I fell in love with macro analysis sitting at a trading desk staring at Telerate and Quotron screens in the summer of 1987 – wild global market instability that culminated that October with the “Black Monday” crash.
Little did I know at the time that it would be the first of many crises I would witness, analyze and reflect upon. There were the S&L and banking crises in the early nineties; the 1994 bond market and derivatives crisis; the Mexican ‘tequila’ crisis in ’95; the devastating Asian Tiger Bubble collapses in ’97; the LTCM/Russia debacle in ’98; the bursting tech bubble in 2000; 9/11; the 2002 corporate debt crisis; the collapse of the mortgage finance Bubble in 2008; the 2011/2012 European debt crisis; and the 2020 pandemic crisis – just to name the most consequential. But I’ve seen nothing in my career as alarming as today’s environment – and it’s not even close.
My analytical framework has been a work-in-progress for 35 years. I’ll note two particular facets of my experience that have been especially valuable.
I am a CPA by training. My accounting education at the University of Oregon was rigorous and invaluable, as was my stint at Price Waterhouse. I have a passion for monetary theory – but I always view money and Credit through the lens of debits and credits. Finance is, after all, one vast global electronic general ledger.
Second, after graduate school, I accepted a position with Gordy Ringoen’s bearish hedge fund in San Francisco. We were up 63% in 1990. We were the geniuses – turning away investors. I’ve talked about this in the past. I remember sitting at my desk daydreaming what it was going to be like for this small town working class kid to become wealthy. And let me tell you, there is nothing that could have gotten me more focused and determined than to watch my hopes and dreams get absolutely crushed.
I owe my perspective and analytical framework to my obsession during the 1990s of trying to understand how a bear market, a severely impaired banking system, and deep economic recession morphed into one of history’s great bull markets and economic booms.
Early on, I became focused on non-bank Credit creation – asset-backed securities, MBS, commercial paper, money market funds, the big brokerages, the repo market, Wall Street structured finance… And in 1994, I watched as the government-sponsored enterprises – Fannie, Freddie, and the FHLB – provided huge liquidity injections to accommodate hedge fund deleveraging. They were operating as quasi-central banks, and no one seemed to care but me. The GSEs were again providers of enormous liquidity during the 1998 crisis, and then in 1999 and 2000.
By the late-nineties, I was convinced that finance had fundamentally changed. It was out with the traditional bank-dominated Credit system – restrained by bank reserve and capital requirements. Meaning there were mechanisms that at least placed some boundaries on lending and Credit expansion.
This new non-bank Credit was completely unfettered. The GSEs and Wall Street finance, in particular, basically operated without any constraints whatsoever.
From my study of history, I had become convinced that Credit was absolutely key to boom and bust and Bubble dynamics. First and foremost, Credit is inherently unstable. Credit begets more Credit and Credit excess ensures only greater amounts of destabilizing Credit excess. I looked at this new Credit structure and the acute instability in ‘93, ‘94, ‘95, ‘97, ‘98, and then the almost doubling of Nasdaq in 1999 – and it was clear to me this new financial structure was a disaster in the making.
I would explain my analysis to anyone who’d listen. And, let me tell you, no one was interested in listening. I expected the Federal Reserve would come to better understand this highly unstable Credit mechanism and move to rein it in. I spoke with Fed officials, economists, financial journalists and other market professionals, and basically everyone told me I was wrong.
You know, looking back years later – my analysis WAS dead wrong on something critically important. I thought this new finance was part of a late-cycle phenomenon that emerged after the ’87 crash. Instead, it was the dawn of historic Credit, speculation, economic and policy cycles.
I was actually right about the monumental evolution in finance in the nineties. Yet it was not until Pimco’s Paul McCulley in 2007 referred to the new “shadow banking” system that people began to take notice. By then, it was far too late.
The genesis of my analytical mistake can be directly traced to central bankers – and it is most pertinent to today's predicament. As I mentioned earlier, I thought the Fed would respond forcefully when they understood the instability of market-based finance. Clearly, I was young and naive. They did the exact opposite. They accommodated it, and over a couple decades remade central bank policy doctrine to nurture, protect, rescue and revitalize this new financial structure.
So, I’ve dedicated my Friday nights for the past 24 years to chronicling the evolution of finance and policymaking and the inflation of the greatest Bubble in the history of mankind.
I’m here today with what I believe is a critically important message. The global Bubble – history’s greatest Bubble - is bursting. The previous cycle has ended, and a new cycle has begun to unfold. We are about to commence an adjustment period that I fear will shake us to the core.
I am reminded of a passage from a book I read some years ago. The author had interviewed Wall Street traders following the 1929 crash – asking them how they could not have seen peril coming. How could they have missed the egregious amounts of broker call loans, all the debt, the speculative excess, and market and international fragilities? Interestingly, their responses were consistent. They were all aware of the key issues – but they said they were fearful in 1927, and when operating in the markets you can only remain frightened by things for so long.
There’s another quote from that era that has always resonated. “Everyone was determined to hold their ground, but the ground gave way.”
At this point, we’ve become numb to all the excess – excessive debt, speculative excess, reckless monetary inflation and policymaking. My sense is that in the markets, within the business community, throughout the country, we know there are serious issues. Yet, individually we’re all determined to hold our ground.
Right now, I sense a major global earthquake. There are multiple fault lines. The ground is giving way in China. The ground is giving way in Europe. The emerging markets are fragile. Japan is an accident in the making. And these various fault lines are linked.
A deep complacency settled in here in the U.S. Most believe we are largely immune to global maladies. The view persists that the Federal Reserve has everything under control.
Analytically, there are interrelated Bubbles globally that essentially create one monumental Bubble. Why do I suggest a singular Bubble? Because of interconnectedness and commonality – because of similar structures.
There are similar policy regimes. The world essentially adopted inflationary Federal Reserve doctrine – low rates, QE, and market interventions and backstops.
Similar market structure – in particular derivatives, swap markets, leverage and speculation. Importantly, virtually the entire world readily adopted so-called “Wall Street finance.” And “whatever it takes” central banking became deeply embedded in market perceptions and prices everywhere.
Interconnectedness: trading systems, derivatives platforms, swaps trading, hedge funds and “family offices”, international mutual fund complexes, inflationary policies… Moreover, over the long boom, international finance became one fungible, commonly shared pool of liquidity – too much of it trend-following, levered speculative finance.
And now, with Bubbles faltering and global financial conditions tightening, I believe global policymakers have lost control of Bubble dynamics.
Clearly, they don’t control inflation dynamics. I believe we’re witnessing a secular change in pricing dynamics and inflation psychology. Moreover, the previous cycle of relatively tame consumer price inflation in the face of massive monetary inflation was aberrational. I won’t delve into details today, but a unique confluence of developments – including globalization, the rise of China, technological innovation, financial asset inflation and speculative Bubbles – all worked to repress consumer prices.
Today’s new cycle, with global fragmentation and the new iron curtain, deep-rooted supply chain issues, commodities supply/demand imbalances, climate change issues and the like, ensures very different inflation dynamics going forward.
Indeed, surging inflation is forcing the Fed into the first real tightening cycle since 1994 – 28 years ago. And since 1994, markets – rather than inflation – have been the Fed’s priority. Now, the powerful revival of traditional inflation dynamics has dictated an abrupt shift in focus and priorities. While early in the process, the Fed is being forced to revise doctrine back to more conventional central banking.
We cannot overstate the significance of the so-called “Fed put” during the previous cycle. This liquidity backstop – that morphed over time into “whatever it takes”, zero rates and endless Trillions of QE – created the perception of safety and liquidity - of “moneyness” - throughout the financial markets. Stocks became a can’t lose, corporate debt the same, and even the crazy cryptocurrencies. Can’t lose included derivatives and Wall Street structured finance – private equity, venture capital, hedge funds and leveraged speculation. With central bank backing, perceptions crystallized that the entire new financial structure was a can’t lose.
And this “moneyness of everything” was paramount to synchronized late-cycle Bubble “blow-off” excess across the globe, with historic misperceptions fundamentally changing how markets and financial structures function – market pricing, speculative dynamics, risk management, and the overall flow of finance. History offers nothing remotely comparable.
These days, it’s increasingly apparent that the world has changed, and this is at the heart of unfolding new cycle dynamics. Central bankers have been jolted – their policies, their doctrine, their views of how the world works. Importantly, their market liquidity backstops have turned problematic and ambiguous. In the end, I believe central banks will have no alternative than to employ additional QE to counter the forces of bursting Bubbles. For now, inflation’s resurgence suggests the halcyon “money” free-for-all days are behind us.
Back during the 1987 crash, so-called “portfolio insurance” played a meaningful role in the avalanche of sell orders that crashed the market. I then watched as derivatives were instrumental in market crises in '94, ’95, ’97, ‘98, 2000, 2008, 2011, and 2020. And with each central bank market bailout, the monstrous derivatives Bubble inflated to even more dangerous extremes.
Peter Bernstein’s classic book, “Against the Gods: The Remarkable Story of Risk,” was published in 1996. It’s a masterpiece, though I’ve always had an issue with the notion that we live in an enlightened age where risks are better understood and managed. Over the past cycle, the view took hold that central banks can control market risk, while derivatives offer an inexpensive and reliable mechanism to mitigate risk.
I don’t believe we can overstate the role derivatives have played – within the markets, but also throughout the real economy. They’re ubiquitous – institutions, corporations, investment managers, and even individual investors all fell in love. I’ve already seen ample evidence that derivatives will be at the epicenter of unfolding financial crises. They’re certainly worthy of keen analytical focus.
There are serious fallacies embedded in the derivatives universe that I expect to be revealed with major consequences.
First, derivatives operate under the assumption of liquid and continuous markets. Meaning, derivatives players assume they’ll always be able to buy and sell in orderly markets to hedge exposures to contracts they’ve written. Yet centuries of history are unequivocal: markets invariably suffer through bouts of illiquidity, discontinuity, panics and collapses.
So, how have derivatives markets flourished for three decades, quickly recovering from multiple crises? There’s one simple answer: central banking and the evolution of market backstops – more recently to the point of egregious monetary inflation.
Keep in mind how things operated over the past cycle: Loose money would fuel a Bubble, the Bubble would burst, and only looser money restored Bubble dynamics to fuel the next even bigger Bubble. This cycle repeated to the point of an insane $5 TN pandemic QE onslaught, stoking the so-called “everything Bubble” and history’s greatest mania.
Over the past decade, not only did the “granddaddy of all bubbles” go global, it also infected the foundation of finance – central bank Credit and government debt. With consumer price inflation now a serious issue for central bankers, tighter monetary policy is hitting a dangerously fragile world.
Myriad Bubbles are faltering outside central bank control, and evidence is mounting that global policymakers have lost the capacity to ensure liquid and continuous markets. As such, we have to question whether colossal derivatives markets, as we’ve known them, will be viable in the unfolding environment.
Buying inexpensive market insurance has been fundamental to so many strategies. It has been central to leveraged speculation and risk-taking more generally. If insurance is readily available and cheap, why not take on more risk and leverage?
And this gets back to derivative market fallacies. The fundamental issue is that market losses are uninsurable. Insurance companies provide protection against random and independent events. Years of actuarial data create the ability to accurately forecast and price for future losses - for automobile accidents, house fires, healthcare expenses, death and so on. Insurance companies price policies and hold reserves for expected future claims.
Market losses are categorically neither random nor independent. They come in waves, with unpredictable scope and timing. Moreover, those that sell market protection do not build reserves against future losses. Instead, they use sophisticated trading programs and buy and sell instruments in the marketplace to provide the necessary cashflow to pay on derivatives written. In particular, when a derivatives dealer writes market protection, the strategy dictates they sell instruments into a declining market to ensure they have the resources to pay on losses. This creates the clear potential to unleash cascading sell orders and a market crash.
And we’ve seen this play out repeatedly, from “portfolio insurance” back in 1987 to just last week’s near crash of the UK bond market. Recall also how in March 2020, the Fed had to make several announcements of ever larger QE programs to finally stem the waterfall of sell orders – in stocks, bonds, and ETFs shares.
The Fed resuscitated the Bubble, with speculative excess and leverage growing only more problematic. And the greater the scope of market risk, the more dangerous derivatives become.
There’s a perception these days that it’s possible to just buy derivative insurance and lock in gains from the great bull market. Economists of old referred to the “fallacy of composition.” Simplistically, what works for one individual has much different consequences if adopted by the group. Right now, I think much of the marketplace believes it can use derivatives to mitigate market risk.
Yet it’s impossible for the broader market to hedge against losses. There’s simply no place to offload tens of Trillions of market risk. No one has the wherewithal to absorb such losses. And if a large segment of a market hedges risk in the derivatives marketplace, those hedges create systemic crash risk. If the market breaks to the downside, the writers of this market protection will be forced to aggressively sell into a collapsing market. If not for QE, derivative markets would surely have collapsed in both 2008 and 2020.
And, again, this is not some theoretical proposition. This dynamic unfolded last week in the UK gilt market. Aggressive Bank of England intervention thwarted a market collapse, but in the process market fragilities were revealed.
Over the years, I’ve shared a flood insurance analogy. Picture a sleepy little village on a pristine river, where a long drought encouraged local insurance companies to write a few policies for waterfront development. As the drought lingered, more entered the flood insurance market to capture some of the easy profits. Building along the river started to boom. Of course, many wanted in on the action, with new insurance operators sprouting up on every corner. Curiously, they actually had no intention of ever paying a claim. They were writing policies and immediately booking the profits, with the plan of moving quickly to offload exposure in the bustling reinsurance market in the unlikely occurrence of torrential rainfall.
The moral of this story is that an extended period of tranquility – a long drought – distorts risk perceptions and market prices, while inviting destabilizing speculation. Effects are both financial and economic.
It’s a sad tale, unfortunately. When torrential rains finally arrived, the crowd of insurance speculators rushed to offload their risk. Panic ensued. There was no one willing and able to write policies, and the reinsurance marketplace collapsed in illiquidity. Importantly, the amount of lavish building all along the river had risen exponentially – all because of the insurance market Bubble. After the flood, scores of so-called “insurance companies” collapsed, and most policies were worthless.
Pondering the current environment, I’m updating my analogue. After the first flood, the local government bailed out the insurance companies, built a dam up river, and handed out a lot of money for local residents to rebuild. Eventually, however, the dam proved incapable of holding back the water. There was another flood, a bigger bailout and only more generous handouts. After multiple rounds of this over a few decades, everyone came to believe risks could simply be ignored. Just build your dream home and place your faith with local government officials.
Complacent townsfolk were oblivious to a momentous predicament. The government had reached its limit in holding back the water. There was no place on the river for additional barriers, and serious structural issues made it too risky to continue to add to the height of existing dams. Understandably, the attention of local officials shifted from supporting insurance and building booms, to the myriad structural issues and risk of a catastrophic domino dam collapse.
The ending to this tale has yet to be written. Do the townsfolk start losing confidence in the local government’s capacity to sustain the boom? Do the townspeople realize there’s no capacity for additional dams? Do they worry about the insurance companies and their policies? One thing’s for sure, the rainfall is unrelenting. All the dams have reached maximum capacity.
Importantly, the boom reached a point where confidence turned fragile – confidence in the local government, confidence in the insurance market, as well as the economy. The reinsurance market began to malfunction, forcing the speculators to back away. Flood insurance became increasingly difficult to get and more expensive. Even before the rains, the building boom faltered.
The message from my update: Perceptions can change with enormous ramifications. After years of good times, the townspeople came to believe the local government had control of the river flow. Heck, many thought they could control the weather. Some refer to a “Lehman” or a “Minsky moment.” I call it the “holy crap moment”. Suddenly, things are not as we thought; they might be spiraling out of control, and our government benefactor no longer has an answer.
I look at the world today and see things spiraling away from the control of central bankers and policymakers.
China’s historic bubble is collapsing. One of history’s great speculative manias – Chinese apartment units – has begun the crash phase. And while China’s spectacular Credit Bubble continues to inflate, even egregious amounts of new Credit are not enough to sustain the boom.
Chinese bank assets reached $55 TN this year, after beginning 2009 at about $9,0 TN. It’s frightening to ponder the quality of Chinese bank assets. We’ve already witnessed a spectacular Chinese developer bond collapse – an industry with several trillion dollars of liabilities. China also has serious Credit issues with multi-trillion local government debt instruments and the multi-trillion AMCs, or “asset management companies,” created to clean up after the nineties bust.
Importantly, the Chinese currency is showing vulnerability, down over 10% y-t-d versus the dollar. Country Garden, China’s largest builder, only months ago viewed as a sound Credit, saw its bond yields today surge to a record 53%.
China would already be in full-fledged financial crisis, if not for one thing: There's still faith that Beijing controls the weather.
Europe faces war, an acute energy crisis, a tumultuous winter, high inflation, recessionary forces, and major debt issues. Yet, so far faith holds that the ECB still controls the weather (“Believe us, we control the weather”).
European peripheral debt markets are a fragile fault line. When yields spiked in June – even in the face of zero rates and ongoing QE – the ECB concocted a so-called “anti-fragmentation tool” for purchasing periphery bonds in the event of a disorderly yield spike. Bond yields reversed sharply lower on the news, but are now right back near June highs. Italian yields spiked 23 bps Wednesday – and are up 18 bps today - on a Moody’s warning of an Italian debt downgrade if the new right-wing coalition government doesn’t stick with spending commitments.
Truth be told, the ECB really doesn’t want to use its anti-fragmentation tool. If they employ it and it flops, they immediately face a serious crisis of confidence. And what’s at stake is nothing short of European monetary integration and the survival of the euro currency. I’ve had a long-held view that, at the end of the day, I don’t expect the Germans and Italians to share a common currency. An unfolding periphery debt crisis risks financial, economic, social and political crises.
