, acute fragility, social disorder, strained international relations, power vacuums, and dangerous geopolitical developments.

In the event of an invasion, the U.S. will lead the global charge for imposing the most onerous sanctions ever. Can the Biden Administration keep the Europeans on board with Putin threatening to tighten shut the gas spigot? How will the U.S. approach relations after China repudiates American efforts to punish Russia? And when U.S. market and economic Bubbles suffer serious blowback, how will a deeply divided and weary nation respond to adversity?

Bubbles inflict tremendous damage upon societies. It has been my greatest fear that the “granddaddy” of all Bubbles would also foment global acrimony, hostility and conflict. I’ve become a broken record on this: I hope things are not as dire as I fear. It’s just that I’ve been closely monitoring these dynamics and pondering the Bubble endgame scenario for some time now.

I’m deeply concerned, and part of my anxiety comes from knowing people haven’t been paying attention. A Russian invasion of Ukraine has potential to be a highly destabilizing catalyst, slamming fragile global markets, exacerbating inflationary pressures, accelerating financial asset Bubble deflation, and pushing forward the transition to what will prove a particularly challenging down cycle.

For the Week:

The S&P500 fell 1.6% (down 8.8% y-t-d), and the Dow dropped 1.9% (down 6.2%). The Utilities declined 1.3% (down 8.5%). The Banks sank 3.0% (up 3.8%), and the Broker/Dealers fell 1.4% (up 0.7%). The Transports slipped 0.2% (down 9.1%). The S&P 400 Midcaps dipped 0.6% (down 7.4%), and the small cap Russell 2000 declined 1.0% (down 10.5%). The Nasdaq100 dropped 1.7% (down 14.2%). The Semiconductors increased 0.6% (down 14.2%). The Biotechs sank 3.4% (down 10.5%). With bullion jumping $40, the HUI gold index surged 6.5% (up 9.2%).

Three-month Treasury bill rates ended the week at 0.315%. Two-year government yields declined four bps to 1.47% (up 74bps y-t-d). Five-year T-note yields fell four bps to 1.82% (up 56bps). Ten-year Treasury yields slipped a basis point to 1.93% (up 42bps). Long bond yields were unchanged at 2.24% (up 34bps). Benchmark Fannie Mae MBS yields gained three bps to a 31-month high 2.89% (up 82bps).

Greek 10-year yields fell six bps to 2.56% (up 125bps y-t-d). Ten-year Portuguese yields dropped nine bps to 1.08% (up 62bps). Italian 10-year yields sank 11 bps to 1.84% (up 67bps). Spain's 10-year yields slipped a basis point to 1.20% (up 64bps). German bund yields dropped 11 bps to 0.19% (up 37bps). French yields fell eight bps to 0.69% (up 49bps). The French to German 10-year bond spread widened three to 50 bps. U.K. 10-year gilt yields sank 17 bps to 1.38% (up 41bps). U.K.'s FTSE equities index fell 1.9% (up 1.7% y-t-d).

Japan's Nikkei Equities Index dropped 2.1% (down 5.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.22% (up 15bps y-t-d). France's CAC40 declined 1.2% (down 3.1%). The German DAX equities index lost 2.5% (down 5.3%). Spain's IBEX 35 equities index slumped 2.4% (down 1.4%). Italy's FTSE MIB index fell 1.7% (down 3.1%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.6% (up 7.7%), and Mexico's Bolsa fell 1.8% (down 1.9%). South Korea's Kospi index was little changed (down 7.8%). India's Sensex equities index declined 0.6% (down 0.7%). China's Shanghai Exchange gained 0.8% (down 4.1%). Turkey's Borsa Istanbul National 100 index fell 0.9% (up 9.4%). Russia's MICEX equities index sank 4.3% (down 10.4%).

Investment-grade bond funds saw outflows of $2.54 billion, and junk bond funds posted negative flows of $3.55 billion (from Lipper).

Federal Reserve Credit last week jumped $20.8bn to a record $8.859 TN. Over the past 127 weeks, Fed Credit expanded $5.132 TN, or 138%. Fed Credit inflated $6.027 Trillion, or 214%, over the past 484 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $17.9bn to $3.448 TN. "Custody holdings" were down $101.8bn, or 2.9%, y-o-y.

Total money market fund assets dropped $43.5bn to $4.550 TN. Total money funds increased $217bn y-o-y, or 5.0%.

Total Commercial Paper increased $4.0bn to $1.023 TN. CP was down $52.6bn, or 4.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 23 bps to a 31-month high 3.92% (up 111bps y-o-y). Fifteen-year rates jumped 22 bps to 3.15% (up 94bps). Five-year hybrid ARM rates rose 18 bps to 2.98% (up 21bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 21 bps to 4.20% (up 119bps).

Currency Watch:

For the week, the U.S. Dollar Index was about unchanged at 96.04 (up 0.4% y-t-d). For the week on the upside, the Brazilian real increased 2.1%, the Mexican peso 1.2%, the New Zealand dollar 0.8%, the Australian dollar 0.6%, the South African rand 0.5%, the Swiss franc 0.5%, the Japanese yen 0.4%, the South Korean won 0.2%, and the British pound 0.2%. On the downside, the Norwegian krone declined 1.4%, the Swedish krona 0.6%, the euro 0.3%, and the Canadian dollar 0.1%. The Chinese renminbi increased 0.46% versus the dollar (up 0.48% y-t-d).

Commodities Watch:

February 13 – Financial Times (Neil Hume and Emiko Terazono): “Stockpiles of some of the global economy’s most important commodities are at historically low levels, as booming demand and supply shortages threaten to fuel inflationary pressures around the world. From industrial metals to energy to agriculture, the rush for raw materials and food staples has been reflected in futures markets, where a large number of commodities have flipped into backwardation — a pricing structure that signals scarcity. Problems are particularly acute in metals… ‘This is the most extreme inventory environment,’ said Nicholas Snowdon, analyst at Goldman Sachs. ‘It’s a completely unprecedented episode. There is no supply response.’ The shortages come against a backdrop of persistently high global inflation, fuelled by logistical disruptions and pent-up demand as economies recover from coronavirus lockdowns.”

February 16 – Bloomberg (Salma El Wardany, Paul Wallace, Matthew Martin and Anthony Di Paola): “The International Energy Agency urged OPEC and its allies to address a widening shortfall in their oil production as a volatile market sends crude prices rocketing toward $100 a barrel. While fuel consumption is bouncing back from the pandemic, the 23-nation alliance led by Saudi Arabia and Russia is struggling to restore output it halted. Members need to fix the issue as the supply gap versus their target spirals toward 1 million barrels a day, IEA Executive Director Fatih Birol told a conference… ‘There is a significant difference between the targets that OPEC+ countries set in terms of their production levels and what is produced today… Therefore it is important that OPEC+ countries narrow this gap’ and ‘hopefully provide more volumes to the market in order to reduce volatility.’”

