I’ve been eagerly anticipating the Fed’s Q3 Z.1 report. As expected, Credit growth slowed somewhat. At a seasonally-adjusted and annualized (SAAR) $3.284 TN pace, Non-Financial Debt (NFD) growth slowed from Q2’s SAAR $4.318 TN and Q1’s SAAR $5.438 TN. NFD ended September at a record $68.463 TN, or 266% of GDP. Unless Q4 Credit growth surprises to the downside, 2022 debt growth will be second only to 2020’s onslaught.
For perspective, annual NFD growth averaged $1.816 TN during the two-decade period 2000 through 2019. This year’s growth in NFD will likely double this average, ongoing Credit excess that is creating ample inflationary fuel. While there was slowing in mortgage Credit growth, powerful lending booms continued. And as the Fed’s balance sheet contracts, the GSEs (government-sponsored enterprises) continue their substantial expansion.
Importantly, exceptionally strong lending growth ran unabated – bank and non-bank. Despite the Fed’s tightening cycle and a year of weak securities market performance, the Great Credit Bubble inflation was ongoing. It has been an extraordinary dynamic. The Fed commenced an aggressive tightening cycle. As one would expect, financial conditions tightened meaningfully – in the markets. Unexpectedly, general Credit and financial conditions away from the securities markets loosened. Indeed, market instability actually worked to bolster key Credit structures financing the economy, including bank lending and “private Credit.”
A brief jaunt down memory lane. Recall that two Bear Stearns Credit funds blew up in June 2007, marking the beginning to the end of the mortgage finance Bubble. As buyers of the riskier tranches of high-risk mortgage derivatives, their demise knocked out the marginal source of demand for riskier mortgage Credit. Yet the subprime eruption was not immediately contractionary. Instead, sinking Treasury and bond yields spurred a big rally in conventional mortgage securities prices. This extended the mortgage lending cycle. The $500 billion of second-half 2007 mortgage Credit growth bolstered the Bubble economy, while holding crisis dynamics at bay. It all came home to roost in late 2008.
Fast-forward to 2022. The Fed’s tightening cycle and resulting market instability worked to stoke the boom in non-market-based lending. Resulting strong system Credit growth underpinned economic resilience and tight labor markets. Loose finance and low unemployment supported strong household and business Credit fundamentals (i.e. low delinquencies/charge-offs), which further emboldened enterprising bank and non-bank lenders.
The role of so-called “private Credit” is huge and unappreciated.
December 8 – Bloomberg (Lisa Lee, Silas Brown and John Gittelsohn): “Blackstone Inc.’s $50 billion private credit fund fueled its rise into the biggest powerhouse in direct leveraged lending. But with some wealthy investors now pulling capital, nerves are on edge about what’s next for funds targeting affluent retail investors in the $1.4 trillion dollar market. BCRED, a non-traded fund that’s been instrumental in transforming the leveraged finance markets, has had an incredible run since it was set up nearly two years ago, attracting billions of dollars each month.”
December 7 – Financial Times (Antoine Gara): “The head of Blackstone has spoken out for the first time since the investment group restricted withdrawals from a $69bn property fund, tying a spate of redemptions to investors facing stress in Asia. The outlook for the Blackstone Real Estate Income Trust, or Breit, has riveted Wall Street after the group limited withdrawals last week. Blackstone’s stock has slid more than 10% since the announcement. Blackstone chief executive Stephen Schwarzman… disputed the idea that the restrictions reflected problems at the fund, which has $125bn of assets mostly invested in warehouses and apartments in the US when accounting for leverage.”
Blackstone’s BCRED and BREIT have been at the leading edge of the non-bank “private Credit” boom. I’m thinking Bear Stearns Credit funds 2007, though today’s funds are so much bigger. There are other notable differences. BCRED, BREIT and their ilk are structured specifically to avoid the mark-to-market nightmare that quickly decimated the Bear Stearns funds. As leveraged buyers of non-securities (i.e. commercial and residential real estate, corporate and business loans), they don’t adjust portfolio prices daily. They also avoid daily investor redemptions.
These funds have enjoyed the perfect structure for this period of market instability. As equities and corporate bonds faltered and market financial conditions tightened, money flooded into these types of structures. Investors were thrilled to bypass market instability and big drawdowns, while earning strong returns.
Growth has been nothing short of stunning – especially considering the market and macro backdrops. BREIT assets surged $38.6 billion, or 36%, over nine months (ended 9/30) to $144.9 billion. The fund is leveraged, with Total Liabilities jumping 39% in nine months to $92.292 billion. BCRED assets surged $19.9 billion, or 62%, over nine months to $52.3 billion. Over this period, debt jumped 48% to $27.0 billion.