Let’s shift to Japan. I have tremendous respect for the Japanese people. They endured a bursting Bubble and prolonged stagnation. As a society, they held things together. For years, I even defended Japanese policymaking. While they terribly mismanaged monetary policy during their Bubble period, they got through the downturn without resorting to reckless monetary inflation. The yen remained strong. But then Ben Bernanke convinced the Bank of Japan to start printing money and, predictably, they’ve not been able to wean themselves from rank inflationism.
The Bank of Japan went so far as to continue enormous monetary inflation as part of a policy to place a 25 basis point ceiling on 10-year government yields. The yen has sunk to a 24-year low, and the Japanese are paying a lot more for a lot of things. I fear Japan is another accident in the making. In a world of surging inflation and spiking market yields, markets are questioning how long the BOJ can continue manipulating the weather. I fear the dam will break when the BOJ yield peg collapses.
Emerging markets are always vulnerable to tightening financial conditions. The high-risk periphery is notoriously on the receiving end of “hot money” speculative flows during Bubble periods, but then faces crisis dynamics when “risk off” deleveraging spurs illiquidity and dislocation.
Crisis dynamics have been in play, though so far this cycle has some nuance. This was a most protracted global Bubble period, and over the years EM countries built significant dollar reserves. These reserves have provided firepower for EM central bankers to stabilize their currencies, which has underpinned general confidence. But EM countries are rapidly burning through these reserves, and a crisis of confidence appears unavoidable. Moreover, when EM central banks sell reserves, such as Treasuries, to bolster their currencies, this puts upward pressure on Treasury and global yields. It’s a “doom loop”.
Eastern European nations face obvious risks. Asian emerging market economies are over-levered and acutely vulnerable to the confluence of tightening financial conditions and Chinese and Japanese crises. Latin America is always vulnerable, with a critical Brazilian presidential election only a few weeks away.
I worry these fragile global fault lines – China, Europe, Japan, EM and others – are poised to succumb in unison.
And in no way do I believe the U.S. is immune. No market experienced comparable speculative excess. No economy feasted so on years of essentially free “money”. U.S. market structure is acutely vulnerable. Our economic structure is extremely vulnerable to tightened Credit and liquidity conditions. In particular, the long boom period saw a proliferation of uneconomic, negative cash-flow businesses and enterprises. In Austrian Economics parlance, it’s been epic malinvestment.
And in no country has there been such faith that the central bank has everything under control – that it controls the weather. The problem today is that the Fed faces a serious inflation problem. Our central bankers appreciate that financial conditions must tighten before price pressures and inflationary psychology spiral out of control.
Meanwhile, our entire financial structure has been underpinned for years by the perception that the Fed will do “whatever it takes” to support the markets and grow the economy. The view holds that the Fed won’t allow a crisis. It will cut rates and deploy as much QE as necessary to thwart financial crisis.
But there’s a big problem: The Bubble has inflated to the point that it will take Trillions of additional QE to accommodate a serious de-risking/deleveraging. Recall again how it required several Fed announcements of additional massive QE to thwart market collapse in March 2020. Five Trillion of QE later, and the Bubble had inflated only bigger and more unwieldy.
And the inflation problem is much more severe and deeply rooted. This means the Fed liquidity backstop has turned uncertain. I expect more QE, but the Fed will respond more slowly and cautiously. And I do not expect this to suffice in the markets.
There are many myths and misperceptions at stake. And I fear the “holy crap” moment – markets hit with the harsh reality that the Fed and global central bankers don’t have everything under control.
In particular, I fear concurrent crises of confidence in policymaking and market structure. De-risking/deleveraging will feed illiquidity and market dislocation. Global derivatives markets will be severely tested.
I’ll also briefly speak to today’s alarming geopolitical backdrop. The Ukraine war, deteriorating relations with China, Taiwan, North Korea, Iran and such. Why are so many things coming to a head right now?
Keep in mind that boom periods engender perceptions of an expanding global pie. Cooperation, integration and alliances are viewed as mutually beneficial. But late in the cycle, perceptions begin to shift. Many see the pie stagnant or shrinking. Zero sum game thinking dominates. Insecurity, animosity, disintegration, fraught alliances and conflict take hold.
I see no end in sight for the extremely challenging market environment. We’ll have to continue to navigate through de-risking/deleveraging dynamics and chaotic market instability. The extraordinary environment demands intense daily focus, discipline, and a risk-management focus. It is time to be on alert and as prepared as possible.
Little did I know at the time that it would be the first of many crises I would witness, analyze and reflect upon. There were the S&L and banking crises in the early nineties; the 1994 bond market and derivatives crisis; the Mexican ‘tequila’ crisis in ’95; the devastating Asian Tiger Bubble collapses in ’97; the LTCM/Russia debacle in ’98; the bursting tech bubble in 2000; 9/11; the 2002 corporate debt crisis; the collapse of the mortgage finance Bubble in 2008; the 2011/2012 European debt crisis; and the 2020 pandemic crisis – just to name the most consequential. But I’ve seen nothing in my career as alarming as today’s environment – and it’s not even close.
My analytical framework has been a work-in-progress for 35 years. I’ll note two particular facets of my experience that have been especially valuable.
I am a CPA by training. My accounting education at the University of Oregon was rigorous and invaluable, as was my stint at Price Waterhouse. I have a passion for monetary theory – but I always view money and Credit through the lens of debits and credits. Finance is, after all, one vast global electronic general ledger.
Second, after graduate school, I accepted a position with Gordy Ringoen’s bearish hedge fund in San Francisco. We were up 63% in 1990. We were the geniuses – turning away investors. I’ve talked about this in the past. I remember sitting at my desk daydreaming what it was going to be like for this small town working class kid to become wealthy. And let me tell you, there is nothing that could have gotten me more focused and determined than to watch my hopes and dreams get absolutely crushed.
I owe my perspective and analytical framework to my obsession during the 1990s of trying to understand how a bear market, a severely impaired banking system, and deep economic recession morphed into one of history’s great bull markets and economic booms.
Early on, I became focused on non-bank Credit creation – asset-backed securities, MBS, commercial paper, money market funds, the big brokerages, the repo market, Wall Street structured finance… And in 1994, I watched as the government-sponsored enterprises – Fannie, Freddie, and the FHLB – provided huge liquidity injections to accommodate hedge fund deleveraging. They were operating as quasi-central banks, and no one seemed to care but me. The GSEs were again providers of enormous liquidity during the 1998 crisis, and then in 1999 and 2000.
By the late-nineties, I was convinced that finance had fundamentally changed. It was out with the traditional bank-dominated Credit system – restrained by bank reserve and capital requirements. Meaning there were mechanisms that at least placed some boundaries on lending and Credit expansion.
This new non-bank Credit was completely unfettered. The GSEs and Wall Street finance, in particular, basically operated without any constraints whatsoever.
From my study of history, I had become convinced that Credit was absolutely key to boom and bust and Bubble dynamics. First and foremost, Credit is inherently unstable. Credit begets more Credit and Credit excess ensures only greater amounts of destabilizing Credit excess. I looked at this new Credit structure and the acute instability in ‘93, ‘94, ‘95, ‘97, ‘98, and then the almost doubling of Nasdaq in 1999 – and it was clear to me this new financial structure was a disaster in the making.
I would explain my analysis to anyone who’d listen. And, let me tell you, no one was interested in listening. I expected the Federal Reserve would come to better understand this highly unstable Credit mechanism and move to rein it in. I spoke with Fed officials, economists, financial journalists and other market professionals, and basically everyone told me I was wrong.
You know, looking back years later – my analysis WAS dead wrong on something critically important. I thought this new finance was part of a late-cycle phenomenon that emerged after the ’87 crash. Instead, it was the dawn of historic Credit, speculation, economic and policy cycles.
I was actually right about the monumental evolution in finance in the nineties. Yet it was not until Pimco’s Paul McCulley in 2007 referred to the new “shadow banking” system that people began to take notice. By then, it was far too late.
The genesis of my analytical mistake can be directly traced to central bankers – and it is most pertinent to today's predicament. As I mentioned earlier, I thought the Fed would respond forcefully when they understood the instability of market-based finance. Clearly, I was young and naive. They did the exact opposite. They accommodated it, and over a couple decades remade central bank policy doctrine to nurture, protect, rescue and revitalize this new financial structure.
So, I’ve dedicated my Friday nights for the past 24 years to chronicling the evolution of finance and policymaking and the inflation of the greatest Bubble in the history of mankind.
I’m here today with what I believe is a critically important message. The global Bubble – history’s greatest Bubble - is bursting. The previous cycle has ended, and a new cycle has begun to unfold. We are about to commence an adjustment period that I fear will shake us to the core.
I am reminded of a passage from a book I read some years ago. The author had interviewed Wall Street traders following the 1929 crash – asking them how they could not have seen peril coming. How could they have missed the egregious amounts of broker call loans, all the debt, the speculative excess, and market and international fragilities? Interestingly, their responses were consistent. They were all aware of the key issues – but they said they were fearful in 1927, and when operating in the markets you can only remain frightened by things for so long.
There’s another quote from that era that has always resonated. “Everyone was determined to hold their ground, but the ground gave way.”
At this point, we’ve become numb to all the excess – excessive debt, speculative excess, reckless monetary inflation and policymaking. My sense is that in the markets, within the business community, throughout the country, we know there are serious issues. Yet, individually we’re all determined to hold our ground.
Right now, I sense a major global earthquake. There are multiple fault lines. The ground is giving way in China. The ground is giving way in Europe. The emerging markets are fragile. Japan is an accident in the making. And these various fault lines are linked.
A deep complacency settled in here in the U.S. Most believe we are largely immune to global maladies. The view persists that the Federal Reserve has everything under control.
Analytically, there are interrelated Bubbles globally that essentially create one monumental Bubble. Why do I suggest a singular Bubble? Because of interconnectedness and commonality – because of similar structures.
There are similar policy regimes. The world essentially adopted inflationary Federal Reserve doctrine – low rates, QE, and market interventions and backstops.
Similar market structure – in particular derivatives, swap markets, leverage and speculation. Importantly, virtually the entire world readily adopted so-called “Wall Street finance.” And “whatever it takes” central banking became deeply embedded in market perceptions and prices everywhere.
Interconnectedness: trading systems, derivatives platforms, swaps trading, hedge funds and “family offices”, international mutual fund complexes, inflationary policies… Moreover, over the long boom, international finance became one fungible, commonly shared pool of liquidity – too much of it trend-following, levered speculative finance.
And now, with Bubbles faltering and global financial conditions tightening, I believe global policymakers have lost control of Bubble dynamics.
Clearly, they don’t control inflation dynamics. I believe we’re witnessing a secular change in pricing dynamics and inflation psychology. Moreover, the previous cycle of relatively tame consumer price inflation in the face of massive monetary inflation was aberrational. I won’t delve into details today, but a unique confluence of developments – including globalization, the rise of China, technological innovation, financial asset inflation and speculative Bubbles – all worked to repress consumer prices.
Today’s new cycle, with global fragmentation and the new iron curtain, deep-rooted supply chain issues, commodities supply/demand imbalances, climate change issues and the like, ensures very different inflation dynamics going forward.
Indeed, surging inflation is forcing the Fed into the first real tightening cycle since 1994 – 28 years ago. And since 1994, markets – rather than inflation – have been the Fed’s priority. Now, the powerful revival of traditional inflation dynamics has dictated an abrupt shift in focus and priorities. While early in the process, the Fed is being forced to revise doctrine back to more conventional central banking.
We cannot overstate the significance of the so-called “Fed put” during the previous cycle. This liquidity backstop – that morphed over time into “whatever it takes”, zero rates and endless Trillions of QE – created the perception of safety and liquidity - of “moneyness” - throughout the financial markets. Stocks became a can’t lose, corporate debt the same, and even the crazy cryptocurrencies. Can’t lose included derivatives and Wall Street structured finance – private equity, venture capital, hedge funds and leveraged speculation. With central bank backing, perceptions crystallized that the entire new financial structure was a can’t lose.
And this “moneyness of everything” was paramount to synchronized late-cycle Bubble “blow-off” excess across the globe, with historic misperceptions fundamentally changing how markets and financial structures function – market pricing, speculative dynamics, risk management, and the overall flow of finance. History offers nothing remotely comparable.
These days, it’s increasingly apparent that the world has changed, and this is at the heart of unfolding new cycle dynamics. Central bankers have been jolted – their policies, their doctrine, their views of how the world works. Importantly, their market liquidity backstops have turned problematic and ambiguous. In the end, I believe central banks will have no alternative than to employ additional QE to counter the forces of bursting Bubbles. For now, inflation’s resurgence suggests the halcyon “money” free-for-all days are behind us.
Back during the 1987 crash, so-called “portfolio insurance” played a meaningful role in the avalanche of sell orders that crashed the market. I then watched as derivatives were instrumental in market crises in '94, ’95, ’97, ‘98, 2000, 2008, 2011, and 2020. And with each central bank market bailout, the monstrous derivatives Bubble inflated to even more dangerous extremes.
Peter Bernstein’s classic book, “Against the Gods: The Remarkable Story of Risk,” was published in 1996. It’s a masterpiece, though I’ve always had an issue with the notion that we live in an enlightened age where risks are better understood and managed. Over the past cycle, the view took hold that central banks can control market risk, while derivatives offer an inexpensive and reliable mechanism to mitigate risk.
I don’t believe we can overstate the role derivatives have played – within the markets, but also throughout the real economy. They’re ubiquitous – institutions, corporations, investment managers, and even individual investors all fell in love. I’ve already seen ample evidence that derivatives will be at the epicenter of unfolding financial crises. They’re certainly worthy of keen analytical focus.
There are serious fallacies embedded in the derivatives universe that I expect to be revealed with major consequences.
First, derivatives operate under the assumption of liquid and continuous markets. Meaning, derivatives players assume they’ll always be able to buy and sell in orderly markets to hedge exposures to contracts they’ve written. Yet centuries of history are unequivocal: markets invariably suffer through bouts of illiquidity, discontinuity, panics and collapses.
So, how have derivatives markets flourished for three decades, quickly recovering from multiple crises? There’s one simple answer: central banking and the evolution of market backstops – more recently to the point of egregious monetary inflation.
Keep in mind how things operated over the past cycle: Loose money would fuel a Bubble, the Bubble would burst, and only looser money restored Bubble dynamics to fuel the next even bigger Bubble. This cycle repeated to the point of an insane $5 TN pandemic QE onslaught, stoking the so-called “everything Bubble” and history’s greatest mania.
Over the past decade, not only did the “granddaddy of all bubbles” go global, it also infected the foundation of finance – central bank Credit and government debt. With consumer price inflation now a serious issue for central bankers, tighter monetary policy is hitting a dangerously fragile world.
Myriad Bubbles are faltering outside central bank control, and evidence is mounting that global policymakers have lost the capacity to ensure liquid and continuous markets. As such, we have to question whether colossal derivatives markets, as we’ve known them, will be viable in the unfolding environment.
Buying inexpensive market insurance has been fundamental to so many strategies. It has been central to leveraged speculation and risk-taking more generally. If insurance is readily available and cheap, why not take on more risk and leverage?
And this gets back to derivative market fallacies. The fundamental issue is that market losses are uninsurable. Insurance companies provide protection against random and independent events. Years of actuarial data create the ability to accurately forecast and price for future losses - for automobile accidents, house fires, healthcare expenses, death and so on. Insurance companies price policies and hold reserves for expected future claims.
Market losses are categorically neither random nor independent. They come in waves, with unpredictable scope and timing. Moreover, those that sell market protection do not build reserves against future losses. Instead, they use sophisticated trading programs and buy and sell instruments in the marketplace to provide the necessary cashflow to pay on derivatives written. In particular, when a derivatives dealer writes market protection, the strategy dictates they sell instruments into a declining market to ensure they have the resources to pay on losses. This creates the clear potential to unleash cascading sell orders and a market crash.
And we’ve seen this play out repeatedly, from “portfolio insurance” back in 1987 to just last week’s near crash of the UK bond market. Recall also how in March 2020, the Fed had to make several announcements of ever larger QE programs to finally stem the waterfall of sell orders – in stocks, bonds, and ETFs shares.
The Fed resuscitated the Bubble, with speculative excess and leverage growing only more problematic. And the greater the scope of market risk, the more dangerous derivatives become.
There’s a perception these days that it’s possible to just buy derivative insurance and lock in gains from the great bull market. Economists of old referred to the “fallacy of composition.” Simplistically, what works for one individual has much different consequences if adopted by the group. Right now, I think much of the marketplace believes it can use derivatives to mitigate market risk.
Yet it’s impossible for the broader market to hedge against losses. There’s simply no place to offload tens of Trillions of market risk. No one has the wherewithal to absorb such losses. And if a large segment of a market hedges risk in the derivatives marketplace, those hedges create systemic crash risk. If the market breaks to the downside, the writers of this market protection will be forced to aggressively sell into a collapsing market. If not for QE, derivative markets would surely have collapsed in both 2008 and 2020.
And, again, this is not some theoretical proposition. This dynamic unfolded last week in the UK gilt market. Aggressive Bank of England intervention thwarted a market collapse, but in the process market fragilities were revealed.
Over the years, I’ve shared a flood insurance analogy. Picture a sleepy little village on a pristine river, where a long drought encouraged local insurance companies to write a few policies for waterfront development. As the drought lingered, more entered the flood insurance market to capture some of the easy profits. Building along the river started to boom. Of course, many wanted in on the action, with new insurance operators sprouting up on every corner. Curiously, they actually had no intention of ever paying a claim. They were writing policies and immediately booking the profits, with the plan of moving quickly to offload exposure in the bustling reinsurance market in the unlikely occurrence of torrential rainfall.