The Bloomberg Commodities Index jumped 1.6% (up 12.6% y-t-d). Spot Gold rose 2.1% to $1,898 (up 3.8%). Silver gained 1.4% to $23.92 (up 2.6%). WTI crude declined $2.03 to $91.07 (up 21%). Gasoline dropped 2.5% (up 20%), while Natural Gas surged 12.4% (up 19%). Copper increased 0.4% (up 1.4%). Wheat was little changed (up 4%), while Corn added 0.3% (up 10%). Bitcoin sank $2,016, or 4.8%, this week to $40,341 (down 13%).

Coronavirus Watch:

February 17 – Associated Press (Carla K. Johnson): “The omicron wave that assaulted the United States this winter also bolstered its defenses… Millions of individual Americans’ immune systems now recognize the virus and are primed to fight it off if they encounter omicron, or even another variant. About half of eligible Americans have received booster shots, there have been nearly 80 million confirmed infections overall and many more infections have never been reported. One influential model uses those factors and others to estimate that 73% of Americans are, for now, immune to omicron, the dominant variant, and that could rise to 80% by mid-March.”

Market Mania Watch:

February 16 – Reuters (Huw Jones and Tom Wilson): “Risks from the $2.6 trillion crypto market could grow quickly and regulators need pre-prepared measures to bring the sector to heel, the Financial Stability Board (FSB), a risk monitoring watchdog for the G20 economies, said… While cryptoassets like bitcoin remain a small part of the financial system, data gaps make it difficult to assess their full use and many investors don't fully understand what they are buying, the FSB said. Traditional finance such as big banks and hedge funds are also becoming more involved, along with derivatives that reference cryptoassets in complex investment strategies, the FSB said… As such, financial stability risks could rapidly escalate…”

February 14 – Wall Street Journal (Susan Pulliam and Juliet Chung): “Federal investigators are probing the business of block trading on Wall Street, examining whether bankers might have improperly tipped hedge-fund clients in advance of large share sales, according to people familiar with the situation. The Securities and Exchange Commission sent subpoenas to firms including Morgan Stanley and Goldman Sachs… as well as several hedge funds, asking for trading records and information about the investors’ communications with bankers, some of the people said. The Justice Department also is investigating the matter, some of the people said. Morgan Stanley has been an early focus of the probe, said people familiar with the matter.”

February 12 – Wall Street Journal (David Benoit): “After a record run for mergers, investors who trade on deal news are feeling nervous. Merger targets Activision Blizzard Inc., Spirit Airlines Inc. and Zynga Inc. are trading well below their agreed-upon acquisition prices, a sign that investors are more worried than usual that the deals could fall apart. Their anxiety stems from a growing conviction that global regulators are gearing up to challenge more deals on antitrust grounds. Their fears were realized earlier this week, when Nvidia Corp. and SoftBank Group Corp. ’s Arm called off a $40 billion deal that regulators had challenged.”

February 14 – Bloomberg (Bailey Lipschultz): “The pace of blank-check mergers failing to cross the finish line is accelerating as the industry grapples with waning investor interest. At least six mergers with special-purpose acquisition companies have been canceled this year, on pace for a record number of nixed deals in a single quarter. At least 22 have been spiked since the middle of 2021, according to… SPAC Research... That compares with 26 tie-ups that were called off in the more than five years prior...”

February 14 – Bloomberg (Allyson Versprille): “The U.S. Securities and Exchange Commission is warning investors about risks associated with accounts that pay clients high interest rates for depositing crypto assets. Companies offering interest-bearing accounts for digital assets don’t provide the same protections as banks and credit unions, and the deposits aren’t insured, the regulator’s Office of Investor Education and Advocacy said… Earlier in the day, the SEC announced that BlockFi Inc. had agreed to pay $100 million to federal and state securities regulators to settle allegations that it illegally offered a product that pays customers high rates to lend out their digital tokens.”

February 15 – Associated Press (Brian Slodysko): “Amid a steady drip of damaging headlines, pressure is building for Congress to pass legislation that would curtail lawmakers’ ability to speculate on the stock market. Trading in Congress has long been criticized by government watchdogs, who say the access to nonpublic information creates a temptation for lawmakers to prioritize their own finances over the public good. But public anger has mounted since the first tremors of the pandemic, when some lawmakers were caught buying and selling millions of dollars worth of stock after being warned about the coming disruption from the virus.”

Market Instability Watch:

February 17 – Bloomberg (Lu Wang): “Stock investors, on guard for turmoil with everything from geopolitics to Federal Reserve hawkishness strafing their nerves, are bracing for a chaotic end to the week with $2.2 trillion of option expirations set to hit the market Friday. The monthly event involves $545 billion of derivatives across single stocks scheduled to expire, Goldman Sachs… estimates. About $985 billion of S&P 500-linked contracts and $165 billion in options tied to the world’s largest exchange-traded fund, the SPDR S&P 500 ETF Trust (ticker SPY), will run out…”

February 17 – Bloomberg (Augusta Saraiva): “U.S. junk-bond investors have withdrawn cash from funds that invest in the asset class for the sixth straight week… Data from Refinitiv Lipper show an outflow of about $3.6 billion for the week ended Feb. 16, driving the six-week total of withdrawals to $16.7 billion. That’s the most since more than $19 billion of exits were recorded in early 2020 when the pandemic first bore down…”

February 16 – Bloomberg (Olivia Raimonde): “Sales in the U.S. high-yield primary bond market have ground to a halt as bankers and would-be debt issuers navigate mounting inflation concerns and geopolitical unrest. Companies have sold about $32 billion of junk bonds so far this year, down sharply from over $73 billion issued by this time in 2021… U.S. high-yield funds, meanwhile, are on track to see investors pull cash for the sixth week in a row. Should that hold, it would mark the longest such stretch of outflows since June 2021, according to Refinitiv Lipper... Access to the high-yield market is crucial for sub-investment grade firms looking to raise funds needed to help keep their businesses running smoothly.”

February 16 – Reuters (Patturaja Murugaboopathy and Gaurav Dogra): “Global non-financial companies have issued the lowest debt volumes in three years in the first six weeks of 2022, deterred by rising interest rates as governments start scaling back their pandemic-era stimulus assistance. According to Refinitiv…, global non-financial companies have raised $207 billion between Jan 1. and Feb. 12, the lowest amount borrowed in that period since 2019. That compares with $318 billion collected in the last year.”

February 15 – Bloomberg (Edward Bolingbroke): “Liquidity is eroding in the U.S. Treasury market again, as the past week’s controversy about how much and how quickly the Federal Reserve will raise interest rates this year unleashed a bout of extreme volatility in yields. The Bloomberg U.S. Government Securities Liquidity Index… is approaching last year’s highs, reached in early November. At that time, expectations for Fed hikes had begun to mount in October, causing historically large daily swings in short-dated Treasury yields in particular.”