Money flowed freely into these types of structures, providing fund managers bountiful buying power. In the case of BREIT and similar real estate funds, inflows supported both Credit demand and asset prices. In the case of BCRED and Credit funds, companies enjoyed abundant Credit availability and loose lending conditions. Booming “private Credit” became a key marginal source of finance for asset markets and the economy more generally.
The Bear Stearns funds blowup marked an inflection point for the mortgage finance Bubbles, a reversal of speculative finance that presaged tightening financial conditions, declining asset prices, acute Credit problems and, eventually, crisis.
I believe the move to redeem investments from the Blackstone funds and similar structures marks an inflection point in “private credit.” And while Blackstone can limit quarterly withdrawals to 5% of assets, the prospect of these funds turning sellers instead of aggressive buyers/lenders has major ramifications for real estate markets and corporate lending. I would expect this reversal of speculative finance over time to correspond to tighter financial conditions and declining asset prices. Furthermore, deteriorating prospects will have investors lining up to redeem before sinking asset prices force downward adjustments to fund NAVs (net asset values). Many will be shocked by the illiquidity of their investments.
I wanted to share this perspective prior to delving into the Q3 2022 Z.1 report. While the powerful lending boom continued during Q3, I suspect this might prove the high-water mark for “private Credit.” Going forward, I would expect slowdowns in Bank Loan and Mortgage growth, two powerful pillars in this year’s system Credit resilience in the face of tightened market financial conditions. And slowing Credit growth only exacerbates vulnerability to the next round of market “risk off” deleveraging – even as emboldened market participants trumpet system resilience. Perhaps the Fed now sees the writing on the wall.
Bank Loans expanded a (nominal) $362 billion during Q3, or 10.8% annualized – down from Q2’s $549 billion, but up from Q3 2021’s $118 billion. Over four quarters, Bank Loans surged an unprecedented $1.504 TN, or 12.3%. For perspective, Bank Loans expanded $519 billion during 2021, below 2005’s record $685 billion. Over the two decades ended 2019, annual Bank Loan growth averaged $363 billion.
By loan category, Loans NEC (“not elsewhere categorized”) expanded $102 billion, or 8.8% annualized, to a record $4.774 TN. Mortgages expanded $187 billion, or 12.1% annualized, to a record $6.349 TN. Consumer Credit increased $73 billion, or 11.6% annualized, to a record $2.571 TN. Strong quarterly growth, but the annual numbers highlight the historic nature of the lending boom. Loans NEC surged $698 billion, or 17.1%; Mortgages $503 billion, or 8.6%; and Consumer Credit $307 billion, or 13.6%.
In contrast, Corporate Bonds contracted $149 billion during the quarter to $14.688 TN, with a one-year contraction of $309 billion, or 2.1%. Lending more than made up the slack, aiding system resilience, but also boosting the prospect for systemic fragilities once the lending Bubble succumbs.
Total Mortgage Credit expanded $322 billion, down from Q2’s $416 billion and Q3 2021’s $345 billion. Home Mortgage borrowings expanded at a 6.61% rate, down from Q2’s 8.62%. One-year Home Mortgage growth of $922 billion is the strongest growth since 2006’s $1.082 TN. Commercial Mortgage growth slowed to $52 billion from Q2’s $92 billion. Over one year, Commercial Mortgages grew $303 billion, or 9.4%, surpassing 2007’s annual record $265 billion. At $170 billion, or 9.3%, one-year Multi-housing Mortgage growth surpassed 2019’s annual record of $134 billion.
Huge deficit spending continued to bolster both system Credit and economic resilience. Federal borrowings expanded SAAR $1.101 TN during the quarter. In nominal dollars, Treasury Securities expanded $418 billion to a record $26.469 TN. This put one-year growth at $2.219 TN, or 9.1%. Over 11 pandemic quarters, Treasuries surged an incredible $7.450 TN, or 39.2%. Since the end of 2007, outstanding Treasury Securities have inflated $20.418 TN, or 337%.
On the subject of “resilience,” the system functioned reasonably well in the face of the $537 billion contraction in Federal Reserve Assets - to $7.663 TN. Fed holdings of Treasury securities declined $377 billion, with Agencies down $159 billion. The Fed’s Reverse Repo Liability increased another $96 billion to a record $2.426 TN, having surged $821 billion, or 51%, over the past year.