The moral of this story is that an extended period of tranquility – a long drought – distorts risk perceptions and market prices, while inviting destabilizing speculation. Effects are both financial and economic.
It’s a sad tale, unfortunately. When torrential rains finally arrived, the crowd of insurance speculators rushed to offload their risk. Panic ensued. There was no one willing and able to write policies, and the reinsurance marketplace collapsed in illiquidity. Importantly, the amount of lavish building all along the river had risen exponentially – all because of the insurance market Bubble. After the flood, scores of so-called “insurance companies” collapsed, and most policies were worthless.
Pondering the current environment, I’m updating my analogue. After the first flood, the local government bailed out the insurance companies, built a dam up river, and handed out a lot of money for local residents to rebuild. Eventually, however, the dam proved incapable of holding back the water. There was another flood, a bigger bailout and only more generous handouts. After multiple rounds of this over a few decades, everyone came to believe risks could simply be ignored. Just build your dream home and place your faith with local government officials.
Complacent townsfolk were oblivious to a momentous predicament. The government had reached its limit in holding back the water. There was no place on the river for additional barriers, and serious structural issues made it too risky to continue to add to the height of existing dams. Understandably, the attention of local officials shifted from supporting insurance and building booms, to the myriad structural issues and risk of a catastrophic domino dam collapse.
The ending to this tale has yet to be written. Do the townsfolk start losing confidence in the local government’s capacity to sustain the boom? Do the townspeople realize there’s no capacity for additional dams? Do they worry about the insurance companies and their policies? One thing’s for sure, the rainfall is unrelenting. All the dams have reached maximum capacity.
Importantly, the boom reached a point where confidence turned fragile – confidence in the local government, confidence in the insurance market, as well as the economy. The reinsurance market began to malfunction, forcing the speculators to back away. Flood insurance became increasingly difficult to get and more expensive. Even before the rains, the building boom faltered.
The message from my update: Perceptions can change with enormous ramifications. After years of good times, the townspeople came to believe the local government had control of the river flow. Heck, many thought they could control the weather. Some refer to a “Lehman” or a “Minsky moment.” I call it the “holy crap moment”. Suddenly, things are not as we thought; they might be spiraling out of control, and our government benefactor no longer has an answer.
I look at the world today and see things spiraling away from the control of central bankers and policymakers.
China’s historic bubble is collapsing. One of history’s great speculative manias – Chinese apartment units – has begun the crash phase. And while China’s spectacular Credit Bubble continues to inflate, even egregious amounts of new Credit are not enough to sustain the boom.
Chinese bank assets reached $55 TN this year, after beginning 2009 at about $9,0 TN. It’s frightening to ponder the quality of Chinese bank assets. We’ve already witnessed a spectacular Chinese developer bond collapse – an industry with several trillion dollars of liabilities. China also has serious Credit issues with multi-trillion local government debt instruments and the multi-trillion AMCs, or “asset management companies,” created to clean up after the nineties bust.
Importantly, the Chinese currency is showing vulnerability, down over 10% y-t-d versus the dollar. Country Garden, China’s largest builder, only months ago viewed as a sound Credit, saw its bond yields today surge to a record 53%.
China would already be in full-fledged financial crisis, if not for one thing: There's still faith that Beijing controls the weather.
Europe faces war, an acute energy crisis, a tumultuous winter, high inflation, recessionary forces, and major debt issues. Yet, so far faith holds that the ECB still controls the weather (“Believe us, we control the weather”).
European peripheral debt markets are a fragile fault line. When yields spiked in June – even in the face of zero rates and ongoing QE – the ECB concocted a so-called “anti-fragmentation tool” for purchasing periphery bonds in the event of a disorderly yield spike. Bond yields reversed sharply lower on the news, but are now right back near June highs. Italian yields spiked 23 bps Wednesday – and are up 18 bps today - on a Moody’s warning of an Italian debt downgrade if the new right-wing coalition government doesn’t stick with spending commitments.
Truth be told, the ECB really doesn’t want to use its anti-fragmentation tool. If they employ it and it flops, they immediately face a serious crisis of confidence. And what’s at stake is nothing short of European monetary integration and the survival of the euro currency. I’ve had a long-held view that, at the end of the day, I don’t expect the Germans and Italians to share a common currency. An unfolding periphery debt crisis risks financial, economic, social and political crises.
Let’s shift to Japan. I have tremendous respect for the Japanese people. They endured a bursting Bubble and prolonged stagnation. As a society, they held things together. For years, I even defended Japanese policymaking. While they terribly mismanaged monetary policy during their Bubble period, they got through the downturn without resorting to reckless monetary inflation. The yen remained strong. But then Ben Bernanke convinced the Bank of Japan to start printing money and, predictably, they’ve not been able to wean themselves from rank inflationism.
The Bank of Japan went so far as to continue enormous monetary inflation as part of a policy to place a 25 basis point ceiling on 10-year government yields. The yen has sunk to a 24-year low, and the Japanese are paying a lot more for a lot of things. I fear Japan is another accident in the making. In a world of surging inflation and spiking market yields, markets are questioning how long the BOJ can continue manipulating the weather. I fear the dam will break when the BOJ yield peg collapses.
Emerging markets are always vulnerable to tightening financial conditions. The high-risk periphery is notoriously on the receiving end of “hot money” speculative flows during Bubble periods, but then faces crisis dynamics when “risk off” deleveraging spurs illiquidity and dislocation.
Crisis dynamics have been in play, though so far this cycle has some nuance. This was a most protracted global Bubble period, and over the years EM countries built significant dollar reserves. These reserves have provided firepower for EM central bankers to stabilize their currencies, which has underpinned general confidence. But EM countries are rapidly burning through these reserves, and a crisis of confidence appears unavoidable. Moreover, when EM central banks sell reserves, such as Treasuries, to bolster their currencies, this puts upward pressure on Treasury and global yields. It’s a “doom loop”.
Eastern European nations face obvious risks. Asian emerging market economies are over-levered and acutely vulnerable to the confluence of tightening financial conditions and Chinese and Japanese crises. Latin America is always vulnerable, with a critical Brazilian presidential election only a few weeks away.
I worry these fragile global fault lines – China, Europe, Japan, EM and others – are poised to succumb in unison.
And in no way do I believe the U.S. is immune. No market experienced comparable speculative excess. No economy feasted so on years of essentially free “money”. U.S. market structure is acutely vulnerable. Our economic structure is extremely vulnerable to tightened Credit and liquidity conditions. In particular, the long boom period saw a proliferation of uneconomic, negative cash-flow businesses and enterprises. In Austrian Economics parlance, it’s been epic malinvestment.
And in no country has there been such faith that the central bank has everything under control – that it controls the weather. The problem today is that the Fed faces a serious inflation problem. Our central bankers appreciate that financial conditions must tighten before price pressures and inflationary psychology spiral out of control.
Meanwhile, our entire financial structure has been underpinned for years by the perception that the Fed will do “whatever it takes” to support the markets and grow the economy. The view holds that the Fed won’t allow a crisis. It will cut rates and deploy as much QE as necessary to thwart financial crisis.
But there’s a big problem: The Bubble has inflated to the point that it will take Trillions of additional QE to accommodate a serious de-risking/deleveraging. Recall again how it required several Fed announcements of additional massive QE to thwart market collapse in March 2020. Five Trillion of QE later, and the Bubble had inflated only bigger and more unwieldy.
And the inflation problem is much more severe and deeply rooted. This means the Fed liquidity backstop has turned uncertain. I expect more QE, but the Fed will respond more slowly and cautiously. And I do not expect this to suffice in the markets.
There are many myths and misperceptions at stake. And I fear the “holy crap” moment – markets hit with the harsh reality that the Fed and global central bankers don’t have everything under control.
In particular, I fear concurrent crises of confidence in policymaking and market structure. De-risking/deleveraging will feed illiquidity and market dislocation. Global derivatives markets will be severely tested.
I’ll also briefly speak to today’s alarming geopolitical backdrop. The Ukraine war, deteriorating relations with China, Taiwan, North Korea, Iran and such. Why are so many things coming to a head right now?
Keep in mind that boom periods engender perceptions of an expanding global pie. Cooperation, integration and alliances are viewed as mutually beneficial. But late in the cycle, perceptions begin to shift. Many see the pie stagnant or shrinking. Zero sum game thinking dominates. Insecurity, animosity, disintegration, fraught alliances and conflict take hold.
I see no end in sight for the extremely challenging market environment. We’ll have to continue to navigate through de-risking/deleveraging dynamics and chaotic market instability. The extraordinary environment demands intense daily focus, discipline, and a risk-management focus. It is time to be on alert and as prepared as possible.
For the Week:
The S&P500 rallied 1.5% (down 23.6% y-t-d), and the Dow gained 2.0% (down 19.4%). The Utilities fell 3.2% (down 12.2%). The Banks recovered 1.8% (down 26.2%), and the Broker/Dealers surged 6.1% (down 10.6%). The Transports rallied 3.5% (down 24.3%). The S&P 400 Midcaps rose 2.9% (down 20.2%), and the small cap Russell 2000 recovered 2.2% (down 24.2%). The Nasdaq100 increased 0.6% (down 32.4%). The Semiconductors rose 2.2% (down 40.3%). The Biotechs gained 1.9% (down 16.8%). With bullion up $34, the HUI gold equities index rose 1.8% (down 23.6%).
Three-month Treasury bill rates ended the week at 3.26%. Two-year government yields added three bps to 4.31% (up 358bps y-t-d). Five-year T-note yields rose five bps to 4.14% (up 288bps). Ten-year Treasury yields gained five bps to 3.88% (up 237bps). Long bond yields added six bps to 3.84% (up 194bps). Benchmark Fannie Mae MBS yields increased five bps to 5.72% (up 366bps).
Greek 10-year yields slipped two bps to 4.81% (up 350bps). Italian yields surged 19 bps to 4.71% (up 353bps). Spain's 10-year yields rose 12 bps to 3.41% (up 285bps). German bund yields gained nine bps to 2.19% (up 237bps). French yields increased eight bps to 2.80% (up 260bps). The French to German 10-year bond spread narrowed about one to 61 bps. U.K. 10-year gilt yields jumped 15 bps to 4.24% (up 327bps). U.K.'s FTSE equities index rallied 1.4% (down 5.3% y-t-d).
Japan's Nikkei Equities Index surged 4.5% (down 5.8% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 gained 1.8% (down 18.0%). The German DAX equities index recovered 1.3% (down 22.7%). Spain's IBEX 35 equities index increased 1.0% (down 14.7%). Italy's FTSE MIB index rallied 1.2% (down 23.6%). EM equities were mostly higher. Brazil's Bovespa index surged 5.8% (up 11.0%), and Mexico's Bolsa index jumped 2.5% (down 14.2%). South Korea's Kospi index rallied 3.6% (down 25.0%). India's Sensex equities index increased 1.3% (unchanged). China's Shanghai Exchange was closed for holidays (down 16.9%). Turkey's Borsa Istanbul National 100 index surged 12.2% (up 92%). Russia's MICEX equities index slipped 0.6% (down 48.7%).
Investment-grade bond funds posted outflows of $3.536 billion, while junk bond funds reported inflows of $1.872 billion (from Lipper).
Federal Reserve Credit last week dropped $44.7bn to $8.728 TN. Fed Credit is down $173bn from the June 22nd peak. Over the past 160 weeks, Fed Credit expanded $5.002 TN, or 134%. Fed Credit inflated $5.917 Trillion, or 211%, over the past 517 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week sank $42.1bn to $3.324 TN - the low since April 2020. "Custody holdings" were down $154bn, or 4.4%, y-o-y.
Total money market fund assets declined $12.2bn to $4.578 TN. Total money funds were up $34bn, or 0.8%, y-o-y.
Total Commercial Paper jumped $13.1bn to $1.243 TN. CP was up $68bn, or 5.8%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped four bps to 6.66% (up 367bps y-o-y). Fifteen-year rates declined six bps to 5.90% (up 367bps). Five-year hybrid ARM rates rose six bps to 5.36% (up 284bps) - the high since January 2009. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 23 bps to 7.05% (up 390bps) - the high since March 2009.
Currency Watch:
October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki): “Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”
October 3 – Reuters (Tetsushi Kajimoto): “Japan stands ready to take ‘decisive’ steps in the foreign exchange market if excessive yen moves persist, Finance Minister Shunichi Suzuki said…, in a new warning against investors selling off the currency. ‘It's important for currencies to move stably as sharp and one-sided moves are undesirable,’ Suzuki told a news conference…, referring to recent sharp falls in the yen.”
For the week, the U.S. Dollar Index added 0.6% to 112.80 (up 17.9% y-t-d). For the week on the upside, the Brazilian real increased 4.1%, the Norwegian krone 1.7%, the South Korean won 1.3%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the Singapore dollar 0.2%, and the New Zealand dollar 0.2%. On the downside, the Swedish krona declined 1.1%, the British pound 0.8%, the Swiss franc 0.7%, the euro 0.6%, the Australian dollar 0.4%, the Japanese yen 0.4%, and the South African rand 0.1%. The Chinese (offshore) renminbi increased 0.10.% versus the dollar (down 10.89% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index jumped 5.1% (up 18.1% y-t-d). Spot Gold rallied 2.1% to $1,695 (down 7.3%). Silver recovered 5.8% to $20.13 (down 13.6%). WTI crude surged $13.15 to $92.64 (up 23%). Gasoline spiked 10.6% (up 23%), while Natural Gas slipped 0.3% to $6.75 (up 81%). Copper declined 0.8% (down 24%). Wheat dropped 4.5% (up 14%), while Corn added 0.8% (up 15%). Bitcoin increased $200, or 1.0%, this week to $19,570 (down 58%).
Market Instability Watch:
October 1 – Bloomberg (Denitsa Tsekova): “The UK’s rapid descent from stability to crisis is threatening to expose the fragility of global efforts to crush inflation, raising the specter of chaos spreading across financial markets. Volatility has surged to the highest level since March 2020 across currency and bond markets. Bank of America’s global cross-asset market risk indicator also jumped to a level not seen since the start of the pandemic. Current and former government officials in the US warned about potential spillover. ‘Fear is contagious,’ said Ben Kumar, senior investment strategist at Seven Investment Management LLP. ‘Higher bond volatility in the UK caused by fund liquidations prompts pound sell-offs due to instability, which prompts UK equity outflows, which prompts parallel selloffs worldwide.’”
October 4 – Bloomberg (Donal Griffin, Marion Halftermeyer, and Dawn Lim): “A Credit Suisse Group AG business that lends out shares reversed some of those transactions in recent days after investors that provided the securities pulled back over concern about the bank’s financial health. The… lender told borrowing clients at the stock-loan unit that some counterparties temporarily stopped dealing with it because of mounting market pressure, forcing it to withdraw shares… The unit saw less than 5% of the total pool pulled, and there was no funding impact for Credit Suisse… While the bank is merely a middle-man in the securities lending deals, several investors that provided the shares have been asking what risks they’re taking with regard to the bank itself…”
October 7 – Reuters (John Revill): “Credit Suisse will buy back up to 3 billion Swiss francs ($3bn) of debt, an attempt by the Swiss bank to show its financial muscle and reassure investors concerned about the lender's overhaul and how much it may cost. Speculation about the bank's future gathered pace on social media in the past week amid anticipation it may need to raise billions of francs in fresh capital, sending its stock and some bonds to new lows. The buyback trims the bank's debts and is an attempt to bolster confidence. But central questions about its restructuring - and whether or not it will need fresh capital to fund it - remain open. One of the largest banks in Europe, Credit Suisse is trying to recover from a string of scandals, including losing more than $5 billion from the collapse of investment firm Archegos last year, when it also had to suspend client funds linked to failed financier Greensill.”
October 5 – Reuters (John Revill): “The Swiss National Bank (SNB) is following the situation at Credit Suisse closely, SNB Governing Board member Andrea Maechler told Reuters… Switzerland's second-biggest bank saw its shares slide by as much as 11.5% and its bonds hit record lows on Monday, before clawing back some of the losses, amid concerns about its ability to restructure its business without asking investors for more money. ‘We are monitoring the situation,’ Maechler said… ‘They are working on a strategy due to come out at the end of October.’”
October 6 – Bloomberg (Ambereen Choudhury and Manuel Baigorri): “Societe Generale SA cut its exposure to counterparties on trades in China by about $80 million in the past few weeks as global banks seek to guard against any potential fallout from rising geopolitical risks in the world’s second-largest economy. It has several hundred million dollars in positions on China’s Financial Futures Exchange… The French bank has been seeking to replicate those positions elsewhere in Asia… Like other firms and multi-nationals, the bank’s executives are growing increasingly concerned about a whole swathe of problems hitting China in recent months…”
October 4 – Financial Times (Eric Platt and Kate Duguid): “Investors and Wall Street analysts are sounding the alarm about a possible ‘market accident’, as successive bouts of tumult in US stocks and bonds and a surging dollar cause rising levels of stress in the financial system. A gauge of strain in US markets… has soared to its highest level since the coronavirus pandemic ructions of May 2020. Even as equities on Wall Street start the new quarter with gains, the OFR’s Financial Stress index is near a two-year high at 3.1, where zero denotes normal market functioning. That has added to a growing list of benchmarks which suggest trading conditions in US government debt, corporate bonds and money markets are increasingly stretched.”
October 6 – Bloomberg (Liz Capo McCormick): “The latest bout of global financial volatility has heightened concerns about regulators’ continuing failure to resolve liquidity problems with US Treasuries -- the debt that serves as a benchmark for the world. It’s getting harder and harder to buy and sell Treasuries in large quantities without those trades moving the market. Market depth, as the measure is known, last Thursday hit the worst level since the throes of the Covid-19 crisis in the spring of 2020, when the Federal Reserve was forced into massive intervention.”