February 16 – Financial Times (Kate Duguid and Eric Platt): “US government debt has been hit with the most serious bout of volatility since the pandemic-fuelled ructions of early 2020, making it more difficult for investors to transact in the world’s most important bond market. An Ice Data Services index tracking volatility in Treasuries hit its highest point this week in almost two years…”

February 14 – Bloomberg (Abhinav Ramnarayan): “Credit investors are in a ‘sell what you can’ mood in an environment of rising rates and political tensions, a Bank of America Corp. survey showed, with Goldman Sachs Group Inc. strategists telling clients to switch to cash. The net overweight position in investment-grade credit has dropped to 16%, the lowest since February 2019, as investors slash bullish bets on bank bonds and boost cash levels, according to Bank of America’s latest European investor survey. That chimes with Goldman’s call… to move to underweight on corporate bonds.”

Inflation Watch:

February 15 – CNBC (Jeff Cox): “Prices at the wholesale level jumped twice the expected level in January as inflation pressures were unabated to start the year… The producer price index… increased 1% for the month, against the… estimate for 0.5%. Over the past 12 months the gauge rose an unadjusted 9.7%, close to a record in data going back to 2010… ‘PPI offers a window to the price pressures that businesses are facing, and which will likely be passed on to consumers in the way of consumer price inflation in the months to come,’ PNC economist Kurt Rankin wrote. ‘Strong gains across the board for businesses reinforce the inflationary concerns that the Federal Reserve is set to battle this year with monetary policy, and which the economy in general has recently begun expressing caution and concern over.’”

February 13 – Bloomberg (Enda Curran and Rich Miller): “Oil’s surge toward $100 a barrel for the first time since 2014 is threatening to deal a double-blow to the world economy by further denting growth prospects and driving up inflation. That’s a worrying combination for the U.S. Federal Reserve and fellow central banks as they seek to contain the strongest price pressures in decades without derailing recoveries... Group of 20 finance chiefs meet virtually this week for the first time this year with inflation among their top concerns… According to Bloomberg Economics’ Shok model, a climb in crude to $100 by the end of this month from around $70 at the end of 2021 would lift inflation by about half a percentage point in the U.S. and Europe in the second half of the year.”

February 13 – Wall Street Journal (Bryan Mena and Harriet Torry): “Consumer prices rose faster last year in large U.S. metropolitan areas seeing an influx of new residents than in the nation overall… The Atlanta-Sandy Springs-Roswell area saw the highest inflation among metropolitan areas with more than 2.5 million people—9.8% for the 12 months through December, according to the Labor Department. Phoenix, St. Louis and Tampa also saw annual inflation rates higher than the 7% national rate in December. The San Francisco-Oakland-Hayward area… saw 4.2% inflation last year, the lowest of any of the 23 large metro areas… Inflation also came in below the national rate in the New York City, Boston and Washington, D.C., metro areas.”

February 13 – Financial Times (Matthew Rocco, Mamta Badkar and Joe Rennison): “Some of the world’s largest consumer brands are passing on rapidly rising input costs to consumers through substantial price hikes… Executives said that US consumers, bolstered by higher wages and savings, have thus far been willing to spend more. Companies including PepsiCo, McDonald’s and breakfast cereal maker Kellogg all flagged the impact of higher labour, shipping and commodity costs and the pandemic’s disruption to supply chains and the workforce during the latest corporate earnings season. ‘US businesses have managed to do something never before accomplished, which is to lump four years’ worth of price increases into one,’ said David Rosenberg, chief economist and strategist at Rosenberg Research.”

February 13 – Wall Street Journal (Thomas Gryta): “Inflation is seeping through American business, hitting companies in unexpected ways beyond higher prices for materials, shipping or wages. It is adding to legal costs for the maker of Marlboro cigarettes, driving up the bill for auto repairs at Allstate…, prompting people to pay less of their credit-card balances and stoking concerns of shrinking ad spending at social-media companies… To preserve profits, companies are passing along more price increases to customers as inflation shows no signs of slowing down. ‘It kind of cascades from initially a small set of goods to a much larger set of goods,’ said Chester Spatt, who was chief economist at the SEC from 2004 to 2007 and is now a professor… at Carnegie Mellon University.”

February 15 – Wall Street Journal (Patrick Thomas): “Inflation is growing on the farm. American farmers are paying significantly higher prices for their weed-killing chemicals, crop seeds, fertilizer, equipment repairs and seasonal labor, eroding some of 2021’s windfall from rising crop prices. Higher farm costs could help push up grocery bills further in 2022, analysts say, following a year in which global food prices rose to decade highs. ‘I just don’t see how I’m going to get paid this year,’ said Brooks Barnes, a… farmer in Wilson County, N.C… Mr. Barnes in the spring of 2021 said he paid $16 a gallon for Bayer AG’s Roundup, the world’s most commonly used weedkiller, for his crops. By September he bought it for about $40 a gallon and in February, his Nutrien Ltd. retailer told him it was $60 a gallon, he said. One of the fertilizers he buys, 24s, cost him $500 a ton from $175 last spring, he said.”

February 15 – Bloomberg (Jen Skerritt and Elizabeth Elkin): “Fertilizer just got even more expensive. Canpotex has agreed to supply China with potash fertilizer shipments at $590 a metric ton through December, which is more than double the price from a year ago and the highest since at least 2013…”

February 15 – Bloomberg (Elizabeth Elkin and Tarso Veloso Ribeiro): “A supply crunch is threatening to cause a spike in prices for the world’s No. 1 weedkiller, making it even more expensive for farmers to grow food. A major supplier of an ingredient in glyphosate — an herbicide that’s widely used by corn, soy, cotton and other farmers around the world — shut down production due to mechanical failures, and repairs could take three months. Bayer AG, the maker of Roundup, whose active ingredient is glyphosate, declared a force majeure on Feb. 11, meaning it may not be able to meet its sales agreements.”

February 12 – Wall Street Journal (Annie Gasparro and Gabriel T. Rubin): “Lettuce Entertain You Enterprises Inc., a… restaurant group, has added a 3% ‘processing fee’ to checks at many of its restaurants. Harley-Davidson Inc. added a charge last year to its motorcycles to cover rising material costs. Peloton… in January began charging $250 for delivery and setup of some of its indoor bikes, a service that was previously included free. Companies are finding all kinds of ways to make consumers pay for rising costs. Often that is not reflected in the posted price.”

February 15 – CNBC (Diana Olick): “The price of lumber has been on a roller coaster since the start of the pandemic, and it’s climbing a big hill yet again. After falling back sharply from a record high in May of last year, lumber prices began climbing again in December. They are now about 22% lower than that peak, but still about three times their average pre-pandemic price, according to Random Lengths. That is adding to the cost of both building a new home and remodeling an older one. The National Association of Home Builders estimated the recent price jump added more than $18,600 to the price of a newly built home.”