Meanwhile, the GSEs continued their rapid expansion, reminiscent of their quasi-central bank role during past crises. The GSEs came into their own as market liquidity backstops with their (at the time) unprecedented $150 billion expansion during the 1994 bond market crisis. GSE growth then ballooned to $305 billion for crisis year 1998 (Russia/LTCM), then added another $317 billion during 1999; $345 billion during 2001; and then $301 billion for subprime blow-up 2007.
GSE Assets expanded $217 billion, or 9.9% annualized, during Q3 to a record $8.983 TN – lagging only Q1 2020 ($325bn) and Q2 2022 ($248bn). This boosted one-year growth to an outrageous $828 billion, or 10.2%. Not shabby for such highly levered, thinly (being generous) capitalized and vulnerable financial institutions. GSE assets inflated $1.853 TN, or 26%, over the past 11 pandemic quarters. Why? The Fed is now raising rates and attempting to tighten financial conditions, as it fights the worst inflation in decades. Meanwhile, their Beltway neighbors partake in Credit inflation like never before.
Household Assets were little changed for the quarter at $162.513 TN. Household Liabilities, meanwhile, jumped $320 billion, or 6.8% annualized, to a record $19.234 TN. Liabilities expanded $1.266 TN, or 7.0%, over the past year, near 2006’s annual record (and cycle peak) $1.302 TN. Household Net Worth (Assets less Liabilities) declined $392 billion during the quarter to $143.278 TN, with a one-year drop of $2.028 TN (1.4%). After peaking at 617% (Q4 2021), Household Net Worth-to-GDP has declined to 558%. This compares to previous cycle peaks of 491% (Q2 2007) and 445% (Q1 2000). Net Worth-to-GDP dropped to 416% during Q1 2009.
Rest of World (ROW) analysis points to persistent weakened demand for U.S. financial assets. ROW holdings fell $1.028 TN during Q3 to a two-year low $39.964 TN. Holdings of Treasuries declined $134 billion to a two-year low $7.297 TN. Agency holdings dipped $41 billion to $1.175 TN, and holdings of Corporate Bonds dropped $206 billion to a five-year low $3.572 TN. Over the past year, Treasuries dropped $274 billion (3.6%), and Agencies declined $67 billion (5.4%). Corporate Bonds sank a notable $834 billion, or 18.9%, over the past year.
Broker/Dealer Assets were little changed during the quarter at $4.424 TN. The Asset “Loans” declined $14 billion for the quarter (and $10bn y-o-y) to $807 billion. While down from Q2’s record high $855 billion, Loans remain about double pre-pandemic levels.
Total system “Repo” Assets jumped $230 billion, or 14.2% annualized, to a record $6.695 TN. “Repo” was up $776 billion, or 13.1%, over four quarters. Over 11 pandemic quarters, “Repos” surged $1.622 TN, or 42.6%.
Interestingly, Deposits posted declines. Bank Time Deposits dropped $274 billion, or 7.8% annualized, during Q3 to $13.822 TN. Money Market Fund Assets increased $52 billion during the quarter to $5.084 TN, with one-year growth of $65 billion, or 1.3%.
I see the redemption issue for Blackstone and similar funds as a serious issue. The boom in “private Credit” – along with private equity and venture capital – is in jeopardy. The Bank of International Settlements this week raised another serious issue.
December 5 – Bloomberg (Paul J. Davies): “Sixty-five trillion dollars is a not big number: It’s a huge, barely comprehensible number. It’s more than 2 1/2 times the size of the entire US Treasury market, the world’s biggest. It’s 14% of the value of all financial assets globally… It’s also the value of hidden dollar debt unrecorded on the balance sheets of non-US banks and shadow banks as of June this year, also according to the BIS… It has been growing rapidly, having nearly doubled since 2008. The fact that most of this hidden debt is owed to banks is another reminder of the ever-growing and opaque interconnections between the traditional financial system and the shadow banking sector. A whole set of recent mini-crises has shown that these links are part of why central banks keep being forced to step in and stabilize government bond markets and other assets when stress levels rise.”
There are many reasons to fear the next serious global bout of de-risking/deleveraging.
For the Week:
The S&P500 dropped 3.4% (down 17.5% y-t-d), and the Dow fell 2.8% (down 7.9%). The Utilities were little changed (down 2.7%). The Banks sank 5.5% (down 24.0%), and the Broker/Dealers slumped 4.4% (down 4.3%). The Transports sank 5.2% (down 16.5%). The S&P 400 Midcaps fell 4.1% (down 13.1%), and the small cap Russell 2000 lost 5.1% (down 20.0%). The Nasdaq100 dropped 3.6% (down 29.1%). The Semiconductors declined 1.8% (down 31.0%). The Biotechs fell 4.0% (down 5.4%). While bullion was unchanged, the HUI gold equities index stumbled 3.9% (down 12.0%).