September 29 – Bloomberg (Edward Bolingbroke): “Anyone doubting that liquidity is draining from the world financial system just has to look at the daily swings in interest-rate swaps. It’s one of the world’s deepest markets, where large financial institutions go to hedge long-term risks. And it’s being hit by unusual volatility. The gap between the floating- and fixed-rate legs of longer-dated swaps tied to the Secured Overnight Financing Rate narrowed by over 7 bps to minus 75 bps on Tuesday, only to widen back by over 5 bps the following day. Both were the largest one-day moves in either direction on record for the index, which was rolled out in October 2020 as a replacement for the London interbank offered rate.”
October 6 – Bloomberg (Ye Xie and Mary Biekert): “Global foreign-currency reserves are falling at the fastest pace on record, as central banks from India to the Czech Republic intervene to support their currencies. Reserves have declined by about $1 trillion, or 7.8%, this year to $12 trillion, the biggest drop since Bloomberg started to compile the data in 2003.”
October 5 – Bloomberg (Lu Wang and Elena Popina): “One giant options transaction may have sparked the S&P 500’s bounce on Wednesday, according to Wells Fargo… The trade, which involved buying and selling call options tied to the index at a cost of around $31 million, probably helped fuel a recovery that saw the benchmark gauge erase a 1.8% decline, says Chris Harvey, the firm’s head of equity strategy. Theories that derivatives trading has potentially driven movement in an underlying asset have been relatively common in this year’s topsy-turvy markets…”
October 1 – Financial Times (Jonathan Wheatley): “Investors have withdrawn a record $70bn from emerging market bond funds this year… Investors took $4.2bn out of EM bond funds in the past week alone, according to… EPFR Global, a fund flow monitor — bringing the annual outflows to the highest level since the US bank began recording the data in 2005. The investor flight underscores how emerging markets are facing mounting risks from surging interest rates in developed markets…”
October 7 – Reuters (Lucy Raitano): “Investors piled into cash at the fastest weekly rate since April 2020 in the week to Wednesday, as soaring government borrowing costs, high energy prices and slowing growth fanned risk aversion, BofA Global Research said… Investors ploughed $88.8 billion into cash, BofA said, citing EPFR data, and sold $18.3 billion in bonds - the fastest weekly rate in four months - with the majority of the sell-off comprising investment-grade bonds.”
October 4 – Financial Times (Adrienne Klasa and George Hammond): “The IMF has warned that a surge of outflows from funds allowing frequent investor withdrawals but holding hard-to-sell assets could amplify market stress and ‘potentially undermine the stability of the financial system’. Withdrawals from open-ended bond funds have increased in recent months, the IMF noted, and another shock could ‘trigger further outflows’, with a mismatch between redemptions and illiquid holdings posing a ‘major potential vulnerability’. The… international body singled out less frequently traded securities such as corporate bonds, certain emerging market assets and real estate as most at risk during periods of market volatility when investors can move to sell in unison.”
October 3 – Bloomberg (Garfield Reynolds): “Funding markets are likely to end the year under stress as banking regulations collide with central-bank tightening and the traditional need to square off positions toward the end of December. That’s the message from three-month cross-currency basis swaps, which blew out at the end of September to the worst since the pandemic meltdown in 2020. The premium that holders of euros and yen need to pay to swap into dollars jumped as UK financial turmoil and Federal Reserve hawkishness gave a further tailwind to the greenback…”
UK Crisis Watch:
October 6 – Financial Times (Tommy Stubbington): “The Bank of England has defended last week’s intervention in the UK government debt market, saying it stepped in to prevent a £50bn fire sale of gilts that would have taken Britain to the brink of a financial crisis. The central bank said… that had it not launched its emergency bond-buying scheme in the wake of chancellor Kwasi Kwarteng’s ‘mini’ Budget, pension funds would have been forced to sell £50bn worth of long-term UK government debt ‘in a short space of time’… The BoE’s defence of the scheme… is the clearest sign yet of how close the UK came to a market meltdown following Kwarteng’s plan for £45bn in unfunded tax cuts. Had the central bank not intervened, it feared there would have been a ‘self-reinforcing spiral’ that threatened ‘severe disruption of core funding markets and consequent widespread financial instability’, said Sir Jon Cunliffe, the BoE’s deputy governor for financial stability…”
October 1 – Bloomberg (Eddie Spence): “When the pound slumped as Kwasi Kwarteng presented his mini-budget, some Britons rushed to the safety of a haven that’s recently lost its luster: gold. ‘Buying has increased exponentially,’ said Ash Kundra, who runs coin dealer J Blundell & Sons in London’s historic Hatton Garden jewelry quarter. ‘I keep running out of coins, I keep running out of bars.’”
October 6 – Reuters (Aimee Donnellan): “The UK’s bond market crisis is entering a messy second act. The Bank of England announced a 65 billion pound gilt-buying scheme to stabilise markets and rescue pension funds. But the fallout from the crisis means those same funds, with 1.7 trillion pounds of assets, now need to reduce risk by selling corporate bonds and other higher-yielding assets… The central bank’s intervention helped the funds avoid having to sell gilts at fire-sale prices to meet collateral demands. But LDI investors are not out of the woods. Bailey’s move may have been too late to stop some pension funds from having to close out their hedges, like interest rate swaps or futures. That leaves them with a potential balance sheet mismatch because they no longer have the derivatives in place to match their liabilities.”
October 6 – Bloomberg (Loukia Gyftopoulou, Will Louch and Abhinav Ramnarayan): “Pension funds are selling billions of pounds worth of assets to rebuild their cash buffers before the Bank of England removes critical market support next week that it introduced to prevent the collapse of the UK’s government bond market. Individual pension funds are each selling tens or hundreds of millions of pounds of liquid assets to boost their reserves, according to pension consultants… Asset sales across the industry have climbed into the tens of billions of pounds, according to Nikesh Patel, head of client solutions at Van Lanschot Kempen, a wealth management firm.”
October 3 – Associated Press (Jill Lawless): “The U.K. government… dropped plans to cut income tax for top earners, part of a package of unfunded cuts unveiled only days ago that sparked turmoil on financial markets and sent the pound to record lows. In a dramatic about-face, Treasury chief Kwasi Kwarteng abandoned plans to scrap the top 45% rate of income tax paid on earnings above 150,000 pounds ($167,000) a year, a policy that had drawn near-universal opposition.”
October 4 – Bloomberg (David Goodman): “Kwasi Kwarteng signed off on £100 billion ($113bn) of bond buying by the Bank of England as the market fell into turmoil last week, higher than the size of the plan announced by the central bank and an indication of the level of concern among officials about volatility in the gilt markets… The chancellor of the exchequer agreed to a request to approve purchases of as much as £100 billion when the plan kicked off…”
October 5 – Reuters (David Milliken): “Ratings agency Fitch lowered the outlook for its credit rating for British government debt to ‘negative’ from ‘stable’…, days after a similar move from rival Standard & Poor's following the government's Sept. 23 fiscal statement. ‘The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term,’ Fitch said.”
October 6 – Bloomberg (Libby Cherry, Greg Ritchie and Mumbi Gitau): “UK bond markets face a potential ‘cliff edge’ when the Bank of England exits the market at the end of next week, leaving traders to navigate a turbulent backdrop without the support of a buyer of last resort. Longer-term gilt yields are already starting to creep higher as the Oct. 14 end date for its bond-buying looms into view, partly as policy makers make it clear they are in no mood to simply prop up prices for traders.”
October 4 – Bloomberg (Loukia Gyftopoulou): “Asset managers including Blackrock Inc. and Schroders Plc are limiting institutional investors’ withdrawals from some UK property funds after a wave of requests to move money. Schroders’ UK Real Estate fund has deferred redemptions due at the start of October to as late as July 2023, which will give the £2.8 billion ($3.2bn) fund more time to ensure it has enough cash to cover the payments…”
October 6 – Reuters (Kylie MacLellan, Muvija M and William James): “The Bank of England will gauge the health of Britain's government bond market before it unwinds the emergency intervention it launched after the government's new economic plan sparked upheaval, the bank said… The BoE waded into Britain's 2.1 trillion pound ($2.4 trillion) gilt market last Wednesday to stop panic selling of long-dated bonds in the aftermath of finance minister Kwasi Kwarteng's ‘mini budget’ announcement last month.”
October 7 – Bloomberg (Andrew Atkinson): “UK corporate insolvencies in the second quarter reached their highest since 2009, with the soaring cost of energy cited as a primary concern for more than a fifth of companies. The figures released by the Insolvency Service and the Office for National Statistics show that more than 1-in-10 firms questioned in August reported a moderate-to-severe risk of failure.”
Bursting Bubble and Mania Watch:
October 6 – Bloomberg (Preston Brewer): “The US IPO market has almost entirely frozen over, with very few companies even trying to navigate the treacherous environment of market volatility, rising interest rates, and low investor appetite for new issues. The poor performance of companies that have recently completed their initial public offering has only tightened this winter’s grip. How Cold Is Cold? How much have US IPOs fallen? Quite a lot. In the recently completed quarter, US IPOs were down 87.5%, and raised nearly 98% less capital compared to the first quarter of 2021, when new issues peaked. Only 52 companies went public in the US in Q3, raising $2.8 billion.”
October 4 – Bloomberg (Bailey Lipschultz): “Serial SPAC dealmaker Bill Foley is the latest industry heavyweight to call it quits as he seeks to give investors back the roughly $2.1 billion he raised for a pair of vehicles. Austerlitz Acquisition Corporation II, which raked in $1.38 billion and was among the largest outstanding blank-check firms, and Austerlitz Acquisition Corporation I, which raised $690 million, are looking to shut down before the end of the year…”
Ukraine War Watch:
October 5 – Reuters: “Russian President Vladimir Putin ordered his government… to take control of Ukraine's Zaporizhzhia nuclear power plant, Europe's largest, as the U.N. nuclear watchdog warned that power supply to the site was ‘extremely fragile’. However, the boss of Ukraine's state energy agency announced he was taking over the plant, which has become a focus of international concern due to the possibility of a nuclear disaster after shelling in the area for which Moscow and Kyiv have blamed each other.”
October 4 – Reuters (Tom Balmforth and Pavel Polityuk): “In an abandoned tower block damaged by Russian shelling in Ukraine's second city, Olga Kobzar plans to tough out winter for as long as she can without electricity, water and central heating by lighting the gas stove in her kitchen for warmth. The 70-year-old, who lives alone in a devastated district of northern Kharkiv where the temperature can fall to -20 Celsius (-4 Fahrenheit), is at the sharp end of what Ukrainian officials say will be the grimmest winter in decades… The seven-month-old war has wrought huge damage to the energy network - and to residential areas in swathes of Ukraine - and officials fear Moscow could deliberately attack critical infrastructure when the frost sets in.”
October 3 – Reuters (Caleb Davis): “Russian TV journalist Marina Ovsyannikova, famous for staging an on-air protest against Russia's war in Ukraine, has been put on Moscow's wanted list after her ex-husband reported she had escaped from pre-trial house arrest. Ovsyannikova, 44, was given two months' house arrest in August, and faces up to 10 years in prison if found guilty of spreading fake news about Russia's armed forces. The case relates to a protest in July when she stood on a river embankment opposite the Kremlin and held up a poster calling President Vladimir Putin a murderer and his soldiers fascists.”
U.S./Russia/China Watch:
October 5 – Reuters (Yimou Lee): “Taiwan expects China to increase its coercion and intimidation to achieve its goal of bringing the island under Beijing's control once President Xi Jinping assumes a third term in office, a senior Taiwanese minister said... Chiu Tai-san, the head of Taiwan's China-policy making Mainland Affairs Council, said Xi will further consolidate his power at the party congress… ‘We believe that the Beijing authorities' work on Taiwan has entered the stage of strengthening the practice of the so-called 'anti-independence and promoting reunification',’ he added. China will do this by using ‘coercion and intimidation’, ‘grey zone’ activities and international law to ‘interfere with and hinder Taiwan's interaction and cooperation with the international community to achieve its goals towards Taiwan’, Chiu said.”
Economic War/Iron Curtain Watch:
September 30 – Reuters (Richard Valdmanis): “The ruptures on the Nord Stream natural gas pipeline system under the Baltic Sea have led to what is likely the biggest single release of climate-damaging methane ever recorded, the United Nations Environment Programme said… A huge plume of highly concentrated methane, a greenhouse gas far more potent but shorter-lived than carbon dioxide, was detected in an analysis this week of satellite imagery… ‘This is really bad, most likely the largest emission event ever detected,’ Manfredi Caltagirone, head of the IMEO for UNEP, told Reuters… Researchers at GHGSat… estimated the leak rate from one of four rupture points was 22,920 kilograms per hour. That is equivalent to burning about 630,000 pounds of coal every hour…”
October 7 – Reuters (Sarah Wu): “Chinese missiles flying over Taiwan and naval drills in the Strait in August that simulated a blockade by China have jolted the semiconductor industry into contemplating what once seemed a remote possibility: war over the major chip-producing island. From drafting contingency plans to inquiring about manufacturing capacity outside Taiwan, some companies are now weighing how to respond if China attacks or restricts access to the democratic island… Taiwan produces the vast majority of the world's most advanced chips and is home to Taiwan Semiconductor Manufacturing Company Ltd (TSMC), the world's largest contract chipmaker…”
Inflation Watch:
October 6 – Bloomberg (Alexandre Tanzi): “Almost half of US families surveyed by the Census Bureau found the recent rise in consumer prices ‘very stressful’ -- and the vast majority of the others were also worried about inflation. The Census Bureau included a new question about the impact from soaring prices in its regular household poll. The result shows that nearly everyone was at least a little stressed by inflation…The survey also highlights disparities among ethnic groups. More than half of Hispanic and Black respondents found inflation ‘very stressful,’ compared with about 43% for Whites and about 38% for Asian Americans.”
October 3 – Bloomberg (Will Wade): “US coal prices surged past $200 for the first time as a global energy crunch drives up demand for the dirtiest fossil fuel. Spot prices for coal from Central Appalachia rose to $204.95 a ton for the week ending Sept. 30, the highest in records dating to 2005…”
Biden Administration Watch:
October 7 – Reuters (Nandita Bose and Pavel Polityuk): “Russian President Vladimir Putin's threat to use nuclear weapons in Ukraine has brought the world closer to ‘Armageddon’ than at any time since the Cold-War Cuban Missile Crisis, U.S. President Joe Biden said. With his seven-month invasion unravelling, Putin celebrated his 70th birthday on Friday with fawning praise from some officials but little public fuss. That was a contrast to just a week ago when he staged a huge concert on Red Square to proclaim the annexation of nearly a fifth of Ukrainian land.”
October 6 – Reuters (Humeyra Pamuk): “The United States is reviewing various options regarding its relationship with Saudi Arabia after Riyadh and other OPEC+ nations agreed this week to large cuts in oil production, Secretary of State Antony Blinken said… ‘As for the relationship (with Riyadh) going forward, we're reviewing a number of response options. We're consulting closely with Congress,’ Blinken said…”
October 5 – Reuters (Ahmad Ghaddar, Alex Lawler and Rowena Edwards): “OPEC+ agreed steep oil production cuts…, curbing supply in an already tight market, causing one of its biggest clashes with the West as the U.S. administration called the surprise decision shortsighted. OPEC's de-facto leader Saudi Arabia said the cut of 2 million barrels per day (bpd) of output - equal to 2% of global supply - was necessary to respond to rising interest rates in the West and a weaker global economy.”
Federal Reserve Watch:
October 5 – Bloomberg (Garfield Reynolds): “Federal Reserve officials keep repeating the mantra they don’t plan to cut interest rates next year. Traders keep doubting them. Eurodollar futures showed reduced expectations… for Fed interest-rate cuts in 2023 but still price in around a one quarter-point move and at least two more in 2024. Federal Reserve Bank of San Francisco President Mary Daly and Fed Atlanta President Raphael Bostic were the latest to bang the drum on the need to keep tightening in place to reduce inflation that remains near a four-decade high.”
October 4 – Reuters (Ann Saphir and Michael S. Derby): “San Francisco Federal Reserve Bank President Mary Daly… said the U.S. central bank has the tools and the knowledge to bring down high inflation, and will use them, even as it tries to find the ‘gentlest’ way to do so. There is ‘a lot’ of room for the Fed to use higher interest rates to reduce demand and ease price pressures, Daly said... ‘If we do our jobs well, and we communicate to the public why we are doing what we are doing, and why the interest rate path we are taking is necessary to get inflation down, and that price stability for us is extremely important, as is doing it as gently as possible so that the economy can be in a balanced state as easily as possible - whatever that looks like, we are going to take the easiest path we can find,’ Daly said.”
October 3 – Reuters (Michael S. Derby): “Federal Reserve Bank of New York President John Williams said… that while there have been nascent signs of cooling inflation, underlying price pressures remain too high, which means the U.S. central bank must press forward to get inflation under control. ‘Clearly, inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential,’ Williams said… ‘Tighter monetary policy has begun to cool demand and reduce inflationary pressures, but our job is not yet done.’”
October 5 – Reuters (Howard Schneider): “The U.S. Federal Reserve's fight against inflation is likely ‘still in early days,’ Atlanta Fed president Raphael Bostic said…, becoming the latest U.S. central banker to caution against the likelihood rates would be reduced in response to any weakening of the economy. Despite ‘glimmers of hope’ in recent data, Bostic said ‘the overarching message I’m drawing...is that we are still decidedly in the inflationary woods, not out of them,’ with the Fed's target funds rate needing to rise to around 4.5% by the end of the year.”