February 12 – Wall Street Journal (Kirk Maltais): “U.S. soybean prices have surged in recent months amid shrinking forecasts for South American crops. Prices for soybeans—the base ingredient in many food products, poultry and livestock feed and renewable fuel, among other things—are edging back toward highs reached last year, which hadn’t previously been seen in a decade. Abnormally dry weather in South America that has spurred surges in coffee and sugar prices also has affected soybeans there… Soybean futures… are trading at their highest level since June... Soybeans have risen over 18% in the year to date…”

Biden Administration Watch:

February 18 – Reuters (Anton Zverev, Pavel Polityuk and Polina Nikolskaya): “Russia's Vladimir Putin has decided to invade Ukraine within days, U.S. President Joe Biden said on Friday after separatists backed by Moscow told civilians to leave breakaway regions on buses, a move the West fears is part of a pretext for an attack. In one of the worst post-Cold War crises, Russia wants to stop Kyiv joining NATO and accuses the West of hysteria, saying it has no plans to invade, while the United States and allies are adamant the military build-up continues. Warning sirens blared in Donetsk and Luhansk on Friday after rebel leaders there announced the evacuation of hundreds of thousands of people to Russia. ‘We have reason to believe the Russian forces are planning to and intend to attack Ukraine in the coming week, in the coming days,’ Biden told reporters…, adding that Kyiv would be a target. ‘As of this moment, I am convinced that he has made the decision.’”

February 18 – Bloomberg: “The U.S. said Russia has massed as many as 190,000 personnel – including troops, National Guard units and Russian-backed separatists – in and around Ukraine in what it called the most significant military mobilization since World War II. Russia told the U.S. this week it has no plans to attack, and its officials have repeatedly dismissed U.S. warnings about a possible invasion as ‘hysteria’ and propaganda. The buildup has sparked a flurry of diplomatic activity: U.S. President Joe Biden will speak with transatlantic leaders on Friday, while Russian Defense Minister Sergei Shoigu spoke with U.S. counterpart Lloyd Austin by phone.”

February 16 – Reuters (Doina Chiacu): “U.S. Secretary of State Antony Blinken… criticized a move by Russian lawmakers toward recognizing two Russian-backed breakaway regions in eastern Ukraine as independent, saying it would be illegal and draw a swift response. Russia's lower house of parliament voted on Tuesday to ask President Vladimir Putin to recognize the self-declared Donetsk and Luhansk People's Republics, and the European Union told Moscow not to follow through. ‘Enactment of this resolution would further undermine Ukraine’s sovereignty and territorial integrity, constitute a gross violation of international law, call into further question Russia’s stated commitment to continue to engage in diplomacy to achieve a peaceful resolution of this crisis,’ Blinken said.”

February 16 – Wall Street Journal (Josh Zumbrun): “The Biden administration faulted China for failing to meet its commitments to purchase U.S. goods under the 2020 trade deal and said it was prepared to take further action to level the competitive playing field with Beijing. China has ‘fallen far short of implementing its commitments to purchase U.S. goods and services in 2020 and 2021,’ the Office of the U.S. Trade Representative said in a report to Congress. ‘To the extent that China’s unfair, nonmarket and distortive policies and practices persist, the United States is prepared to use domestic trade tools strategically as needed in order to achieve a more level playing field with China for U.S. workers and businesses,’ the report said.”

February 16 – Bloomberg (Steven T. Dennis): “The standoff in the Senate Banking Committee over Federal Reserve nominee Sarah Bloom Raskin has no quick resolution in sight, leaving all of President Joe Biden’s Fed picks in limbo, potentially into next month. Republican Senator Pat Toomey… vowed… to keep blocking a committee vote on Raskin unless he gets more information about why the Kansas City Fed granted a highly-sought-after master account to a Colorado-based fintech company where Raskin served as a director.”

Federal Reserve Watch:

February 16 – Reuters (Howard Schneider and Ann Saphir): “Federal Reserve officials last month agreed that, with inflation tightening its grip on the economy and employment strong, it was time to raise interest rates, but also that any decisions would depend on a meeting-by-meeting analysis of inflation and other data, according to the minutes of the Jan. 25-26 policy meeting. The account of the two-day session showed the U.S. central bank readying for a fight against the fastest pace of price increases since the 1980s, with officials saying that while they still expected inflation to ease through the year they would be ready to hike rates fast if it does not. ‘Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the (Federal Open Market) Committee to remove policy accommodation at a faster pace than they currently anticipate,’ the minutes stated.”

February 16 – Financial Times (Colby Smith): “At the start of the pandemic, US central bank officials were united on the need to shore up the world’s largest economy and stave off a financial crisis by slashing interest rates to zero and buying trillions of dollars of assets. But as the Federal Reserve prepares to unwind that unprecedented monetary support in the face of surging inflation, divisions have emerged among its policymakers over how — and how quickly — to withdraw the stimulus… Minutes from January’s meeting of the Federal Open Market Committee… showed that officials agree on one thing: the first US interest rate rise since 2018 will be implemented ‘soon’... Beyond that, there appears to be little harmony yet on the number, or size, of subsequent interest rate rises. ‘It is very telling to me that there is a lot of debate going on across the committee and there is no consensus about the appropriate pace of tightening,’ said Blerina Uruci, US economist at T Rowe Price. ‘It seems very much still up in the air.’ Differences of opinion among officials have played out in public too, as policymakers use speeches and interviews to suggest significantly different approaches to tightening monetary policy.”

February 14 – Associated Press (Christopher Rugaber): “A worsening inflation picture has touched off a range of opinions from the Federal Reserve’s policymakers about just how fast they should raise interest rates beginning at their next meeting in March. James Bullard, president of the Federal Reserve Bank of St. Louis… reiterated his call for the Fed to take the aggressive step of raising its benchmark short-term rate by a full percentage point by July 1. Esther George, president of the Kansas City Fed, expressed support for a more ‘gradual’ approach. And Mary Daly of the San Francisco Fed declined to commit herself to more than a modest rate hike next month.”

February 14 – CNBC (Jeff Cox): “St. Louis Federal Reserve President James Bullard made his case for a rapid move higher in interest rates, saying Monday that the central bank needs to react to accelerating inflation. ‘I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation. This is a lot of inflation,’ Bullard told CNBC… ‘Our credibility is on the line here and we do have to react to the data… However, I do think we can do it in a way that’s organized and not disruptive to markets… The inflation that we’re seeing is very bad for low- and moderate-income households… People are unhappy, consumer confidence is declining. This is not a good situation. We have to reassure people that we’re going to defend our inflation target and we’re going to get back to 2%.’”

February 14 – Wall Street Journal (Nick Timiraos): “A top Federal Reserve official said the central bank should consider selling bonds from its $9 trillion asset portfolio to address high inflation and guard against harmful effects that can result from raising short-term rates above long-term rates… Kansas City Fed President Esther George said one drawback of expanding the Fed’s asset portfolio to stimulate the economy in downturns… is that officials may now face more complications in removing stimulus by using two policy tools—interest rates and the bond portfolio. ‘There was an explicit recognition that introducing quantitative easing was going to complicate monetary policy,’ she said. ‘So I don’t think we can avoid the complexity that has come with a decision to deploy this tool. At the same time, she added, ‘what you don’t want to do is oversteer here.’”