Three-month Treasury bill rates ended the week at 4.1625%. Two-year government yields rose seven bps to 4.35% (up 361bps y-t-d). Five-year T-note yields jumped 12 bps to 3.77% (up 251bps). Ten-year Treasury yields gained nine bps to 3.58% (up 207bps). Long bond yields added a basis point to 3.56% (up 166bps). Benchmark Fannie Mae MBS yields surged 27 bps to 5.16% (up 309bps).
Greek 10-year yields rose 10 bps to 3.98% (up 266bps y-t-d). Italian yields gained seven bps to 3.84% (up 267bps). Spain's 10-year yields increased eight bps to 2.96% (up 239bps). German bund yields rose eight bps to 1.93% (up 211bps). French yields gained nine bps to 2.40% (up 220bps). The French to German 10-year bond spread widened about one to 47 bps. U.K. 10-year gilt yields added three bps to 3.18% (up 221bps). U.K.'s FTSE equities index declined 1.1% (up 1.2% y-t-d).
Japan's Nikkei Equities Index increased 0.4% (down 3.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.26% (up 19bps y-t-d). France's CAC40 fell 1.0% (down 6.6%). The German DAX equities index lost 1.1% (down 9.5%). Spain's IBEX 35 equities index declined 1.1% (down 4.9%). Italy's FTSE MIB index fell 1.4% (down 11.2%). EM equities were mostly lower. Brazil's Bovespa index sank 3.9% (up 2.6%), and Mexico's Bolsa index fell 1.5% (down 5.3%). South Korea's Kospi index slumped 1.9% (down 19.8%). India's Sensex equities index declined 1.1% (up 6.7%). China's Shanghai Exchange Index rose 1.6% (down 11.9%). Turkey's Borsa Istanbul National 100 index gained 0.9% (up 169%). Russia's MICEX equities index was little changed (down 42.5%).
Investment-grade bond funds posted inflows of $1.196 billion, and junk bond funds reported positive flows of $66 million (from Lipper).
Federal Reserve Credit declined $22.6bn last week to $8.546 TN. Fed Credit was down $354bn from the June 22nd peak. Over the past 169 weeks, Fed Credit expanded $4.820 TN, or 129%. Fed Credit inflated $5.736 Trillion, or 204%, over the past 526 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week fell $5.5bn to $3.307 TN - the low since June 2017. "Custody holdings" were down $139bn, or 4.0%, y-o-y.
Total money market fund assets jumped $47.7bn to $4.718 TN - the high since June 2020. Total money funds were up $82.4bn, or 1.8%, y-o-y.
Total Commercial Paper surged $24.8bn to $1.318 TN - the high since November 2009. CP was up $229bn, or 21.0%, over the past year.
Freddie Mac 30-year fixed mortgage rates dropped 11 bps to a three-month low 6.28% (up 318bps y-o-y). Fifteen-year rates fell 11 bps to 5.68% (up 330bps). Five-year hybrid ARM rates slipped two bps to 5.47% (up 302bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 14 bps to 6.63% (up 338bps).
Currency Watch:
For the week, the U.S. Dollar Index increased 0.3% to 104.81 (up 9.6% y-t-d). For the week on the upside, the South African rand increased 0.9%, the Swiss franc 0.3%, the New Zealand dollar 0.1%, the Australian dollar 0.1%, and the euro 0.1%. On the downside, the Norwegian krone declined 2.2%, the Mexican peso 1.9%, the Japanese yen 1.7%, the Canadian dollar 1.3%, the Brazilian real 0.5%, the British pound 0.2%, the Singapore dollar 0.2% and the South Korean won 0.1%. The Chinese (onshore) renminbi gained 1.37% versus the dollar (down 8.66% y-t-d).
Commodities Watch:
December 7 – Reuters (Peter Hobson and Siyi Liu): “China's central bank said… it had added 32 tonnes of gold worth around $1.8 billion to its reserves, the first time it has disclosed an increase since September 2019. The additions bring China's reported holdings at the end of November to 1,980 tonnes, worth around $112 billion. China has the world's sixth-largest official national gold reserves after countries including Russia, Germany and the United States, which is the biggest with 8,133.5 tonnes… The World Gold Council (WGC) said last month that central banks globally bought 399 tonnes of gold in the third quarter of 2022, by far the most ever in a single three-month period.”