October 4 – Reuters (Howard Schneider): “Inflation is the most serious problem facing the Federal Reserve and ‘may take some time’ to address, Fed Governor Philip Jefferson said… in his first public remarks since joining the U.S. central bank's governing body. ‘Restoring price stability may take some time and will likely entail a period of below-trend growth,’ Jefferson told a conference…, joining the current Fed consensus for continued interest rate increases to battle price pressures.”
October 6 – Financial Times (Gillian Tett): “Dallas is almost 5,000 miles from London. But when the UK gilt markets imploded last week… the drama left Richard Fisher, former chair of the Dallas Federal Reserve, wincing. Fisher has warned for years that a decade of ultra loose monetary policy would create pockets of future financial instability. So he sees the British gilts drama (which occurred because the pension funds mishandled highly leveraged bets) not as an isolated event — but as the sign of a trend. ‘This [foolish strategy] always happens when rates are near the zero bound and things have gone to an extreme,’ he told CNBC, noting that the crisis is ‘an indication of other things that are likely to pop up’ because investors and institutions have been dangerously overleveraged and ‘thinking that rates will stay low forever’.”
U.S. Bubble Watch:
October 4 – New York Times (Alan Rappeport and Jim Tankersley): “America’s gross national debt exceeded $31 trillion for the first time…, a grim financial milestone that arrived just as the nation’s long-term fiscal picture has darkened amid rising interest rates. The breach of the threshold… comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation… ‘So many of the concerns we’ve had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,’ said Michael A. Peterson, the chief executive officer of the Peter G. Peterson Foundation… ‘Too many people were complacent about our debt path in part because rates were so low.’”
October 7 – CNBC (Jeff Cox): “Job growth fell just short of expectations in September and the unemployment rate declined despite efforts by the Federal Reserve to slow the economy, the Labor Department reported…. Nonfarm payrolls increased 263,000 for the month, compared with the Dow Jones estimate of 275,000. September’s payroll figure marked a deceleration from the 315,000 gain in August and tied for the lowest monthly increase since April 2021.”
October 4 – Reuters (Lucia Mutikani): “U.S. job openings fell by the most in nearly 2-1/2 years in August, suggesting that the labor market was starting to cool as the economy grapples with higher interest rates aimed at dampening demand and taming inflation. Despite the fifth month of decreases in job openings this year reported by the Labor Department in its Job Openings and Labor Turnover Survey, or JOLTS report…, vacancies remained above 10 million for the 14th straight month. While there were 1.7 job openings for every unemployed person in August, down from two in July, this closely watched measure of supply-demand balance in the labor market remained above its historical average. Layoffs also stayed low, signs of a still-tight labor market, which likely keep the Federal Reserve on its aggressive monetary policy tightening path.”
October 5 – Bloomberg (Vince Golle): “US mortgage rates jumped to a 16-year high of 6.75%, marking the seventh-straight weekly increase and spurring the worst slump in home loan applications since the depths of the pandemic. Over the past seven weeks, mortgage rates have soared 1.30 percentage points, the largest surge over a comparable period since 2003…”
October 5 – Yahoo Finance (Dani Romero): “Mortgage applications… became the latest sign showing how hard rates are hitting housing. And it could get worse. The volume of mortgage applications for purchases dropped 13% last week compared with the previous week…, while refinance activity… plunged 18%. Purchase apps were down 37% year over year and refis were 86% lower.”
October 3 – Bloomberg (Prashant Gopal): “Home prices in the US have taken a turn and are now posting the biggest monthly declines since 2009. Median home prices fell 0.98% in August from a month earlier, following a 1.05% drop in July… Black Knight Inc. said… The two periods mark the largest monthly declines since January 2009. ‘Together they represent two straight months of significant pullbacks after more than two years of record-breaking growth,’ said Ben Graboske, Black Knight Data and Analytics president. The housing market is losing steam fast with skyrocketing mortgage rates driving affordability to the lowest level since the 1980s.”
October 5 – Forbes (Jonathan Ponciano): “As mortgage demand plummets to the lowest level in 25 years, some experts believe the housing market decline will hit a cadre of regions especially hard—pushing prices down as much as 20% in pandemic-era hotspots and other areas where affordability has plunged… Surging rates have tacked on $337, or 15%, to the typical monthly mortgage payment over the past six weeks alone and pummeled housing demand nationwide as a result—so much that prices have started to slip from record highs in some markets over the past few weeks.”
October 3 – Bloomberg (Vince Golle): “A gauge of US manufacturing stumbled in September to a more than two-year low, moving closer to outright stagnation as orders contracted for the third time in four months. The Institute for Supply Management’s gauge of factory activity dropped nearly 2 points to 50.9, the lowest since May 2020… The… measure of new orders declined more than 4 points to 47.1, also the lowest level since the early months of the pandemic… Meantime, a measure of prices paid for materials used in the production process retreated for a sixth-straight month. At 51.7, the price index is the lowest since June 2020…”
October 7 – Bloomberg (Reade Pickert): “US consumer borrowing rose in August by more than forecast as credit-card balances increased by the most in five months. Total credit increased $32.2 billion from the prior month… The median forecast… called for a $25 billion advance… Revolving credit outstanding, which includes credit cards, rose $17.2 billion. That marked the third-largest monthly advance on record. Non-revolving credit, which includes auto and school loans, increased $15.1 billion.”
October 4 – Reuters (Savyata Mishra): “Chipmaker Micron Technology said… it planned to invest up to $100 billion over the next 20-plus years to build a computer chip factory complex in upstate New York, in a bid to boost domestic chip manufacturing. The project, which Micron claims will be the world's largest semiconductor fabrication facility, is expected to create nearly 50,000 jobs in New York, with the first phase investment of $20 billion planned by the end of this decade.”
Fixed Income Watch:
October 4 – Bloomberg (Scott Carpenter and Charles Williams): “Southern Auto Finance Co. is delaying its first sale of bonds backed by subprime car loans after market volatility caused the issuer to wait for better timing, according to Chief Executive Officer George Fussell. The Pompano Beach, Florida-based company plans to look at reviving its $118.8 million asset-backed securities sale in about a month, if market conditions have improved.”
China Watch:
September 30 – Reuters (Liangping Gao): “New home prices in China fell for the third straight month in September as a mortgage boycott across the country and a slowing economy discouraged potential home buyers, a private survey showed… China's property market crisis worsened this summer, with official data showing home prices, sales and investment all falling in August, adding pressure on the world's second-largest economy, which barely grew in the second quarter.”
October 5 – Financial Times (Edward White): “Xi Jinping has delivered a blunt message to the top ranks of the ruling Chinese Communist party: no one is beyond reach. In the weeks leading up to this month’s party congress, at which Xi is expected to secure a third term as party leader and head of the military, China’s courts have orchestrated a series of high-profile corruption trials of senior cadres from the state’s police and security apparatus. Death sentences — which can be commuted to life in prison after two years — were last week handed down to Fu Zhenghua, Xi’s former justice minister, Sun Lijun, the former deputy minister of public security, and Wang Like, a former top official in Jiangsu. Jail terms of more than 10 years were also issued to at least three other former police and security chiefs.”
October 6 – Bloomberg (Linda Lew): “China’s Covid-19 tally climbed to the highest in about a month, driven by people traveling during the week-long National Day holiday and sparking a fresh round of lockdowns aimed at controlling the outbreaks ahead of the Party Congress. The country reported 1,138 new local infections for Wednesday, the highest since Sept. 9…”
October 6 – Bloomberg (Krystal Chia): “Goldman Sachs… sees Hong Kong’s home prices declining 30% from last year’s levels, worsening its outlook as rapidly rising interest rates deepen a property market rut. Residential prices are expected to fall by 15% this year and another 15% in the next…”
Central Banker Watch:
October 4 – Reuters (Francesco Canepa): “The European Central Bank must at a ‘minimum’ stop stimulating the economy through its monetary policy, the ECB's President Christine Lagarde said…, in a likely reference to raising interest rates back to ‘neutral’ territory. This is defined as a level of interest rate that neither stimulates nor curbs economic growth, all else being equal.”
October 6 – Bloomberg (Theophilos Argitis): “Bank of Canada Governor Tiff Macklem said he remains firmly on an interest-rate hiking path, quashing hopes for an imminent end to a tightening cycle that’s choking indebted households and threatening the economy with recession. Macklem… played down a recent slowing of headline inflation, saying underlying price pressures are elevated and risk becoming entrenched without further rate increases. ‘Simply put, there is more to be done,’ Macklem told the Halifax Chamber of Commerce. Inflation will ‘not fade away by itself.’ Canada benchmark two-year yields jumped to the highest level since 2007 on his comments…”
October 3 – Reuters (Wayne Cole): “Australia's central bank… surprised markets by lifting interest rates by a smaller-than-expected 25 bps, saying they had already risen substantially, although it added that further tightening would still be needed… The Reserve Bank of Australia (RBA) raised its cash rate to a nine-year peak of 2.60%, the sixth hike in as many months which included four outsized moves of 50 bps.”
Global Bubble Watch:
October 3 – Bloomberg (Finbarr Flynn, Garfield Reynolds and Colin Keatinge): “Governments and companies around the world are facing unprecedented costs to refinance bonds, a burden that’s set to deepen fissures in debt markets and expose more vulnerabilities among weaker borrowers. A corporate treasurer or finance minister looking to issue new notes now would likely have to pay interest that’s about 156 bps higher on average than the coupons on existing securities, after that gap surged to a record in recent days. That all adds up to about $1.01 trillion in additional costs if all those securities were refinanced…”
October 3 – Bloomberg (Alexandre Tanzi): “Global manufacturing contracted in September for the first time in more than two years as orders and production continued to weaken, underscoring growing risks of a worldwide recession. The JPMorgan global manufacturing purchasing managers gauge fell for a fourth consecutive month, to 49.8 last month… An index of new orders shrank for a third-straight month to a more than two-year low and a measure of international trade fell…”
October 6 – Reuters (Andrea Shalal): “The International Monetary Fund will next week downgrade its forecast for 2.9% global growth in 2023, Managing Director Kristalina Georgieva said…, citing rising risks of recession and financial instability. Georgieva said the outlook for the global economy was ‘darkening’… ‘We are experiencing a fundamental shift in the global economy, from a world of relative predictability ... to a world with more fragility - greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters,’ she said… Georgieva said the old order, characterized by adherence to global rules, low interest rates and low inflation, was giving way to one in which ‘any country can be thrown off course more easily and more often.’”
October 5 – Reuters (Philip Blenkinsop): “The World Trade Organization forecast a slowdown of global trade growth next year as sharply higher energy and food prices and rising interest rates curb import demand, and warned of a possible contraction if the war in Ukraine worsens. The… trade body said… merchandise trade would increase by 3.5% this year, up from its April estimate of 3.0%. However, for 2023, it sees trade growth of just 1.0%, compared with a previous forecast of 3.4%. The WTO said there was high uncertainty over its forecasts.”
October 3 – Bloomberg (Theophilos Argitis): “Canadian consumer confidence has dropped to near record lows again amid growing angst about the global economy. The Bloomberg Nanos Canadian Confidence Index… declined for a fifth straight week to touch some of the weakest levels ever outside of the last two economic crises. Canadians have rarely been so pessimistic about the economy since the index was launched in 2008.”
Europe Watch:
October 4 – Bloomberg (John Follain, Michael Nienaber, and Peter Laca): “The European Union’s executive arm is planning to urgently prepare several different options for how to cap the price of natural gas as it tries to alleviate an energy crisis, but EU diplomats warned the bloc’s timetable may be unrealistic. Leaders aim to agree on specific plans when they meet in Brussels for a summit in just two weeks, French President Emmanuel Macron told reporters. After a meeting of European heads of state in Prague, there’s a growing consensus that measures are needed to tackle rising energy prices, but specifics remain scarce. Several countries warned the EU that it needs to move quickly or jeopardize the bloc’s solidarity as nations are starting go their own way.”
EM Crisis Watch:
October 3 – Financial Times (Bryan Harris, Michael Pooler and Carolina Ingizza): “Brazil is braced for a tense presidential runoff after a closely fought first-round vote set up a showdown between two of Latin America’s most divisive politicians. While leftwing challenger Luiz Inácio Lula da Silva came out on top with 48.4%..., incumbent leader Jair Bolsonaro will be buoyed by a performance that defied many assumptions. The far-right populist surprised pundits by claiming a 43.2% share… The race now goes to a second round on October 30…”
October 3 – Financial Times (Laura Pitel): “Turkey’s official inflation rate climbed to a new 24-year high last month as the country reeled from President Recep Tayyip Erdoğan’s unorthodox economic policy. The consumer price index rose 83.45% in September… up from 80.21% the previous month. Erdoğan rejects the established economic consensus that raising interest rates helps to curb inflation. He has ordered the central bank to cut borrowing costs twice in the past two months, bringing the benchmark interest rate down to 12%.”
October 4 – Bloomberg (Firat Kozok and Burhan Yuksekkas): “Turkey’s foreign trade deficit widened by almost 300% on an annual basis last month, driven by costlier energy and other commodities. The gap widened to $10.4 billion from $2.6 billion in September 2021... It reached a record $11.2 billion in August… Turkey has faced worsening trade imbalances as the government pumps up economic growth through cheap loans.”
October 4 – Financial Times (John Reed, Andy Lin and Chloe Cornish): “India’s foreign exchange reserves have dwindled by nearly $100bn this year as its central bank defends the rupee against a surging dollar amid intensifying market turmoil around the world… As pressure from the surging dollar has depleted reserves and driven India’s south Asian neighbours Sri Lanka and Pakistan into financial distress, India’s reserves of more than $500bn remain adequate, according to analysts and the Reserve Bank of India.”
October 5 – Reuters (Jihoon Lee): “South Korea's foreign exchange reserves shrank by nearly $20 billion in September, the second-biggest monthly drop on record, as authorities stepped up dollar-selling intervention to counter the won's slump to a 13-1/2-year low. The country's FX reserves stood at $416.77 billion at the end of September, down $19.66 billion from $436.43 billion a month earlier…”
October 6 – Reuters (Kylie Madry): “Mexican Economy Minister Tatiana Clouthier stepped down…, depriving Mexico of one of its key trade negotiators as her government scrambles to head off a major dispute over energy with the United States and Canada. Clouthier… said she had first told President Andres Manuel Lopez Obrador she intended to quit not long after the energy disagreement threatened to become costly for Mexico.”
Japan Watch:
October 3 – Reuters (Yoshifumi Takemoto and Leika Kihara): “Core consumer prices in Japan's capital, a leading indicator of nationwide inflation, rose 2.8% in September from a year earlier, exceeding the central bank's 2% target for a fourth straight month and marking the biggest gain since 2014. The data reinforced market expectations that nationwide core consumer inflation will approach 3% in coming months and may cast doubt on the Bank of Japan's view that recent cost-push price increases will prove temporary.”
October 4 – Bloomberg (Taiga Uranaka and Takashi Nakamichi): “In these turbulent times, Japanese bank chiefs have a lot to worry about: a patchy economic recovery, a weakening yen, emerging inflation, and swelling public debt to name a few. But one of their biggest concerns is how to prepare for the day when the Bank of Japan eventually ends its unprecedented monetary easing and raises interest rates. BOJ Governor Haruhiko Kuroda has pledged to stick to the policy for now, but any unwinding would have ramifications for the bond market and an economy used to years of rates near zero… ‘What I am worried most about is, as interest rates have been pinned down for years, there are few traders and dealers remaining who experienced moves in rates,’ said Masahiro Kihara, CEO of Mizuho Financial Group…”
October 2 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japanese manufacturer' business mood worsened in the three months to September and corporate inflation expectations hit a record high, a central bank survey showed, as stubbornly high material costs clouded the outlook… Corporate capital expenditure plans for the current fiscal year stayed strong, the Bank of Japan's ‘tankan’ survey showed, thanks in part to the boost to exporters from the weak yen.”
October 6 – Bloomberg (Yoshiaki Nohara): “Japan’s households cut back on spending for a second month in August, as the rising cost of living weighed on consumers’ budgets amid a summer wave of Covid infections, suggesting fragility in the country’s recovery path. Household outlays dropped 1.7% from July… Falls were led by housing and food. Spending increased 5.1% from a year ago, compared with a 6.7% increase forecast by analysts.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 3 – Reuters (Noor Zainab Hussain): “Insurers are bracing for a hit of up to $57 billion as they try to assess the damage from Hurricane Ian in Florida and South Carolina, risk modeling firm Verisk said… The industry projection includes estimated wind, storm surge, and inland flood losses resulting from Ian's landfalls in the two states, Verisk said. However, the estimate range… does not include elements such as losses to the National Flood Insurance Program and any potential impacts of litigation or social inflation that could lead to a total insured industry loss of $60 billion.”
October 5 – Reuters (Robert Cyran): “Hurricane Ian hit the Florida coast last week, leaving huge amounts of damage and a large death toll in its wake. Governor Ron DeSantis is piecing together recovery efforts while defending his response to the storm. But there’s a separate crisis brewing that could come to a head in the next decade. Damage from wind and flooding isn’t going to get any better – and the state’s residents are running out of ways to get insurance. Insured losses from the storm could be $42 billion to $57 billion, according to insurance software firm Verisk, with total damage double that…”
October 4 – Wall Street Journal (Anne Tergesen): “Florida residents who suffered financial losses from Hurricane Ian might be able to tap their retirement accounts to cover emergency expenses, a last resort more victims of natural disasters are using. Though 401(k) plans are set up to keep Americans’ nest eggs out of reach until retirement age, the Internal Revenue Service allows savers to pull money out for certain economic hardships, including buying a first home, preventing foreclosure and covering high medical bills. Since the IRS added natural disasters to the list of sanctioned reasons for hardship withdrawals in 2020, thousands of workers have tapped their retirement savings for that purpose.”