February 13 – Bloomberg (Ana Monteiro): “San Francisco Federal Reserve President Mary Daly said it’s paramount for the central bank to be measured and data-dependent as it starts lifting U.S. interest rates to ensure stability. ‘Abrupt and aggressive action can actually have a destabilizing effect on the very growth and price stability we’re trying to achieve,’ Daly said on CBS’s ‘Face the Nation’... ‘So what I favor is moving in March, and then watching, measuring, being very careful about what we see ahead of us and then taking the next interest rate increase when it seems the best place to do that. And that could be in the next meeting or it could be a meeting away.’”

February 13 – Bloomberg (Tony Czuczka): “Senator Joe Manchin said the Federal Reserve needs to ‘stop pussyfooting around’ and ‘tackle inflation head-on,’ renewing his call for the central bank to act against the fastest pace of price increases since the early 1980s. The West Virginia Democrat has warned for months about the impact of U.S. government spending on inflation. In December, he pulled the plug on negotiations on President Joe Biden’s plan for expanded social programs and tax increases, citing rising prices among his concerns.”

February 16 – Reuters (Ann Saphir): “Minneapolis Federal Reserve Bank President Neel Kashkari said… it's 'appropriate' for the U.S. central bank to take steps to normalize monetary policy to deal with high inflation, but warned against raising rates too fast or too far. ‘My caution to my colleagues, and to myself, is, ‘let's not overdo it,’’ Kashkari said… ‘If we raise rates really aggressively, we run the risk of slamming the brakes on the economy, putting the economy into recession, which would then -- we'd be crashing back down into this low inflation environment.’”

U.S. Bubble Watch:

February 16 – CNBC (Jeff Cox): “Consumer spending bounced back sharply in January as rising inflation and a post-holiday surge kept cash registers ringing… Retail sales for the month rose 3.8%, much better than the 2.1%... estimate. The numbers are not adjusted for inflation; the 0.6% rise in the consumer price index for the month helped push a reversal from the 2.5% sales decline in December… Online shopping contributed the most on a percentage basis, with nonstore retailers seeing a gain of 14.5%. Furniture and home furnishing sales increased 7.2%, while motor vehicle and parts dealers saw a 5.7% rise. Food and drinking establishments, considered a barometer for the pandemic-era economy, saw sales dip just 0.9% for the month…”

February 14 – Reuters (Jonnelle Marte): “The unprecedented level of job switching seen last year as the U.S. labor market rebounded from the pandemic gave workers more leverage to ask for better pay and played a role in pushing inflation to its highest level in decades, a new study suggests. An increase in the share of people who searched for jobs while they were employed helped boost inflation by about 1 percentage point throughout much of last year, according to… the Chicago Federal Reserve. That suggests job-switching at times accounted for roughly 20% of the price growth seen in 2021.”

February 18 – CNBC (Diana Olick): “Sales of previously owned homes in January rose 6.7% from December to a seasonally adjusted annualized rate of 6.5 million units, according to the National Association of Realtors. That exceeded Wall Street expectations significantly. Sales were 2.3% lower compared with January 2021. The supply of homes for sale fell to a record low, down 16.5% from a year ago. There were just 860,000 homes for sale at the end of January. At the current sales pace it would take just 1.6 months to exhaust that inventory. A 4 to 6-month supply is considered a balanced market. That is also a record low… Homes priced between $100,000 and $250,000 were down 23% from a year ago, while sales of homes priced between $750,000 and $1 million rose 33%. Sales of homes priced above $1 million were up 39%.”

February 17 – Bloomberg (Jo Constantz): “Mortgage rates in the U.S. are getting closer to 4%. The average for a 30-year loan was 3.92%, up from 3.69% last week and the highest since May 2019… ‘Psychologically, it’s clearly not great news, especially if you put in a bid three weeks ago and lost,’ said David Battany, executive vice president of capital markets for Guild Mortgage Co.”

February 15 – New York Times (Emily Badger): “A single house under construction in America today faces all kinds of problems, starting with a run on lumber, then bricklayers in demand, subcontractors with Covid, appliances on back order and plumbing fixtures out at sea. Get through all of that, and then comes one more hitch with what should be a straightforward finishing touch. ‘Garage doors are a nightmare,’ said Rick Palacios Jr., the director… at John Burns Real Estate Consulting. If you had to rank the headaches homebuilders face, he said, ‘garage doors are the worst right now.’ The home-building industry is having the most difficult time in decades meeting demand, the sum of many pandemic complications. But this moment reaches peak absurdity with garage doors.”

February 15 – Bloomberg (Prashant Gopal and Jo Constantz): “First-time homebuyers, already getting clobbered by bidding wars, now face a potential knockout punch: higher mortgage rates. Costs for 30-year loans hit a more than two-year high of 3.69% last week… Further increases are expected as the Federal Reserve… hikes its benchmark rate. That’s a daunting prospect for entry-level buyers when affordability is already at its worst since 2018… Their modest incomes put them at a disadvantage when competing against downsizing seniors and single-family landlords for the same moderately priced houses… ‘Housing affordability is set to get crushed,’ said Mark Zandi, chief economist for Moody’s Analytics, who expects 30-year rates to climb above 4% this year.”

February 14 – Bloomberg (Allison McNeely): “For Atlanta real estate agent Jamie Douglas, a dearth of inventory has made it almost impossible to take on new clients hunting for affordable rental homes. Now, she works with people who have at least $5,000 a month to spend on rent, double her usual base of around $2,500 because there’s just nothing available at lower price points. One house will get 15 to 20 applications and be rented within a day, she said. ‘I literally have people begging me to get them a rental,’ Douglas said... ‘It’s just so crazy down here.’”

Fixed-Income Bubble Watch:

February 15 – Wall Street Journal (Heather Gillers): “Retirement funds are clamoring to invest in private-market loans, hungry for an asset that can beat public markets while at the same time throwing off cash to help pay benefits. Two of the nation’s three biggest pension funds—those serving public workers in New York and California—have added private-credit allocation targets in the past two years. Across the U.S., state and local retirement funds with private-credit portfolios are expanding them faster than any other alternative investment, from an average allocation of 3% to an average target of 5.7%... For decades, U.S. pension funds have been scaling back on bonds, bank loans and other types of publicly traded debt as yields dropped. Now the retirement savings of firefighters and school bus drivers are helping fuel an investing boom in private loans to borrowers ranging from private-equity managers overhauling companies to consumers buying on layaway.”

China Watch:

February 15 – Bloomberg: “China’s inflation eased in January as food and energy prices weakened, providing Beijing with more leeway to shore up a slowing economy ahead of a key political leadership meeting later this year. The producer price index rose 9.1% from a year earlier…, down from 10.3% in December, while consumer-price growth slowed to 0.9%. Both gauges were below the median forecasts… Slower inflation in recent months has given the central bank scope to cut interest rates and pump liquidity into the financial system to support a faltering economy.”