The Bloomberg Commodities Index dropped 2.4% (up 12.7% y-t-d). Spot Gold was unchanged at $1,797 (down 1.7%). Silver increased 1.4% to $23.47 (up 0.7%). WTI crude sank $8.96 to $71.02 (down 5.6%). Gasoline dropped 9.8% (down 7.7%), and Natural Gas slipped 0.6% to $6.25 (up 67%). Copper increased 0.7% (down 13.1%). Wheat slumped 3.5% (down 4.7%), and Corn slipped 0.3% (up 8.6%). Bitcoin was up $80 this week, or 0.5%, to $17,146 (down 63%).
Market Instability Watch:
December 6 – Reuters (Marc Jones): “Pension funds and other 'non-bank' financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said. The BIS, dubbed the central bank to the world's central banks, also said in its latest quarterly report that 2022's market upheaval had largely been navigated without major issues… Its main warning concerned what it described as the FX swap debt ‘blind spot’ that risked leaving policymakers in a ‘fog’. FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen before later repaying them, have a history of problems.”
December 5 – Bloomberg (Greg Ritchie): “There’s a hidden risk to the global financial system embedded in the $65 trillion of dollar debt being held by non-US institutions via currency derivatives, according to the Bank for International Settlements. In a paper with the title ‘huge, missing and growing,’ the BIS said a lack of information is making it harder for policy makers to anticipate the next financial crisis. In particular, they raised concern with the fact that the debt is going unrecorded on balance sheets because of accounting conventions on how to track derivative positions. The findings… offer a rare insight into the scale of hidden leverage. Foreign-exchange swaps were a flashpoint during the global financial crisis of 2008 and pandemic of 2020, when dollar funding stress forced central banks to step in to help struggling borrowers.”
December 4 – Financial Times (Eric Platt, Kate Duguid, Tommy Stubbington, Jonathan Wheatley and Leo Lewis): “After a decade of falling interest rates and central bank largesse, global financial markets are facing a reckoning. Soaring inflation is being met by rising interest rates, the slowing of central bank asset purchases and fiscal shocks, all of which are sucking liquidity, the ability to transact without dramatically moving prices, out of markets. Violent, sudden price moves in one market can provoke a vicious loop of margin calls and forced sales of other assets, with unpredictable results. ‘The market is so illiquid and so erratic and so volatile,’ Elaine Stokes, a portfolio manager at Loomis Sayles, said. ‘It’s trading on every impulse and we can’t keep doing that.’ Policymakers are paying close attention to market plumbing and financial stability risks, with the vice-chair of the Federal Reserve last month warning a ‘shock could lead to the amplification of vulnerabilities’.”
December 3 – New York Times (Alan Rappeport): “Developing nations are facing a catastrophic debt crisis in the coming months as rapid inflation, slowing growth, rising interest rates and a strengthening dollar coalesce into a perfect storm that could set off a wave of messy defaults and inflict economic pain on the world’s most vulnerable people. Poor countries owe, by some calculations, as much as $200 billion to wealthy nations, multilateral development banks and private creditors. Rising interest rates have increased the value of the dollar, making it harder for foreign borrowers with debt denominated in U.S. currency to repay their loans. Defaulting on a huge swath of loans would send borrowing costs for vulnerable nations even higher and could spawn financial crises…”
December 5 – Bloomberg (Myriam Balezou): “Credit Suisse Group AG completed a 4 billion-franc ($4.3bn), two-pronged capital increase, giving Chief Executive Officer Ulrich Koerner the funds needed to embark on a comprehensive restructuring of the troubled lender. Investors agreed to buy 98.2% of the stock on sale in a rights offer to raise 2.24 billion francs, Credit Suisse said in a statement late Thursday. The remainder of the stock will be sold in the market at or above the offer price of 2.52 francs a share.”
December 6 – Bloomberg (Alexandra Harris): “Banks are starting to have a tougher time obtaining funds in the financial system as the Federal Reserve shrinks its balance sheet and hikes interest rates, leaving analysts searching for any signs that the strains are approaching the magnitude of past credit crunches. Short-term funding rates are already rising as banks return to the markets for cash, a phenomenon that analysts anticipated, while balances at the Fed’s reverse repo facility have begun to ebb.”