October 1 – Wall Street Journal (Leslie Scism and Cameron McWhirter): “Florida homeowners had reduced their flood insurance coverage in the years before Hurricane Ian dumped up to 15 inches of rain on the state, inundating coastal and inland areas. Only a small number of residences in two of Florida’s hardest-hit inland counties are covered by flood insurance. The percentage of protected homes is higher in coastal areas that sustained the most damage, but still, is over 50% in just one of the affected counties… In all locations pummeled by Ian, the percentage of homes covered by flood policies is down from five years ago.”
October 4 – Associated Press (Terry Chea): “As California’s drought deepens, Elaine Moore’s family is running out of an increasingly precious resource: water. The Central Valley almond growers had two wells go dry this summer. Two of her adult children are now getting water from a new well the family drilled after the old one went dry last year. She’s even supplying water to a neighbor whose well dried up… Amid a megadrought plaguing the American West, more rural communities are losing access to groundwater as heavy pumping depletes underground aquifers that aren’t being replenished by rain and snow.”
October 5 – Bloomberg (Michael Hirtzer, Elizabeth Elkin, and Joe Deaux): “A logjam of more than 100 ships, tugboats and their convoys of barges in the shrinking Mississippi River is threatening to grind trade of grains, fertilizer, metals and petroleum to a halt. The largest US barge operator warned customers it won’t be able to make good on deliveries. Ingram Barge Co. declared force majeure… due to ‘near-historic’ low water conditions on the Mississippi, the top route to get US grains and soybeans to the world market.”
Leveraged Speculation Watch:
October 5 – Reuters (Nell Mackenzie): “Investors pulled $32 billion from hedge funds in the second quarter of 2022, spooked by inflation, geopolitical tensions and the war in Ukraine, according to… Preqin. The outflows were the largest that the $4.1 trillion hedge fund industry had seen since the start of the coronavirus pandemic in the first quarter of 2020. The declines may continue as central banks continue to raise rates, Preqin said.”
October 3 – Bloomberg (Alexandra Semenova): “A risk-off mood across global financial markets amid persistent economic turmoil deterred prospective hedge funders from starting up new firms in the second quarter. The estimated number of new hedge fund launches slid to only 80 in Q2, down sharply from 185 in the first quarter of the year, according to… Hedge Fund Research. The latest figure also reflects the fewest new funds launched since the fourth quarter of 2008, during the Global Financial Crisis.”
Geopolitical Watch:
October 7 – Reuters (Josh Smith and Joori Roh): “South Korea and the United States began joint maritime exercises with a U.S. aircraft carrier on Friday, South Korea's military said, a day after it scrambled fighter jets in reaction to an apparent North Korean bombing drill. The maritime drills will take place in waters off South Korea's east coast on Oct. 7-8, South Korea's Joint Chiefs of Staff said… ‘We will continue to strengthen our operational capabilities and readiness to respond to any provocations by North Korea through joint drills with ... the USS Ronald Reagan Carrier Strike Group,’ South Korea's Joint Chiefs of Staff said.”
October 5 – Reuters (Humeyra Pamuk): “South Korea and the U.S. military conducted rare missile drills and an American supercarrier repositioned east of North Korea after Pyongyang flew a missile over Japan, one of the allies' sharpest responses since 2017 to a North Korean weapon test. U.S. Secretary of State Antony Blinken warned that nuclear-armed North Korea risked further condemnation and isolation if it continued its ‘provocations.’ ‘I think what we're seeing is that if they continue down this road, it will only increase condemnation, increase the isolation, increase the steps that are taken in response to their actions,’ he said…”
October 4 – Los Angeles Times (David Pierson and Stephanie Yang): “With the war in Ukraine and Russia’s threats to deploy tactical nuclear weapons, it was easy to lose sight of the rising danger North Korea poses to peace in Asia. But the reclusive state recaptured the world’s attention Tuesday when it launched an intermediate-range ballistic missile over Japan for the first time since 2017, prompting Japanese orders to take shelter across two northern prefectures. The U.S. and South Korea responded by sending warplanes on a bombing drill targeting an uninhabited island in the Yellow Sea… The North Korean missile… marked the nation's fifth round of weapons tests in 10 days.”
The S&P500 rallied 1.5% (down 23.6% y-t-d), and the Dow gained 2.0% (down 19.4%). The Utilities fell 3.2% (down 12.2%). The Banks recovered 1.8% (down 26.2%), and the Broker/Dealers surged 6.1% (down 10.6%). The Transports rallied 3.5% (down 24.3%). The S&P 400 Midcaps rose 2.9% (down 20.2%), and the small cap Russell 2000 recovered 2.2% (down 24.2%). The Nasdaq100 increased 0.6% (down 32.4%). The Semiconductors rose 2.2% (down 40.3%). The Biotechs gained 1.9% (down 16.8%). With bullion up $34, the HUI gold equities index rose 1.8% (down 23.6%).
Three-month Treasury bill rates ended the week at 3.26%. Two-year government yields added three bps to 4.31% (up 358bps y-t-d). Five-year T-note yields rose five bps to 4.14% (up 288bps). Ten-year Treasury yields gained five bps to 3.88% (up 237bps). Long bond yields added six bps to 3.84% (up 194bps). Benchmark Fannie Mae MBS yields increased five bps to 5.72% (up 366bps).
Greek 10-year yields slipped two bps to 4.81% (up 350bps). Italian yields surged 19 bps to 4.71% (up 353bps). Spain's 10-year yields rose 12 bps to 3.41% (up 285bps). German bund yields gained nine bps to 2.19% (up 237bps). French yields increased eight bps to 2.80% (up 260bps). The French to German 10-year bond spread narrowed about one to 61 bps. U.K. 10-year gilt yields jumped 15 bps to 4.24% (up 327bps). U.K.'s FTSE equities index rallied 1.4% (down 5.3% y-t-d).
Japan's Nikkei Equities Index surged 4.5% (down 5.8% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 gained 1.8% (down 18.0%). The German DAX equities index recovered 1.3% (down 22.7%). Spain's IBEX 35 equities index increased 1.0% (down 14.7%). Italy's FTSE MIB index rallied 1.2% (down 23.6%). EM equities were mostly higher. Brazil's Bovespa index surged 5.8% (up 11.0%), and Mexico's Bolsa index jumped 2.5% (down 14.2%). South Korea's Kospi index rallied 3.6% (down 25.0%). India's Sensex equities index increased 1.3% (unchanged). China's Shanghai Exchange was closed for holidays (down 16.9%). Turkey's Borsa Istanbul National 100 index surged 12.2% (up 92%). Russia's MICEX equities index slipped 0.6% (down 48.7%).
Investment-grade bond funds posted outflows of $3.536 billion, while junk bond funds reported inflows of $1.872 billion (from Lipper).
Federal Reserve Credit last week dropped $44.7bn to $8.728 TN. Fed Credit is down $173bn from the June 22nd peak. Over the past 160 weeks, Fed Credit expanded $5.002 TN, or 134%. Fed Credit inflated $5.917 Trillion, or 211%, over the past 517 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week sank $42.1bn to $3.324 TN - the low since April 2020. "Custody holdings" were down $154bn, or 4.4%, y-o-y.
Total money market fund assets declined $12.2bn to $4.578 TN. Total money funds were up $34bn, or 0.8%, y-o-y.
Total Commercial Paper jumped $13.1bn to $1.243 TN. CP was up $68bn, or 5.8%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped four bps to 6.66% (up 367bps y-o-y). Fifteen-year rates declined six bps to 5.90% (up 367bps). Five-year hybrid ARM rates rose six bps to 5.36% (up 284bps) - the high since January 2009. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 23 bps to 7.05% (up 390bps) - the high since March 2009.
Currency Watch:
October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki): “Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”
October 3 – Reuters (Tetsushi Kajimoto): “Japan stands ready to take ‘decisive’ steps in the foreign exchange market if excessive yen moves persist, Finance Minister Shunichi Suzuki said…, in a new warning against investors selling off the currency. ‘It's important for currencies to move stably as sharp and one-sided moves are undesirable,’ Suzuki told a news conference…, referring to recent sharp falls in the yen.”
For the week, the U.S. Dollar Index added 0.6% to 112.80 (up 17.9% y-t-d). For the week on the upside, the Brazilian real increased 4.1%, the Norwegian krone 1.7%, the South Korean won 1.3%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the Singapore dollar 0.2%, and the New Zealand dollar 0.2%. On the downside, the Swedish krona declined 1.1%, the British pound 0.8%, the Swiss franc 0.7%, the euro 0.6%, the Australian dollar 0.4%, the Japanese yen 0.4%, and the South African rand 0.1%. The Chinese (offshore) renminbi increased 0.10.% versus the dollar (down 10.89% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index jumped 5.1% (up 18.1% y-t-d). Spot Gold rallied 2.1% to $1,695 (down 7.3%). Silver recovered 5.8% to $20.13 (down 13.6%). WTI crude surged $13.15 to $92.64 (up 23%). Gasoline spiked 10.6% (up 23%), while Natural Gas slipped 0.3% to $6.75 (up 81%). Copper declined 0.8% (down 24%). Wheat dropped 4.5% (up 14%), while Corn added 0.8% (up 15%). Bitcoin increased $200, or 1.0%, this week to $19,570 (down 58%).
Market Instability Watch:
October 1 – Bloomberg (Denitsa Tsekova): “The UK’s rapid descent from stability to crisis is threatening to expose the fragility of global efforts to crush inflation, raising the specter of chaos spreading across financial markets. Volatility has surged to the highest level since March 2020 across currency and bond markets. Bank of America’s global cross-asset market risk indicator also jumped to a level not seen since the start of the pandemic. Current and former government officials in the US warned about potential spillover. ‘Fear is contagious,’ said Ben Kumar, senior investment strategist at Seven Investment Management LLP. ‘Higher bond volatility in the UK caused by fund liquidations prompts pound sell-offs due to instability, which prompts UK equity outflows, which prompts parallel selloffs worldwide.’”
October 4 – Bloomberg (Donal Griffin, Marion Halftermeyer, and Dawn Lim): “A Credit Suisse Group AG business that lends out shares reversed some of those transactions in recent days after investors that provided the securities pulled back over concern about the bank’s financial health. The… lender told borrowing clients at the stock-loan unit that some counterparties temporarily stopped dealing with it because of mounting market pressure, forcing it to withdraw shares… The unit saw less than 5% of the total pool pulled, and there was no funding impact for Credit Suisse… While the bank is merely a middle-man in the securities lending deals, several investors that provided the shares have been asking what risks they’re taking with regard to the bank itself…”
October 7 – Reuters (John Revill): “Credit Suisse will buy back up to 3 billion Swiss francs ($3bn) of debt, an attempt by the Swiss bank to show its financial muscle and reassure investors concerned about the lender's overhaul and how much it may cost. Speculation about the bank's future gathered pace on social media in the past week amid anticipation it may need to raise billions of francs in fresh capital, sending its stock and some bonds to new lows. The buyback trims the bank's debts and is an attempt to bolster confidence. But central questions about its restructuring - and whether or not it will need fresh capital to fund it - remain open. One of the largest banks in Europe, Credit Suisse is trying to recover from a string of scandals, including losing more than $5 billion from the collapse of investment firm Archegos last year, when it also had to suspend client funds linked to failed financier Greensill.”
October 5 – Reuters (John Revill): “The Swiss National Bank (SNB) is following the situation at Credit Suisse closely, SNB Governing Board member Andrea Maechler told Reuters… Switzerland's second-biggest bank saw its shares slide by as much as 11.5% and its bonds hit record lows on Monday, before clawing back some of the losses, amid concerns about its ability to restructure its business without asking investors for more money. ‘We are monitoring the situation,’ Maechler said… ‘They are working on a strategy due to come out at the end of October.’”
October 6 – Bloomberg (Ambereen Choudhury and Manuel Baigorri): “Societe Generale SA cut its exposure to counterparties on trades in China by about $80 million in the past few weeks as global banks seek to guard against any potential fallout from rising geopolitical risks in the world’s second-largest economy. It has several hundred million dollars in positions on China’s Financial Futures Exchange… The French bank has been seeking to replicate those positions elsewhere in Asia… Like other firms and multi-nationals, the bank’s executives are growing increasingly concerned about a whole swathe of problems hitting China in recent months…”
October 4 – Financial Times (Eric Platt and Kate Duguid): “Investors and Wall Street analysts are sounding the alarm about a possible ‘market accident’, as successive bouts of tumult in US stocks and bonds and a surging dollar cause rising levels of stress in the financial system. A gauge of strain in US markets… has soared to its highest level since the coronavirus pandemic ructions of May 2020. Even as equities on Wall Street start the new quarter with gains, the OFR’s Financial Stress index is near a two-year high at 3.1, where zero denotes normal market functioning. That has added to a growing list of benchmarks which suggest trading conditions in US government debt, corporate bonds and money markets are increasingly stretched.”
October 6 – Bloomberg (Liz Capo McCormick): “The latest bout of global financial volatility has heightened concerns about regulators’ continuing failure to resolve liquidity problems with US Treasuries -- the debt that serves as a benchmark for the world. It’s getting harder and harder to buy and sell Treasuries in large quantities without those trades moving the market. Market depth, as the measure is known, last Thursday hit the worst level since the throes of the Covid-19 crisis in the spring of 2020, when the Federal Reserve was forced into massive intervention.”
September 29 – Bloomberg (Edward Bolingbroke): “Anyone doubting that liquidity is draining from the world financial system just has to look at the daily swings in interest-rate swaps. It’s one of the world’s deepest markets, where large financial institutions go to hedge long-term risks. And it’s being hit by unusual volatility. The gap between the floating- and fixed-rate legs of longer-dated swaps tied to the Secured Overnight Financing Rate narrowed by over 7 bps to minus 75 bps on Tuesday, only to widen back by over 5 bps the following day. Both were the largest one-day moves in either direction on record for the index, which was rolled out in October 2020 as a replacement for the London interbank offered rate.”
October 6 – Bloomberg (Ye Xie and Mary Biekert): “Global foreign-currency reserves are falling at the fastest pace on record, as central banks from India to the Czech Republic intervene to support their currencies. Reserves have declined by about $1 trillion, or 7.8%, this year to $12 trillion, the biggest drop since Bloomberg started to compile the data in 2003.”
October 5 – Bloomberg (Lu Wang and Elena Popina): “One giant options transaction may have sparked the S&P 500’s bounce on Wednesday, according to Wells Fargo… The trade, which involved buying and selling call options tied to the index at a cost of around $31 million, probably helped fuel a recovery that saw the benchmark gauge erase a 1.8% decline, says Chris Harvey, the firm’s head of equity strategy. Theories that derivatives trading has potentially driven movement in an underlying asset have been relatively common in this year’s topsy-turvy markets…”
October 1 – Financial Times (Jonathan Wheatley): “Investors have withdrawn a record $70bn from emerging market bond funds this year… Investors took $4.2bn out of EM bond funds in the past week alone, according to… EPFR Global, a fund flow monitor — bringing the annual outflows to the highest level since the US bank began recording the data in 2005. The investor flight underscores how emerging markets are facing mounting risks from surging interest rates in developed markets…”
October 7 – Reuters (Lucy Raitano): “Investors piled into cash at the fastest weekly rate since April 2020 in the week to Wednesday, as soaring government borrowing costs, high energy prices and slowing growth fanned risk aversion, BofA Global Research said… Investors ploughed $88.8 billion into cash, BofA said, citing EPFR data, and sold $18.3 billion in bonds - the fastest weekly rate in four months - with the majority of the sell-off comprising investment-grade bonds.”
October 4 – Financial Times (Adrienne Klasa and George Hammond): “The IMF has warned that a surge of outflows from funds allowing frequent investor withdrawals but holding hard-to-sell assets could amplify market stress and ‘potentially undermine the stability of the financial system’. Withdrawals from open-ended bond funds have increased in recent months, the IMF noted, and another shock could ‘trigger further outflows’, with a mismatch between redemptions and illiquid holdings posing a ‘major potential vulnerability’. The… international body singled out less frequently traded securities such as corporate bonds, certain emerging market assets and real estate as most at risk during periods of market volatility when investors can move to sell in unison.”
October 3 – Bloomberg (Garfield Reynolds): “Funding markets are likely to end the year under stress as banking regulations collide with central-bank tightening and the traditional need to square off positions toward the end of December. That’s the message from three-month cross-currency basis swaps, which blew out at the end of September to the worst since the pandemic meltdown in 2020. The premium that holders of euros and yen need to pay to swap into dollars jumped as UK financial turmoil and Federal Reserve hawkishness gave a further tailwind to the greenback…”
UK Crisis Watch:
October 6 – Financial Times (Tommy Stubbington): “The Bank of England has defended last week’s intervention in the UK government debt market, saying it stepped in to prevent a £50bn fire sale of gilts that would have taken Britain to the brink of a financial crisis. The central bank said… that had it not launched its emergency bond-buying scheme in the wake of chancellor Kwasi Kwarteng’s ‘mini’ Budget, pension funds would have been forced to sell £50bn worth of long-term UK government debt ‘in a short space of time’… The BoE’s defence of the scheme… is the clearest sign yet of how close the UK came to a market meltdown following Kwarteng’s plan for £45bn in unfunded tax cuts. Had the central bank not intervened, it feared there would have been a ‘self-reinforcing spiral’ that threatened ‘severe disruption of core funding markets and consequent widespread financial instability’, said Sir Jon Cunliffe, the BoE’s deputy governor for financial stability…”
October 1 – Bloomberg (Eddie Spence): “When the pound slumped as Kwasi Kwarteng presented his mini-budget, some Britons rushed to the safety of a haven that’s recently lost its luster: gold. ‘Buying has increased exponentially,’ said Ash Kundra, who runs coin dealer J Blundell & Sons in London’s historic Hatton Garden jewelry quarter. ‘I keep running out of coins, I keep running out of bars.’”