February 13 – Wall Street Journal (Rebecca Feng and Anniek Bao): “China’s property developers started 2022 with weak sales, as many real-estate companies struggled to rekindle interest from home buyers despite Beijing’s recent attempts to ease some restrictions on the troubled sector. January contracted sales reports released in recent days by more than a dozen Chinese developers showed year-over-year declines ranging from about 10% to more than 80% for some companies. They also reflected price reductions by industry heavyweights such as Country Garden… and Sunac... In all, total contracted sales of the country’s 100 largest developers saw a year-over-year drop of nearly 40% in January…”

February 18 – Bloomberg (Sofia Horta e Costa): “Almost exactly a year after China’s property-market debt squeeze sparked the first in a wave of defaults by developers, the industry is fighting for survival. Home sales continue to plunge and elevated borrowing costs mean offshore refinancing is off the table for many developers. Global agencies are pulling their ratings on property bonds, while a string of auditor resignations is adding to doubts over financial transparency... A sudden 81% plunge in the Hong Kong-listed shares of one real-estate firm is raising concern over the risk of margin calls… A Bloomberg index of Chinese junk dollar debt fell every day this week through Thursday, driving yields above 20%. A gauge of Chinese property shares is down 3.4% this week, taking its losses over the past 12 months to 28%...”

February 16 – Bloomberg: “China’s defaulting property developers are making little headway on restructuring their offshore bonds, testing the patience of distressed-debt investors who stepped in to buy after an industrywide liquidity crunch. At least a dozen developers defaulted on their dollar bonds over the past year, with an estimated $48.9 billion outstanding pending debt resolution…”

February 16 – Bloomberg (Venus Feng and Wei Zhou): “Investor confidence in Zhenro Properties Group Ltd. has been shaken by concerns that it may not proceed with a planned $200 million perpetual-bond redemption, sparking a selloff in its stock and bonds. The note in question traded at 93 cents on the dollar a week ago, before a rout that has since reduced it to 23 cents, illustrating the fragility of sentiment toward China’s embattled property sector. Zhenro’s… shares have seen $1.5 billion wiped from their value the past week, and the company’s credit ratings have been slashed amid questions over its ability to raise cash.”

February 14 – Bloomberg (David Scanlan): “Chinese banks continued to boost lending to the property sector in January, extending about 600 billion yuan ($94bn) of loans, double the monthly average from the fourth quarter, China Securities Journal reported…”

February 14 – Bloomberg (Alfred Cang): “Cedar Holdings Group Co., a Chinese commodities trader, is under pressure to repay 20 billion yuan ($3.1bn) due to investors in wealth management products, Caixin reported. The outstanding Cedar-backed products are held by about 8,000 individuals… The company in April last year started delaying redemptions on matured products, only paying interest, and as of last month also stopped making interest payments, according to Caixin. China has been rocked by a string of defaults amid a liquidity squeeze in the property market… Cedar ranked 359th on the Fortune Global 500 list of companies last year, generating revenue of $33.8 billion.”

February 14 – Dow Jones: “China's car sales declined for the eighth straight month, as coronavirus outbreaks in some Chinese cities hit car production. Retail sales of passenger cars in January fell 4.4% from a year earlier to 2.09 million vehicles… The passenger-car association expects the world's biggest car market to remain sluggish in February, as the economic slowdown, tightened scrutiny in the real-estate sector and sporadic Covid-19 outbreaks may continue to weaken consumer demand. Toyota Motor Corp. said its sales in China last month dropped 21.5% from a year earlier, while the sales of two China joint ventures of Volkswagen AG fell 19.9% and 17.9% in January…”

February 15 – Bloomberg: “China’s once-hot convertible bond market is cooling sharply as a double whammy of falling equities and bond prices caused a key gauge to fall the most in two years. The CSI Convertible Bond Index slumped as much as 5.2% this week in its biggest two-day loss since February 2020, after some popular notes tumbled.”

February 15 – Reuters (Donny Kwok and Farah Master): “China's President Xi Jinping has told Hong Kong's leaders that their ‘overriding mission’ was to stabilise and control a worsening COVID-19 outbreak, media reported… as a fast rising wave of infections overwhelmed authorities. The directive ramps up pressure on Hong Kong Chief Executive Carrie Lam a day after she said her government's response to the outbreak had been unsatisfactory, with hospitals and medical staff unable to cope.”

February 17 – Reuters (Farah Master and Clare Jim): “Hong Kong's coronavirus battle intensified on Thursday as authorities reported that new cases had multiplied by 60 times so far this month, and the city's leader said city-wide testing was being considered in the global financial hub. Hospitals have been overwhelmed with some patients, including the elderly, left lying on beds outside in chilly, sometimes rainy weather, in shocking scenes that prompted an apology from authorities in the Chinese-controlled city.”

Central Banker Watch:

February 14 – Bloomberg (Alexander Weber): “European Central Bank President Christine Lagarde repeated that officials won’t rush to remove stimulus in the euro region as she sought to highlight the limits of their powers at a time of volatile prices. ‘We need to be open about what we can and cannot do as a central bank,” she told European Parliament lawmakers... ‘For example, our monetary policy cannot fill pipelines with gas, clear backlogs at ports or train more lorry drivers.’”

February 16 – Financial Times (Martin Arnold): “The European Central Bank must consider the ‘unprecedented’ rise in house prices when assessing the high level of inflation and deciding how fast to tighten monetary policy, said one of its senior executives. In the most ‘hawkish’ comments by an ECB executive board member ahead of next month’s meeting…, Isabel Schnabel told the Financial Times: ‘We cannot ignore this.’ ‘If this [rise in the costs of home ownership] were included, it would have a substantial effect on measured inflation, in particular on core inflation, where the weight of owner-occupied housing is larger,’ she said. ‘It has to be part of our general considerations.’”

February 16 – Bloomberg (Aaron Eglitis and Carolynn Look): “The European Central Bank is ‘quite likely’ to lift interest rates in 2022 to combat an unprecedented surge in euro-area prices but mustn’t ‘rock the boat’ as it tightens monetary policy, according to Governing Council member Martins Kazaks. ‘It’s going to be data-dependent,’ the Latvian central bank chief said... ‘We’ll see, but it’s quite likely that it happens this year.’”

February 15 – Bloomberg (William Horobin): “The European Central Bank could end net asset purchases as soon as the third quarter of 2022 without triggering an interest-rate increase shortly afterward, according to Governing Council member Francois Villeroy de Galhau. Villeroy said it’s no longer appropriate for the ECB to keep net bond-buying under its regular APP program open-ended, following reductions through October, because it ‘ties our hand for too long.’”

February 14 – Bloomberg (Swati Pandey and Garfield Reynolds): “The Reserve Bank of Australia’s patient stance on interest rates could see it rushed into a short, sharp tightening cycle that would leave it with less firepower to face a future downturn, said Sally Auld, chief investment officer at JBWere Ltd. ‘The risk for the RBA is that if they wait and they don’t hike until the fourth quarter of this year, then I think the problem that they might run into is that the window to do more sort of shuts quite quickly,’ Auld, who advises clients at National Australia Bank Ltd.’s private wealth arm, said…”

Global Bubble Watch:

February 16 – Reuters (David Milliken): “British consumer prices rose at the fastest annual pace in nearly 30 years last month, intensifying the squeeze on households and reinforcing the chances that the Bank of England will raise interest rates for a third meeting in a row. The annual rate of consumer price inflation rose to 5.5% in January, the highest since March 1992, when Britain was emerging from a long period of inflation-feeding high wage deals.”