Crypto Bubble Collapse Watch:
December 5 – New York Times (David Yaffe-Bellany): “Not long after several Wall Street banks collapsed in 2008, a nine-page document circulated on an obscure mailing list, proposing a new kind of financial system that wouldn’t rely on any ‘trusted third party.’ The paper was the basis for what became the cryptocurrency industry. Using sweeping, idealistic language, its adherents vowed to conduct business in a transparent and egalitarian way, rejecting the high-risk practices of a small number of powerful financial firms that caused the Great Recession. But last month, the actions of a single crypto firm — the $32 billion exchange FTX — plunged the emerging industry into its own version of a 2008-style crisis. Once considered a safe marketplace for people to trade virtual currencies, FTX filed for bankruptcy after the crypto equivalent of a bank run…”
December 8 – Bloomberg (Anders Melin, Vicky Feng and Venus Feng): “In Japan, the logo spelling F-T-X was plastered on a billboard next to the face of star baseball player Shohei Ohtani. In China, social media influencers peppered followers with sponsored posts pointing them to the platform and its frizzy-haired founder. In late October, just days before FTX’s spectacular collapse, Sam Bankman-Fried himself spoke at a Hong Kong conference organized by the local government. Like in the US, legions of people in East Asia were drawn to Bankman-Fried’s righteous nerd-of-the-people veneer. SBF had been a trader himself, some reasoned. He had the textbook look and feel of a tech genius. What’s more, signing up for FTX was much easier than many other platforms. Thousands from Seoul to Singapore are now living with the consequences of trusting him.”
December 6 – Bloomberg (Sidhartha Shukla and Emily Nicolle): “Contagion from the messy implosion of Sam Bankman-Fried’s crypto empire is spilling into the world of decentralized finance, after a hedge fund was declared in default on almost $36 million of loans. Orthogonal Trading said… it had been ‘severely impacted by the collapse of FTX and associated trading activities,’ making it unable to repay on a $10 million crypto loan. That prompted the entity that runs the lending pool on DeFi protocol Maple to issue a notice of default for all the fund’s active borrowings.”
December 3 – Reuters (Shubhendu Deshmukh and Rhea Binoy): “Crypto broker Genesis and its parent company Digital Currency Group (DCG) owe customers of the Winklevoss twins' crypto exchange Gemini $900 million, the Financial Times reported… Crypto exchange Gemini is trying to recover the funds after Genesis was wrongfooted by last month’s failure of Sam Bankman-Fried’s FTX crypto group… Venture capital company Digital Currency Group, which owns Genesis Trading and cryptocurrency asset manager Grayscale, owes $575 million to Genesis' crypto lending arm…”
December 7 – Wall Street Journal (Ben Foldy and Jean Eaglesham): “Investors bemoan the lack of disclosure in the crypto industry. But many crypto companies disclose a lot of information, and some of it is worrisome, a review of financial statements shows. The blowups of FTX and Celsius Network LLC exposed hidden risks that might have raised red flags for investors, including related-party transactions, commingled customer funds, sketchy record-keeping and questionable accounting. Some of these problems often appear in disclosures by public crypto companies, including weak systems used to keep numbers accurate. A look at 19 of the publicly traded crypto miners showed that 16 disclosed significant internal-control weaknesses in the past four years, some of which were ‘alarming,’ according to Bedrock AI, which makes software that analyzes financial filings.”
Bursting Bubble and Mania Watch:
December 7 – Reuters (Chibuike Oguh): “Blackstone Inc Chief Executive Stephen Schwarzman said… redemptions in his firm's $69 billion non-traded real estate income trust (REIT) were driven by investors roiled by market volatility rather than dissatisfaction with the fund. Blackstone shares have lost 15% of their value since Dec. 1, when the… firm disclosed it had for the first time limited redemptions from the REIT, which is marketed to high net-worth investors rather than institutional clients… Blackstone relies on the REIT for about 17% of its earnings… Schwarzman told the Goldman Sachs financial services conference that individual investors were hit particularly hard by a liquidity crunch in Asia, as the Hang Seng Index nosedived and many also had to cover positions they amassed with debt, causing financial distress.”
December 6 – Reuters (Chibuike Oguh): “Blackstone Inc said redemptions from its $50 billion non-traded business development company reached its pre-set limit for the first time but investors were still allowed to cash out on their investments. This is the first time redemption requests had reached the pre-set limit of 5% since Blackstone launched the product in January last year. It also comes after Blackstone announced… that it would curb withdrawals from its $69 billion unlisted real estate income trust (REIT) following a surge in redemption requests. Blackstone Private Credit Fund (BCRED) received withdrawal requests from its investors that were about 5% of the fund's outstanding shares in the fourth quarter that ended on Nov. 30…”
December 6 – Wall Street Journal (Konrad Putzier and Peter Grant): “Big and small investors are queuing up to pull money out of real-estate funds, the latest sign that the surge in interest rates is threatening to upend the commercial-property sector. Blackstone Inc. last week said it would limit the amount of money investors could withdraw from its $69 billion flagship real-estate fund following a surge in redemption requests. Starwood Capital Group shortly after notified investors that it was also restricting withdrawals in a $14.6 billion fund… The Blackstone and Starwood funds are the two largest nontraded real-estate investment trusts, a popular investment structure with wealthy individuals.”