October 6 – Reuters (Aimee Donnellan): “The UK’s bond market crisis is entering a messy second act. The Bank of England announced a 65 billion pound gilt-buying scheme to stabilise markets and rescue pension funds. But the fallout from the crisis means those same funds, with 1.7 trillion pounds of assets, now need to reduce risk by selling corporate bonds and other higher-yielding assets… The central bank’s intervention helped the funds avoid having to sell gilts at fire-sale prices to meet collateral demands. But LDI investors are not out of the woods. Bailey’s move may have been too late to stop some pension funds from having to close out their hedges, like interest rate swaps or futures. That leaves them with a potential balance sheet mismatch because they no longer have the derivatives in place to match their liabilities.”
October 6 – Bloomberg (Loukia Gyftopoulou, Will Louch and Abhinav Ramnarayan): “Pension funds are selling billions of pounds worth of assets to rebuild their cash buffers before the Bank of England removes critical market support next week that it introduced to prevent the collapse of the UK’s government bond market. Individual pension funds are each selling tens or hundreds of millions of pounds of liquid assets to boost their reserves, according to pension consultants… Asset sales across the industry have climbed into the tens of billions of pounds, according to Nikesh Patel, head of client solutions at Van Lanschot Kempen, a wealth management firm.”
October 3 – Associated Press (Jill Lawless): “The U.K. government… dropped plans to cut income tax for top earners, part of a package of unfunded cuts unveiled only days ago that sparked turmoil on financial markets and sent the pound to record lows. In a dramatic about-face, Treasury chief Kwasi Kwarteng abandoned plans to scrap the top 45% rate of income tax paid on earnings above 150,000 pounds ($167,000) a year, a policy that had drawn near-universal opposition.”
October 4 – Bloomberg (David Goodman): “Kwasi Kwarteng signed off on £100 billion ($113bn) of bond buying by the Bank of England as the market fell into turmoil last week, higher than the size of the plan announced by the central bank and an indication of the level of concern among officials about volatility in the gilt markets… The chancellor of the exchequer agreed to a request to approve purchases of as much as £100 billion when the plan kicked off…”
October 5 – Reuters (David Milliken): “Ratings agency Fitch lowered the outlook for its credit rating for British government debt to ‘negative’ from ‘stable’…, days after a similar move from rival Standard & Poor's following the government's Sept. 23 fiscal statement. ‘The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term,’ Fitch said.”
October 6 – Bloomberg (Libby Cherry, Greg Ritchie and Mumbi Gitau): “UK bond markets face a potential ‘cliff edge’ when the Bank of England exits the market at the end of next week, leaving traders to navigate a turbulent backdrop without the support of a buyer of last resort. Longer-term gilt yields are already starting to creep higher as the Oct. 14 end date for its bond-buying looms into view, partly as policy makers make it clear they are in no mood to simply prop up prices for traders.”
October 4 – Bloomberg (Loukia Gyftopoulou): “Asset managers including Blackrock Inc. and Schroders Plc are limiting institutional investors’ withdrawals from some UK property funds after a wave of requests to move money. Schroders’ UK Real Estate fund has deferred redemptions due at the start of October to as late as July 2023, which will give the £2.8 billion ($3.2bn) fund more time to ensure it has enough cash to cover the payments…”
October 6 – Reuters (Kylie MacLellan, Muvija M and William James): “The Bank of England will gauge the health of Britain's government bond market before it unwinds the emergency intervention it launched after the government's new economic plan sparked upheaval, the bank said… The BoE waded into Britain's 2.1 trillion pound ($2.4 trillion) gilt market last Wednesday to stop panic selling of long-dated bonds in the aftermath of finance minister Kwasi Kwarteng's ‘mini budget’ announcement last month.”
October 7 – Bloomberg (Andrew Atkinson): “UK corporate insolvencies in the second quarter reached their highest since 2009, with the soaring cost of energy cited as a primary concern for more than a fifth of companies. The figures released by the Insolvency Service and the Office for National Statistics show that more than 1-in-10 firms questioned in August reported a moderate-to-severe risk of failure.”
Bursting Bubble and Mania Watch:
October 6 – Bloomberg (Preston Brewer): “The US IPO market has almost entirely frozen over, with very few companies even trying to navigate the treacherous environment of market volatility, rising interest rates, and low investor appetite for new issues. The poor performance of companies that have recently completed their initial public offering has only tightened this winter’s grip. How Cold Is Cold? How much have US IPOs fallen? Quite a lot. In the recently completed quarter, US IPOs were down 87.5%, and raised nearly 98% less capital compared to the first quarter of 2021, when new issues peaked. Only 52 companies went public in the US in Q3, raising $2.8 billion.”
October 4 – Bloomberg (Bailey Lipschultz): “Serial SPAC dealmaker Bill Foley is the latest industry heavyweight to call it quits as he seeks to give investors back the roughly $2.1 billion he raised for a pair of vehicles. Austerlitz Acquisition Corporation II, which raked in $1.38 billion and was among the largest outstanding blank-check firms, and Austerlitz Acquisition Corporation I, which raised $690 million, are looking to shut down before the end of the year…”
Ukraine War Watch:
October 5 – Reuters: “Russian President Vladimir Putin ordered his government… to take control of Ukraine's Zaporizhzhia nuclear power plant, Europe's largest, as the U.N. nuclear watchdog warned that power supply to the site was ‘extremely fragile’. However, the boss of Ukraine's state energy agency announced he was taking over the plant, which has become a focus of international concern due to the possibility of a nuclear disaster after shelling in the area for which Moscow and Kyiv have blamed each other.”
October 4 – Reuters (Tom Balmforth and Pavel Polityuk): “In an abandoned tower block damaged by Russian shelling in Ukraine's second city, Olga Kobzar plans to tough out winter for as long as she can without electricity, water and central heating by lighting the gas stove in her kitchen for warmth. The 70-year-old, who lives alone in a devastated district of northern Kharkiv where the temperature can fall to -20 Celsius (-4 Fahrenheit), is at the sharp end of what Ukrainian officials say will be the grimmest winter in decades… The seven-month-old war has wrought huge damage to the energy network - and to residential areas in swathes of Ukraine - and officials fear Moscow could deliberately attack critical infrastructure when the frost sets in.”
October 3 – Reuters (Caleb Davis): “Russian TV journalist Marina Ovsyannikova, famous for staging an on-air protest against Russia's war in Ukraine, has been put on Moscow's wanted list after her ex-husband reported she had escaped from pre-trial house arrest. Ovsyannikova, 44, was given two months' house arrest in August, and faces up to 10 years in prison if found guilty of spreading fake news about Russia's armed forces. The case relates to a protest in July when she stood on a river embankment opposite the Kremlin and held up a poster calling President Vladimir Putin a murderer and his soldiers fascists.”
U.S./Russia/China Watch:
October 5 – Reuters (Yimou Lee): “Taiwan expects China to increase its coercion and intimidation to achieve its goal of bringing the island under Beijing's control once President Xi Jinping assumes a third term in office, a senior Taiwanese minister said... Chiu Tai-san, the head of Taiwan's China-policy making Mainland Affairs Council, said Xi will further consolidate his power at the party congress… ‘We believe that the Beijing authorities' work on Taiwan has entered the stage of strengthening the practice of the so-called 'anti-independence and promoting reunification',’ he added. China will do this by using ‘coercion and intimidation’, ‘grey zone’ activities and international law to ‘interfere with and hinder Taiwan's interaction and cooperation with the international community to achieve its goals towards Taiwan’, Chiu said.”
Economic War/Iron Curtain Watch:
September 30 – Reuters (Richard Valdmanis): “The ruptures on the Nord Stream natural gas pipeline system under the Baltic Sea have led to what is likely the biggest single release of climate-damaging methane ever recorded, the United Nations Environment Programme said… A huge plume of highly concentrated methane, a greenhouse gas far more potent but shorter-lived than carbon dioxide, was detected in an analysis this week of satellite imagery… ‘This is really bad, most likely the largest emission event ever detected,’ Manfredi Caltagirone, head of the IMEO for UNEP, told Reuters… Researchers at GHGSat… estimated the leak rate from one of four rupture points was 22,920 kilograms per hour. That is equivalent to burning about 630,000 pounds of coal every hour…”
October 7 – Reuters (Sarah Wu): “Chinese missiles flying over Taiwan and naval drills in the Strait in August that simulated a blockade by China have jolted the semiconductor industry into contemplating what once seemed a remote possibility: war over the major chip-producing island. From drafting contingency plans to inquiring about manufacturing capacity outside Taiwan, some companies are now weighing how to respond if China attacks or restricts access to the democratic island… Taiwan produces the vast majority of the world's most advanced chips and is home to Taiwan Semiconductor Manufacturing Company Ltd (TSMC), the world's largest contract chipmaker…”
Inflation Watch:
October 6 – Bloomberg (Alexandre Tanzi): “Almost half of US families surveyed by the Census Bureau found the recent rise in consumer prices ‘very stressful’ -- and the vast majority of the others were also worried about inflation. The Census Bureau included a new question about the impact from soaring prices in its regular household poll. The result shows that nearly everyone was at least a little stressed by inflation…The survey also highlights disparities among ethnic groups. More than half of Hispanic and Black respondents found inflation ‘very stressful,’ compared with about 43% for Whites and about 38% for Asian Americans.”
October 3 – Bloomberg (Will Wade): “US coal prices surged past $200 for the first time as a global energy crunch drives up demand for the dirtiest fossil fuel. Spot prices for coal from Central Appalachia rose to $204.95 a ton for the week ending Sept. 30, the highest in records dating to 2005…”
Biden Administration Watch:
October 7 – Reuters (Nandita Bose and Pavel Polityuk): “Russian President Vladimir Putin's threat to use nuclear weapons in Ukraine has brought the world closer to ‘Armageddon’ than at any time since the Cold-War Cuban Missile Crisis, U.S. President Joe Biden said. With his seven-month invasion unravelling, Putin celebrated his 70th birthday on Friday with fawning praise from some officials but little public fuss. That was a contrast to just a week ago when he staged a huge concert on Red Square to proclaim the annexation of nearly a fifth of Ukrainian land.”
October 6 – Reuters (Humeyra Pamuk): “The United States is reviewing various options regarding its relationship with Saudi Arabia after Riyadh and other OPEC+ nations agreed this week to large cuts in oil production, Secretary of State Antony Blinken said… ‘As for the relationship (with Riyadh) going forward, we're reviewing a number of response options. We're consulting closely with Congress,’ Blinken said…”
October 5 – Reuters (Ahmad Ghaddar, Alex Lawler and Rowena Edwards): “OPEC+ agreed steep oil production cuts…, curbing supply in an already tight market, causing one of its biggest clashes with the West as the U.S. administration called the surprise decision shortsighted. OPEC's de-facto leader Saudi Arabia said the cut of 2 million barrels per day (bpd) of output - equal to 2% of global supply - was necessary to respond to rising interest rates in the West and a weaker global economy.”
Federal Reserve Watch:
October 5 – Bloomberg (Garfield Reynolds): “Federal Reserve officials keep repeating the mantra they don’t plan to cut interest rates next year. Traders keep doubting them. Eurodollar futures showed reduced expectations… for Fed interest-rate cuts in 2023 but still price in around a one quarter-point move and at least two more in 2024. Federal Reserve Bank of San Francisco President Mary Daly and Fed Atlanta President Raphael Bostic were the latest to bang the drum on the need to keep tightening in place to reduce inflation that remains near a four-decade high.”
October 4 – Reuters (Ann Saphir and Michael S. Derby): “San Francisco Federal Reserve Bank President Mary Daly… said the U.S. central bank has the tools and the knowledge to bring down high inflation, and will use them, even as it tries to find the ‘gentlest’ way to do so. There is ‘a lot’ of room for the Fed to use higher interest rates to reduce demand and ease price pressures, Daly said... ‘If we do our jobs well, and we communicate to the public why we are doing what we are doing, and why the interest rate path we are taking is necessary to get inflation down, and that price stability for us is extremely important, as is doing it as gently as possible so that the economy can be in a balanced state as easily as possible - whatever that looks like, we are going to take the easiest path we can find,’ Daly said.”
October 3 – Reuters (Michael S. Derby): “Federal Reserve Bank of New York President John Williams said… that while there have been nascent signs of cooling inflation, underlying price pressures remain too high, which means the U.S. central bank must press forward to get inflation under control. ‘Clearly, inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential,’ Williams said… ‘Tighter monetary policy has begun to cool demand and reduce inflationary pressures, but our job is not yet done.’”
October 5 – Reuters (Howard Schneider): “The U.S. Federal Reserve's fight against inflation is likely ‘still in early days,’ Atlanta Fed president Raphael Bostic said…, becoming the latest U.S. central banker to caution against the likelihood rates would be reduced in response to any weakening of the economy. Despite ‘glimmers of hope’ in recent data, Bostic said ‘the overarching message I’m drawing...is that we are still decidedly in the inflationary woods, not out of them,’ with the Fed's target funds rate needing to rise to around 4.5% by the end of the year.”
October 4 – Reuters (Howard Schneider): “Inflation is the most serious problem facing the Federal Reserve and ‘may take some time’ to address, Fed Governor Philip Jefferson said… in his first public remarks since joining the U.S. central bank's governing body. ‘Restoring price stability may take some time and will likely entail a period of below-trend growth,’ Jefferson told a conference…, joining the current Fed consensus for continued interest rate increases to battle price pressures.”
October 6 – Financial Times (Gillian Tett): “Dallas is almost 5,000 miles from London. But when the UK gilt markets imploded last week… the drama left Richard Fisher, former chair of the Dallas Federal Reserve, wincing. Fisher has warned for years that a decade of ultra loose monetary policy would create pockets of future financial instability. So he sees the British gilts drama (which occurred because the pension funds mishandled highly leveraged bets) not as an isolated event — but as the sign of a trend. ‘This [foolish strategy] always happens when rates are near the zero bound and things have gone to an extreme,’ he told CNBC, noting that the crisis is ‘an indication of other things that are likely to pop up’ because investors and institutions have been dangerously overleveraged and ‘thinking that rates will stay low forever’.”
U.S. Bubble Watch:
October 4 – New York Times (Alan Rappeport and Jim Tankersley): “America’s gross national debt exceeded $31 trillion for the first time…, a grim financial milestone that arrived just as the nation’s long-term fiscal picture has darkened amid rising interest rates. The breach of the threshold… comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation… ‘So many of the concerns we’ve had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,’ said Michael A. Peterson, the chief executive officer of the Peter G. Peterson Foundation… ‘Too many people were complacent about our debt path in part because rates were so low.’”
October 7 – CNBC (Jeff Cox): “Job growth fell just short of expectations in September and the unemployment rate declined despite efforts by the Federal Reserve to slow the economy, the Labor Department reported…. Nonfarm payrolls increased 263,000 for the month, compared with the Dow Jones estimate of 275,000. September’s payroll figure marked a deceleration from the 315,000 gain in August and tied for the lowest monthly increase since April 2021.”
October 4 – Reuters (Lucia Mutikani): “U.S. job openings fell by the most in nearly 2-1/2 years in August, suggesting that the labor market was starting to cool as the economy grapples with higher interest rates aimed at dampening demand and taming inflation. Despite the fifth month of decreases in job openings this year reported by the Labor Department in its Job Openings and Labor Turnover Survey, or JOLTS report…, vacancies remained above 10 million for the 14th straight month. While there were 1.7 job openings for every unemployed person in August, down from two in July, this closely watched measure of supply-demand balance in the labor market remained above its historical average. Layoffs also stayed low, signs of a still-tight labor market, which likely keep the Federal Reserve on its aggressive monetary policy tightening path.”
October 5 – Bloomberg (Vince Golle): “US mortgage rates jumped to a 16-year high of 6.75%, marking the seventh-straight weekly increase and spurring the worst slump in home loan applications since the depths of the pandemic. Over the past seven weeks, mortgage rates have soared 1.30 percentage points, the largest surge over a comparable period since 2003…”
October 5 – Yahoo Finance (Dani Romero): “Mortgage applications… became the latest sign showing how hard rates are hitting housing. And it could get worse. The volume of mortgage applications for purchases dropped 13% last week compared with the previous week…, while refinance activity… plunged 18%. Purchase apps were down 37% year over year and refis were 86% lower.”
October 3 – Bloomberg (Prashant Gopal): “Home prices in the US have taken a turn and are now posting the biggest monthly declines since 2009. Median home prices fell 0.98% in August from a month earlier, following a 1.05% drop in July… Black Knight Inc. said… The two periods mark the largest monthly declines since January 2009. ‘Together they represent two straight months of significant pullbacks after more than two years of record-breaking growth,’ said Ben Graboske, Black Knight Data and Analytics president. The housing market is losing steam fast with skyrocketing mortgage rates driving affordability to the lowest level since the 1980s.”
October 5 – Forbes (Jonathan Ponciano): “As mortgage demand plummets to the lowest level in 25 years, some experts believe the housing market decline will hit a cadre of regions especially hard—pushing prices down as much as 20% in pandemic-era hotspots and other areas where affordability has plunged… Surging rates have tacked on $337, or 15%, to the typical monthly mortgage payment over the past six weeks alone and pummeled housing demand nationwide as a result—so much that prices have started to slip from record highs in some markets over the past few weeks.”