February 15 – Bloomberg (Finbarr Flynn): “Asia dollar bonds dropped this week, with trouble in China’s property sector adding to the headache of strong U.S. inflation that’s expected to trigger a rise in interest rates. A Bloomberg index of such debt from around the region suffered its biggest drop since mid-January on Monday, with concerns about yet-another Chinese developer’s ability to make repayments contributing to the drop. Spreads on investment-grade notes widened further early Tuesday…”

February 12 – Bloomberg (Abhinav Ramnarayan, Alice Gledhill and James Hirai): “Investors in European bonds are heading into this rate-hike cycle more vulnerable than they’ve ever been before, suggesting that the painful selloff of recent weeks could be only the beginning. Bonds have tumbled this month as the highest inflation in decades spurs traders and bank analysts to outdo each other in betting on ever more hikes from the Federal Reserve and European Central Bank… Even though ECB chief Christine Lagarde has tried to push back on expectations for the euro zone, sharp moves in long maturity debt from Germany to the likes of Deutsche Bahn AG and Nestle SA are bringing into question the ‘haven’ status of these securities.”

February 14 – Bloomberg (Jack Sidders): “In London’s Royal Albert Dock, almost two dozen buildings conceived of as a new Chinese Canary Wharf stand mostly empty and in the hands of lenders who have finally pulled the plug. About 10 miles to the west, some construction workers angry at not being paid have downed tools on Guangzhou R&F Properties Co.’s flagship development in Nine Elms. And in Paternoster Square, in the heart of the City of London, the tycoon behind embattled developer Shimao Group Holdings Ltd. is in talks to sell a prize office building previously occupied by Goldman Sachs...”

EM Watch:

February 14 – Bloomberg (Netty Ismail, Karl Lester M. Yap and Sydney Maki): “Playbooks for emerging-market carry trades are getting redrafted as favored funding currencies gear up for gains, threatening to eat into investors’ returns. The European Central Bank made a hawkish pivot this month and will likely deliver its first rate increase in more than a decade sometime in 2022. That’s driving fresh strength in the euro, which has long been a favorite funding currency. Meanwhile, growing expectations that the Federal Reserve will have to lift interest rates as many as seven times this year to control soaring consumer prices are putting fire in the belly of the dollar. Even the yen has rallied off tension between Russia and Ukraine, which deepened on Friday.”

February 17 – Bloomberg (Baris Balci and Cagan Koc): “Turkey’s central bank kept its benchmark interest rate unchanged for a second month…, as President Recep Tayyip Erdogan’s government struggles to contain price surges that could threaten his two-decade rule. The Monetary Policy Committee held its one-week repo rate at 14%... Turkish inflation climbed to 48.7% last month, pushing the nation’s yield when adjusted for inflation to almost -35%, the lowest by far among emerging market peers.”

February 12 – Financial Times (Laura Pitel): “Fitch downgraded Turkey’s sovereign debt and issued a scathing verdict on president Recep Tayyip Erdogan’s plan to tackle soaring inflation. The international rating agency pushed the long-term debt rating deeper into junk territory, lowering it from BB- to B+ — putting G20 country on a par with Benin, Egypt, Turkmenistan, Rwanda and Kenya.”

February 14 – Financial Times (Jonathan Wheatley): “The difference between the pace of growth in developing and advanced economies is set to narrow to its lowest level this century. For emerging markets seeking investors, that is a problem: the point of investing in a developing economy is that it offers markedly quicker growth than developed ones. Without that, the money will go elsewhere. Emerging market assets traditionally have greater yields than those available in rich countries for two reasons. One is that their economies are growing faster. The other is that they are riskier. ‘Without growth, it’s just [all] risk,’ says David Lubin, head of emerging market economics at the American bank Citi.”

Europe Watch:

February 14 – Bloomberg (Elena Mazneva, Dina Khrennikova and Olga Tanas): “Russia is showing no indication of increasing gas flows to Europe amid rising tension with the west over Ukraine. Top supplier Gazprom PJSC again opted not to book any pipeline space for March to send gas to Germany via the key Yamal-Europe link… Westbound supplies through that route have been halted since December. The company also didn’t buy extra transit capacity through Ukraine. Russia has been curbing flows for months.”

February 13 – Financial Times: “European printing companies have warned that industries such as food and consumer goods could suffer significant disruption to their supply chains because of a growing shortage of paper. Strikes by thousands of workers at mills owned by forestry group UPM-Kymmene in Finland have exacerbated paper shortages that started with an unexpectedly strong rebound in demand after lockdowns eased. ‘You’ve got paper prices spiking and everyone chasing too few tonnes,’ said Iwan Le Moine, director of EMGE, a consultancy. ‘It’s an absolute mess.’”

Japan Watch:

February 13 – Bloomberg (Chikako Mogi, Masaki Kondo and Toru Fujioka): “Japanese bonds got a double boost Monday as traders returned from a long weekend to find strong demand for haven assets, just as the central bank showed its determination to enforce yield-curve control. The Bank of Japan offered to buy an unlimited amount of 10-year bonds at a fixed rate of 0.25% in a bid to cap the recent rise in yields”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 14 – NPR (Nathan Rott): “Shrunk reservoirs. Depleted aquifers. Low rivers. Raging wildfires. It's no secret that the Western U.S. is in a severe drought. New research published Monday shows just how extreme the situation has become. The Western U.S. and northern Mexico are experiencing their driest period in at least 1,200 years, according to the new study, published in the journal Nature Climate Change. The last comparable — though not as severe — multidecade megadrought occurred in the 1500s, when the West was still largely inhabited by Native American tribes. Today, the region is home to tens of millions of people, massive agricultural centers and some of the fastest-growing cities in the U.S. — all in an area where there's less water available than there was in the past, partially due to human-caused climate change.”

February 17 – Bloomberg (Brian K. Sullivan): “California had its driest January since 1984, with the lack of rain and snow pushing drought conditions across the most populous U.S. state to nearly 100%. January was the second driest start of the year on records going back to 1895, said Ahira Sanchez-Lugo, a climatologist with the National Centers for Environmental Information.”

February 16 – Bloomberg (Jeff Green): “The gender pay gap among top executives at S&P 500 companies in the first year of the pandemic grew to its widest since 2012, fueled in part by male executives’ disproportionate gains from stock-based compensation. In 2020, women in the c-suite earned 75% of what their male counterparts took home, a report… by Morningstar found. That’s the widest the gap has been in nine years, and down from 88% — a high point — in 2018. There were slightly more women in the highest paying jobs at public companies than years prior and their salaries were about on par with men in similar roles. Yet, the bulk of executive pay comes from stock-related awards, and there, men outperformed women by 30-percentage points.”