December 5 – Bloomberg (David Pan and Naureen S Malik): “The digital gold rush in Texas is losing its luster as Bitcoin miners grapple with financial woes, leaving behind what some fear will be a wasteland of unfinished sites and abandoned equipment. In an effort to become a haven for crypto mining, Texas has aggressively lured miners with cheap power and favorable regulations, prompting many to take out billions in loans to buy pricey machines and build out infrastructure. However, soaring energy costs, a sharp decline in Bitcoin prices and more competition have compressed profit margins and made it difficult for miners to repay debt. Some are on the verge of bankruptcy. ‘There are just tons of assets everywhere, it’s like a mess.’ said Mason Jappa, chief executive at… crypto-mining service firm Blockware Solutions. ‘I got messages about transformers, switch gears, and mobile data centers and containers for mining, they are just sitting there.’”
December 7 – Reuters (Priyamvada C, Medha Singh, Sruthi Shankar and Eva Mathews): “Carvana Co is speaking with lawyers and investment bankers about options for managing its debt load, Bloomberg Law reported…, as concerns grow about the company's solvency due to plunging used-car prices, while a rating cut hammered shares. Carvana has spoken with advisers at Kirkland & Ellis and Moelis & Co…”
December 8 – CNBC (Greg Iacurci): “The share of retirement savers who withdrew money from a 401(k) plan to cover a financial hardship hit a record high in October, according to… Vanguard Group. That dynamic — when coupled with other factors like fast-rising credit card balances and a declining personal savings rate — suggests households are having a tougher time making ends meet amid persistently high inflation and need ready cash… Nearly 0.5% of workers participating in a 401(k) plan took a new ‘hardship distribution’ in October, according to Vanguard, which tracks 5 million savers. That’s the largest share since Vanguard began tracking the data in 2004.”
December 7 – Reuters (John Mccrank): “The U.S. Securities and Exchange Commission will vote on whether to propose some of the biggest changes to the American equity markets in nearly two decades at a Dec. 14 meeting, the agency said… The potential changes include new rules that would require marketable retail stock orders to be sent to auctions before they are executed, a new standard for brokers to show they get the best possible executions for client orders, and lower trading increments and access fees on exchanges, the SEC said.”
Ukraine War Watch:
December 6 – Associated Press (Jamey Keaten): “Drones struck inside Russia’s border with Ukraine on Tuesday in the second day of attacks exposing the vulnerability of some of Moscow’s most important military sites, experts said. Ukrainian officials did not formally confirm carrying out drone strikes inside Russia, and they have maintained ambiguity over previous high-profile attacks. But Britain’s Defense Ministry said Russia was likely to consider the attacks on Russian bases more than 500 kilometers (300 miles) from the border with Ukraine as ‘some of the most strategically significant failures of force protection since its invasion of Ukraine.’”
December 7 – Reuters (Mark Trevelyan and Tom Balmforth): “Russian President Vladimir Putin said… his army could be fighting in Ukraine for a long time, but he saw no sense in expanding a call-up of 300,000 reservists… Earlier, Russia's ally Belarus said it was moving troops and military hardware to counteract what it called a threat of terrorism, amid signs that Moscow may be pressing Minsk to open a new front in Ukraine as the war has bogged down… Putin further said the risk of a nuclear war was growing - the latest in a string of such warnings apparently meant to deter Kyiv's Western backers from more robust involvement - but that Russia would not threaten recklessly to use such weapons.”
December 7 – Reuters (Mark Trevelyan and Tom Balmforth): “Russian President Vladimir Putin said… his army could be fighting in Ukraine for a long time, but he saw no sense in expanding a call-up of 300,000 reservists from September and October after serious Russian battlefield setbacks. Earlier, Russia's ally Belarus said it was moving troops and military hardware to counteract what it called a threat of terrorism, amid signs that Moscow may be pressing Minsk to open a new front in Ukraine as the war has bogged down.”