October 3 – Bloomberg (Vince Golle): “A gauge of US manufacturing stumbled in September to a more than two-year low, moving closer to outright stagnation as orders contracted for the third time in four months. The Institute for Supply Management’s gauge of factory activity dropped nearly 2 points to 50.9, the lowest since May 2020… The… measure of new orders declined more than 4 points to 47.1, also the lowest level since the early months of the pandemic… Meantime, a measure of prices paid for materials used in the production process retreated for a sixth-straight month. At 51.7, the price index is the lowest since June 2020…”
October 7 – Bloomberg (Reade Pickert): “US consumer borrowing rose in August by more than forecast as credit-card balances increased by the most in five months. Total credit increased $32.2 billion from the prior month… The median forecast… called for a $25 billion advance… Revolving credit outstanding, which includes credit cards, rose $17.2 billion. That marked the third-largest monthly advance on record. Non-revolving credit, which includes auto and school loans, increased $15.1 billion.”
October 4 – Reuters (Savyata Mishra): “Chipmaker Micron Technology said… it planned to invest up to $100 billion over the next 20-plus years to build a computer chip factory complex in upstate New York, in a bid to boost domestic chip manufacturing. The project, which Micron claims will be the world's largest semiconductor fabrication facility, is expected to create nearly 50,000 jobs in New York, with the first phase investment of $20 billion planned by the end of this decade.”
Fixed Income Watch:
October 4 – Bloomberg (Scott Carpenter and Charles Williams): “Southern Auto Finance Co. is delaying its first sale of bonds backed by subprime car loans after market volatility caused the issuer to wait for better timing, according to Chief Executive Officer George Fussell. The Pompano Beach, Florida-based company plans to look at reviving its $118.8 million asset-backed securities sale in about a month, if market conditions have improved.”
China Watch:
September 30 – Reuters (Liangping Gao): “New home prices in China fell for the third straight month in September as a mortgage boycott across the country and a slowing economy discouraged potential home buyers, a private survey showed… China's property market crisis worsened this summer, with official data showing home prices, sales and investment all falling in August, adding pressure on the world's second-largest economy, which barely grew in the second quarter.”
October 5 – Financial Times (Edward White): “Xi Jinping has delivered a blunt message to the top ranks of the ruling Chinese Communist party: no one is beyond reach. In the weeks leading up to this month’s party congress, at which Xi is expected to secure a third term as party leader and head of the military, China’s courts have orchestrated a series of high-profile corruption trials of senior cadres from the state’s police and security apparatus. Death sentences — which can be commuted to life in prison after two years — were last week handed down to Fu Zhenghua, Xi’s former justice minister, Sun Lijun, the former deputy minister of public security, and Wang Like, a former top official in Jiangsu. Jail terms of more than 10 years were also issued to at least three other former police and security chiefs.”
October 6 – Bloomberg (Linda Lew): “China’s Covid-19 tally climbed to the highest in about a month, driven by people traveling during the week-long National Day holiday and sparking a fresh round of lockdowns aimed at controlling the outbreaks ahead of the Party Congress. The country reported 1,138 new local infections for Wednesday, the highest since Sept. 9…”
October 6 – Bloomberg (Krystal Chia): “Goldman Sachs… sees Hong Kong’s home prices declining 30% from last year’s levels, worsening its outlook as rapidly rising interest rates deepen a property market rut. Residential prices are expected to fall by 15% this year and another 15% in the next…”
Central Banker Watch:
October 4 – Reuters (Francesco Canepa): “The European Central Bank must at a ‘minimum’ stop stimulating the economy through its monetary policy, the ECB's President Christine Lagarde said…, in a likely reference to raising interest rates back to ‘neutral’ territory. This is defined as a level of interest rate that neither stimulates nor curbs economic growth, all else being equal.”
October 6 – Bloomberg (Theophilos Argitis): “Bank of Canada Governor Tiff Macklem said he remains firmly on an interest-rate hiking path, quashing hopes for an imminent end to a tightening cycle that’s choking indebted households and threatening the economy with recession. Macklem… played down a recent slowing of headline inflation, saying underlying price pressures are elevated and risk becoming entrenched without further rate increases. ‘Simply put, there is more to be done,’ Macklem told the Halifax Chamber of Commerce. Inflation will ‘not fade away by itself.’ Canada benchmark two-year yields jumped to the highest level since 2007 on his comments…”
October 3 – Reuters (Wayne Cole): “Australia's central bank… surprised markets by lifting interest rates by a smaller-than-expected 25 bps, saying they had already risen substantially, although it added that further tightening would still be needed… The Reserve Bank of Australia (RBA) raised its cash rate to a nine-year peak of 2.60%, the sixth hike in as many months which included four outsized moves of 50 bps.”
Global Bubble Watch:
October 3 – Bloomberg (Finbarr Flynn, Garfield Reynolds and Colin Keatinge): “Governments and companies around the world are facing unprecedented costs to refinance bonds, a burden that’s set to deepen fissures in debt markets and expose more vulnerabilities among weaker borrowers. A corporate treasurer or finance minister looking to issue new notes now would likely have to pay interest that’s about 156 bps higher on average than the coupons on existing securities, after that gap surged to a record in recent days. That all adds up to about $1.01 trillion in additional costs if all those securities were refinanced…”
October 3 – Bloomberg (Alexandre Tanzi): “Global manufacturing contracted in September for the first time in more than two years as orders and production continued to weaken, underscoring growing risks of a worldwide recession. The JPMorgan global manufacturing purchasing managers gauge fell for a fourth consecutive month, to 49.8 last month… An index of new orders shrank for a third-straight month to a more than two-year low and a measure of international trade fell…”
October 6 – Reuters (Andrea Shalal): “The International Monetary Fund will next week downgrade its forecast for 2.9% global growth in 2023, Managing Director Kristalina Georgieva said…, citing rising risks of recession and financial instability. Georgieva said the outlook for the global economy was ‘darkening’… ‘We are experiencing a fundamental shift in the global economy, from a world of relative predictability ... to a world with more fragility - greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters,’ she said… Georgieva said the old order, characterized by adherence to global rules, low interest rates and low inflation, was giving way to one in which ‘any country can be thrown off course more easily and more often.’”
October 5 – Reuters (Philip Blenkinsop): “The World Trade Organization forecast a slowdown of global trade growth next year as sharply higher energy and food prices and rising interest rates curb import demand, and warned of a possible contraction if the war in Ukraine worsens. The… trade body said… merchandise trade would increase by 3.5% this year, up from its April estimate of 3.0%. However, for 2023, it sees trade growth of just 1.0%, compared with a previous forecast of 3.4%. The WTO said there was high uncertainty over its forecasts.”
October 3 – Bloomberg (Theophilos Argitis): “Canadian consumer confidence has dropped to near record lows again amid growing angst about the global economy. The Bloomberg Nanos Canadian Confidence Index… declined for a fifth straight week to touch some of the weakest levels ever outside of the last two economic crises. Canadians have rarely been so pessimistic about the economy since the index was launched in 2008.”
Europe Watch:
October 4 – Bloomberg (John Follain, Michael Nienaber, and Peter Laca): “The European Union’s executive arm is planning to urgently prepare several different options for how to cap the price of natural gas as it tries to alleviate an energy crisis, but EU diplomats warned the bloc’s timetable may be unrealistic. Leaders aim to agree on specific plans when they meet in Brussels for a summit in just two weeks, French President Emmanuel Macron told reporters. After a meeting of European heads of state in Prague, there’s a growing consensus that measures are needed to tackle rising energy prices, but specifics remain scarce. Several countries warned the EU that it needs to move quickly or jeopardize the bloc’s solidarity as nations are starting go their own way.”
EM Crisis Watch:
October 3 – Financial Times (Bryan Harris, Michael Pooler and Carolina Ingizza): “Brazil is braced for a tense presidential runoff after a closely fought first-round vote set up a showdown between two of Latin America’s most divisive politicians. While leftwing challenger Luiz Inácio Lula da Silva came out on top with 48.4%..., incumbent leader Jair Bolsonaro will be buoyed by a performance that defied many assumptions. The far-right populist surprised pundits by claiming a 43.2% share… The race now goes to a second round on October 30…”
October 3 – Financial Times (Laura Pitel): “Turkey’s official inflation rate climbed to a new 24-year high last month as the country reeled from President Recep Tayyip Erdoğan’s unorthodox economic policy. The consumer price index rose 83.45% in September… up from 80.21% the previous month. Erdoğan rejects the established economic consensus that raising interest rates helps to curb inflation. He has ordered the central bank to cut borrowing costs twice in the past two months, bringing the benchmark interest rate down to 12%.”
October 4 – Bloomberg (Firat Kozok and Burhan Yuksekkas): “Turkey’s foreign trade deficit widened by almost 300% on an annual basis last month, driven by costlier energy and other commodities. The gap widened to $10.4 billion from $2.6 billion in September 2021... It reached a record $11.2 billion in August… Turkey has faced worsening trade imbalances as the government pumps up economic growth through cheap loans.”
October 4 – Financial Times (John Reed, Andy Lin and Chloe Cornish): “India’s foreign exchange reserves have dwindled by nearly $100bn this year as its central bank defends the rupee against a surging dollar amid intensifying market turmoil around the world… As pressure from the surging dollar has depleted reserves and driven India’s south Asian neighbours Sri Lanka and Pakistan into financial distress, India’s reserves of more than $500bn remain adequate, according to analysts and the Reserve Bank of India.”
October 5 – Reuters (Jihoon Lee): “South Korea's foreign exchange reserves shrank by nearly $20 billion in September, the second-biggest monthly drop on record, as authorities stepped up dollar-selling intervention to counter the won's slump to a 13-1/2-year low. The country's FX reserves stood at $416.77 billion at the end of September, down $19.66 billion from $436.43 billion a month earlier…”
October 6 – Reuters (Kylie Madry): “Mexican Economy Minister Tatiana Clouthier stepped down…, depriving Mexico of one of its key trade negotiators as her government scrambles to head off a major dispute over energy with the United States and Canada. Clouthier… said she had first told President Andres Manuel Lopez Obrador she intended to quit not long after the energy disagreement threatened to become costly for Mexico.”
Japan Watch:
October 3 – Reuters (Yoshifumi Takemoto and Leika Kihara): “Core consumer prices in Japan's capital, a leading indicator of nationwide inflation, rose 2.8% in September from a year earlier, exceeding the central bank's 2% target for a fourth straight month and marking the biggest gain since 2014. The data reinforced market expectations that nationwide core consumer inflation will approach 3% in coming months and may cast doubt on the Bank of Japan's view that recent cost-push price increases will prove temporary.”
October 4 – Bloomberg (Taiga Uranaka and Takashi Nakamichi): “In these turbulent times, Japanese bank chiefs have a lot to worry about: a patchy economic recovery, a weakening yen, emerging inflation, and swelling public debt to name a few. But one of their biggest concerns is how to prepare for the day when the Bank of Japan eventually ends its unprecedented monetary easing and raises interest rates. BOJ Governor Haruhiko Kuroda has pledged to stick to the policy for now, but any unwinding would have ramifications for the bond market and an economy used to years of rates near zero… ‘What I am worried most about is, as interest rates have been pinned down for years, there are few traders and dealers remaining who experienced moves in rates,’ said Masahiro Kihara, CEO of Mizuho Financial Group…”
October 2 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japanese manufacturer' business mood worsened in the three months to September and corporate inflation expectations hit a record high, a central bank survey showed, as stubbornly high material costs clouded the outlook… Corporate capital expenditure plans for the current fiscal year stayed strong, the Bank of Japan's ‘tankan’ survey showed, thanks in part to the boost to exporters from the weak yen.”
October 6 – Bloomberg (Yoshiaki Nohara): “Japan’s households cut back on spending for a second month in August, as the rising cost of living weighed on consumers’ budgets amid a summer wave of Covid infections, suggesting fragility in the country’s recovery path. Household outlays dropped 1.7% from July… Falls were led by housing and food. Spending increased 5.1% from a year ago, compared with a 6.7% increase forecast by analysts.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 3 – Reuters (Noor Zainab Hussain): “Insurers are bracing for a hit of up to $57 billion as they try to assess the damage from Hurricane Ian in Florida and South Carolina, risk modeling firm Verisk said… The industry projection includes estimated wind, storm surge, and inland flood losses resulting from Ian's landfalls in the two states, Verisk said. However, the estimate range… does not include elements such as losses to the National Flood Insurance Program and any potential impacts of litigation or social inflation that could lead to a total insured industry loss of $60 billion.”
October 5 – Reuters (Robert Cyran): “Hurricane Ian hit the Florida coast last week, leaving huge amounts of damage and a large death toll in its wake. Governor Ron DeSantis is piecing together recovery efforts while defending his response to the storm. But there’s a separate crisis brewing that could come to a head in the next decade. Damage from wind and flooding isn’t going to get any better – and the state’s residents are running out of ways to get insurance. Insured losses from the storm could be $42 billion to $57 billion, according to insurance software firm Verisk, with total damage double that…”
October 4 – Wall Street Journal (Anne Tergesen): “Florida residents who suffered financial losses from Hurricane Ian might be able to tap their retirement accounts to cover emergency expenses, a last resort more victims of natural disasters are using. Though 401(k) plans are set up to keep Americans’ nest eggs out of reach until retirement age, the Internal Revenue Service allows savers to pull money out for certain economic hardships, including buying a first home, preventing foreclosure and covering high medical bills. Since the IRS added natural disasters to the list of sanctioned reasons for hardship withdrawals in 2020, thousands of workers have tapped their retirement savings for that purpose.”
October 1 – Wall Street Journal (Leslie Scism and Cameron McWhirter): “Florida homeowners had reduced their flood insurance coverage in the years before Hurricane Ian dumped up to 15 inches of rain on the state, inundating coastal and inland areas. Only a small number of residences in two of Florida’s hardest-hit inland counties are covered by flood insurance. The percentage of protected homes is higher in coastal areas that sustained the most damage, but still, is over 50% in just one of the affected counties… In all locations pummeled by Ian, the percentage of homes covered by flood policies is down from five years ago.”
October 4 – Associated Press (Terry Chea): “As California’s drought deepens, Elaine Moore’s family is running out of an increasingly precious resource: water. The Central Valley almond growers had two wells go dry this summer. Two of her adult children are now getting water from a new well the family drilled after the old one went dry last year. She’s even supplying water to a neighbor whose well dried up… Amid a megadrought plaguing the American West, more rural communities are losing access to groundwater as heavy pumping depletes underground aquifers that aren’t being replenished by rain and snow.”
October 5 – Bloomberg (Michael Hirtzer, Elizabeth Elkin, and Joe Deaux): “A logjam of more than 100 ships, tugboats and their convoys of barges in the shrinking Mississippi River is threatening to grind trade of grains, fertilizer, metals and petroleum to a halt. The largest US barge operator warned customers it won’t be able to make good on deliveries. Ingram Barge Co. declared force majeure… due to ‘near-historic’ low water conditions on the Mississippi, the top route to get US grains and soybeans to the world market.”
Leveraged Speculation Watch:
October 5 – Reuters (Nell Mackenzie): “Investors pulled $32 billion from hedge funds in the second quarter of 2022, spooked by inflation, geopolitical tensions and the war in Ukraine, according to… Preqin. The outflows were the largest that the $4.1 trillion hedge fund industry had seen since the start of the coronavirus pandemic in the first quarter of 2020. The declines may continue as central banks continue to raise rates, Preqin said.”
October 3 – Bloomberg (Alexandra Semenova): “A risk-off mood across global financial markets amid persistent economic turmoil deterred prospective hedge funders from starting up new firms in the second quarter. The estimated number of new hedge fund launches slid to only 80 in Q2, down sharply from 185 in the first quarter of the year, according to… Hedge Fund Research. The latest figure also reflects the fewest new funds launched since the fourth quarter of 2008, during the Global Financial Crisis.”
Geopolitical Watch:
October 7 – Reuters (Josh Smith and Joori Roh): “South Korea and the United States began joint maritime exercises with a U.S. aircraft carrier on Friday, South Korea's military said, a day after it scrambled fighter jets in reaction to an apparent North Korean bombing drill. The maritime drills will take place in waters off South Korea's east coast on Oct. 7-8, South Korea's Joint Chiefs of Staff said… ‘We will continue to strengthen our operational capabilities and readiness to respond to any provocations by North Korea through joint drills with ... the USS Ronald Reagan Carrier Strike Group,’ South Korea's Joint Chiefs of Staff said.”
October 5 – Reuters (Humeyra Pamuk): “South Korea and the U.S. military conducted rare missile drills and an American supercarrier repositioned east of North Korea after Pyongyang flew a missile over Japan, one of the allies' sharpest responses since 2017 to a North Korean weapon test. U.S. Secretary of State Antony Blinken warned that nuclear-armed North Korea risked further condemnation and isolation if it continued its ‘provocations.’ ‘I think what we're seeing is that if they continue down this road, it will only increase condemnation, increase the isolation, increase the steps that are taken in response to their actions,’ he said…”
October 4 – Los Angeles Times (David Pierson and Stephanie Yang): “With the war in Ukraine and Russia’s threats to deploy tactical nuclear weapons, it was easy to lose sight of the rising danger North Korea poses to peace in Asia. But the reclusive state recaptured the world’s attention Tuesday when it launched an intermediate-range ballistic missile over Japan for the first time since 2017, prompting Japanese orders to take shelter across two northern prefectures. The U.S. and South Korea responded by sending warplanes on a bombing drill targeting an uninhabited island in the Yellow Sea… The North Korean missile… marked the nation's fifth round of weapons tests in 10 days.”