Leveraged Speculation Watch:

February 12 – Bloomberg (Lu Wang): “It’s the classic attack from market pragmatists on quant investing: Stock trades that look smart in theory end up misfiring in real life. And researchers from the Federal Reserve and the University of Calabria in Italy are now the latest to pour skepticism on the popularity of systematic funds that chase recent winners and dump losers, part of the so-called factor-investing boom. These momentum products have delivered subpar risk-adjusted returns relative to the broader market since 2015, per a new paper from authors including Fed economist Ayelen Banegas.”

February 16 – Wall Street Journal (Liz Hoffman and Justine Baer): “Federal prosecutors are investigating whether short-sellers conspired to drive down stock prices by sharing damaging research reports ahead of time and engaging in illegal trading tactics, people familiar with the matter said. The U.S. Justice Department has seized hardware, trading records and private communications in an effort to prove a wide-ranging conspiracy among investors who bet against corporate shares, the people said. One tactic under investigation is ‘spoofing,’ an illegal ploy that involves flooding the market with fake orders in an effort to push a stock price up or down, they said. Another is ‘scalping,’ where activist short-sellers cash out their positions without disclosing it.”

Geopolitical Watch:

February 17 – Wall Street Journal (Yaroslav Trofimov, Ann M. Simmons and William Mauldin): “Violence escalated in eastern Ukraine on Thursday, with Russian-backed separatists and authorities in Kyiv trading accusations over cease-fire violations along the front line, as President Biden said Moscow was fabricating a pretext to invade its neighbor and warned the threat of a Russian incursion remained ‘very high.’ Adding to the tension, the Kremlin threatened in a letter to the U.S. to resort to unspecified ‘military-technical measures’ if it didn’t receive from the U.S. and its allies legally binding guarantees of its security, which include a pledge from the North Atlantic Treaty Organization that it would never allow Ukraine to join, as well as curbs on troop deployments in Eastern Europe. In the United Nations, meanwhile, Russia formally leveled allegations that Russian leaders have repeated in recent weeks—that Ukraine is pursuing a ‘genocide’ against Russian speakers. Western officials dismiss those accusations as a disinformation effort to justify military action against Kyiv.”

February 16 – Reuters (Natalia Zinets): “Ukraine… said Russia was likely behind the largest cyberattacks of their kind on the country, which downed the web portal of the defence ministry and disrupted banking and terminal services at large state-owned lenders. The Kremlin has denied involvement in the distributed denial of service (DDoS) attacks, which hit Ukraine at a time when the country is bracing itself for a possible invasion after Russia massed more than 100,000 troops near its borders in recent weeks. Ukraine has previously also accused Russia of launching cyberattacks to sow panic and crash its financial system. ‘Yesterday, on February 15, the largest DDoS attack in the history of Ukraine was carried out on government websites, on the banking sector,’ Deputy Prime Minister Mykhailo Fedorov said… ‘This attack is unprecedented, it was prepared in advance. And the key goal of this attack is destabilization, it is to sow panic, to do everything so that a certain chaos appears in our country.’”

February 16 – Financial Times (Polina Ivanova, Max Seddon and John Paul Rathbone): “In December, a month after Russia first began building up its military forces on the Ukrainian border, the withdrawal of 10,000 soldiers from the frontline led to a temporary easing of tensions. Yet within weeks troop numbers were rising again, part of what is now one of the biggest military build-ups in Europe since the end of the cold war — large enough for Washington to warn that Russia had the means to invade Ukraine at any moment. So analysts and western military planners have reacted with caution to talk emanating from Moscow this week of a de-escalation on the border — with some suggesting the opposite was true and that numbers were increasing.”

February 14 – Reuters (Guy Faulconbridge): “Russian mercenaries with ties to Moscow's spies have increased their presence in Ukraine in recent weeks, stoking fears among some NATO members that Russia could try to engineer a pretext for an invasion, three senior Western security sources said. They said their concerns had strengthened in recent weeks that a Russian incursion into Ukraine could be preceded by an information war, and cyber attacks on Ukraine's critical infrastructure such as electricity and gas networks.”

February 15 – New York Times (Jack Nicas and Anton Troianovski): “In the midst of his brinkmanship over neighboring Ukraine in recent weeks, President Vladimir V. Putin has also been busy trying to expand Russia’s influence thousands of miles away: in Latin America. He spoke to Daniel Ortega, Nicaragua’s strongman president, for the first time since 2014. He also called the leaders of Venezuela and Cuba. He hosted the president of Argentina, Alberto Fernández, who vowed during a Kremlin visit to reduce his country’s reliance on the United States. And on Wednesday… Mr. Putin is scheduled to meet with President Jair Bolsonaro of Brazil. Mr. Bolsonaro is flying to Moscow despite repeated entreaties from American officials in recent weeks that he postpone his trip as the West scrambles to pressure Mr. Putin over Ukraine.”

February 13 – Financial Times (Editorial Board): “While many western leaders stayed away from last week’s opening of the Beijing Winter Olympics, China’s president Xi Jinping still managed to attract a star guest: Russia’s Vladimir Putin. After talks and dinner, a more than 5,000-word joint statement by the two leaders denounced American interference in their affairs and opposed further enlargement of Nato… The meeting showed how the growing threat of war over Ukraine is accelerating a major realignment in geopolitics, pushing Moscow and Beijing into a closer embrace. Russia will look to China to alleviate the impact of western sanctions that might follow an assault on Ukraine. China will now demand Russian support for its own regional ambitions over Taiwan and elsewhere. One crucial glue in the relationship is hydrocarbons. Russia has abundant oil, gas and coal, and… some military technologies that China lacks. Beijing has capital, machinery and other sorts of technology that Moscow needs.”

February 14 – Financial Times (Edward White): “As Argentina’s president Alberto Fernández backed out of Beijing’s Great Hall of the People, his ambassador delivered a final message to Chinese leader Xi Jinping: ‘Without the Communist party, there would be no new China!’ The jingoistic line — the title of a famous revolutionary song — was received warmly. ‘Well said, well said,’ Xi responded last week… ‘Thank you for your support.’ The exchange — later broadcast by Chinese state media — was one of a series of meetings held between China’s leaders and more than 30 autocrats, democratic leaders and royals on the sidelines of the Winter Olympics. They came to Beijing despite US calls for a diplomatic boycott in protest at Xi’s crackdowns on Xinjiang and Hong Kong and highlighted China’s new standing in the international order, according to former government officials and China foreign policy experts.”

February 17 – Associated Press: “China… rejected a U.S. accusation that Beijing is failing to live up to its market-opening commitments in a new round of complaints as companies wait for the two governments to restart talks on ending a tariff war. The Ministry of Commerce criticized the Biden administration for saying it is developing new ways to deal with Chinese trade tactics. U.S. Trade Representative Katherine Tai… said Beijing has ‘expanded its state-led, non-market approach’ instead of carrying out market-opening promises made when it joined the World Trade Organization in 2001. That complaint is ‘completely at odds with the facts,’ said a Ministry of Commerce spokesman, Gao Feng. ‘There are many different market economic models,’ Gao said…”