U.S./Russia/China/Europe Watch:
December 7 – Bloomberg: “President Vladimir Putin called Russia’s nuclear arsenal a ‘deterrent factor’ in conflicts, stopping short of pledging not to be the first to use them. Warning that the threat of nuclear war in the world is rising, Putin reiterated that Russia will defend itself and its allies ‘with all the means we have if necessary.’ In televised comments… he blamed the US and its allies for making nuclear threats. ‘We won’t brandish them like a razor, running around the world, but we of course proceed from the fact they are there,’ he said of Russia’s arsenal. ‘This is naturally a deterrent factor, not provoking expansion of conflicts but a deterrent and I hope everyone understands this.’”
De-globalization and Iron Curtain Watch:
December 4 – Reuters (Guy Faulconbridge and Olesya Astakhova): “Russia, the world's second largest oil exporter, will not sell oil that is subject to a Western price cap even if it has to cut production, President Vladimir Putin's point man on energy said. The Group of Seven and Australia on Friday agreed a $60 per barrel price cap on Russian seaborne crude oil after European Union members overcame resistance from Poland. The move by the West to prohibit shipping, insurance and re-insurance companies from handling cargoes of Russian crude above the cap, is an attempt to punish Putin for the Ukraine conflict.”
December 8 – Reuters (Aziz El Yaakoubi and Eduardo Baptista): “Saudi Arabia and China showcased deepening ties with a series of strategic deals on Thursday during a visit by President Xi Jinping, including one with tech giant Huawei, whose growing foray into the Gulf region has raised U.S. security concerns. King Salman signed a ‘comprehensive strategic partnership agreement’ with Xi, who received a lavish welcome in a country forging new global partnerships beyond the West.”
December 8 – Financial Times (Samer Al-Atrush and Edward White): “Chinese president Xi Jinping announced a ‘new era’ in Beijing’s relationship with the Gulf region as he met Saudi Arabia’s crown prince Mohammed bin Salman in Riyadh… In an opinion piece published in Saudi Arabia’s media, Xi wrote: ‘The visit will carry forward our traditional friendship, and usher in a new era in China’s relations with the Arab world, with Arab states of the Gulf and with Saudi Arabia.’ Ahead of his welcome in Riyadh by the kingdom’s day-to-day ruler, Xi wrote that Saudi Arabia and China ‘respect each other’s sovereignty and development path [and] respect each other’s history and cultural traditions’.”
Inflation Watch:
December 8 – Reuters (Robert Frank): “Manhattan rents rose 2% in November, dashing hopes that prices would cool and forcing many renters to give up their leases or downsize… The median rent for a Manhattan apartment in November hit $4,033, up from $3,964 in October, according to… Douglas Elliman and Miller Samuel. The average rent, which is often skewed by luxury sales, fell slightly for the month but is still up 19% over last year, hitting $5,249 in November.”
December 7 – Bloomberg (Kevin Crowley): “Exxon Mobil Corp. is awarding US employees above-inflation pay increases just weeks after the Texas oil giant posted its highest quarterly profit, underlining how strong 2022 has been for the fossil-fuel industry while other sectors like technology and finance cut jobs. Workers will receive an average salary bump of 9%, and those who got promoted will see a further 5% increase…”
December 6 – Bloomberg (Colin McKerracher): “Falling battery prices have been one of the most consistent trends in the electric vehicle industry for the last decade. Prices dropped from well over $1,000 per kilowatt hour in 2010 to $141 per kWh last year. This jump-started one of the biggest shifts in the auto industry in the last century, spurring automakers to plow billions of dollars into EVs. The trend has ground to a halt this year, with BloombergNEF’s annual lithium-ion battery price survey showing a 7% increase in average pack prices in 2022 in real terms. This is the first increase in the history of the survey.”
Federal Reserve Watch:
December 3 – Bloomberg (Steve Matthews): “Federal Reserve officials have enough worrisome inflation data to consider raising interest rates to a higher peak than investors expect and potentially follow the half-point hike they’ve signaled this month with the same again in February. Monthly wages rose at the strongest pace since January and US employment surged more than forecast last month… That will concern Fed Chairman Jerome Powell, who this week cautioned that slacker job-market conditions and less-lofty earnings growth were needed to cool an inflation rate near a 40-year high.”
U.S. Bubble Watch:
December 8 – Bloomberg (Augusta Saraiva): “Recurring applications for US unemployment benefits rose to the highest since early February, suggesting that Americans who are losing their job are having more trouble finding a new one as the labor market shows tentative signs of cooling. Continuing claims… climbed by 62,000 to 1.7 million… Initial unemployment claims increased by 4,000 to 230,000 in the week ended Dec. 3.”
December 6 – Reuters (Deborah Sophia, Akash Sriram, Granth Vanaik and Yuvraj Malik): “U.S. companies, from tech majors to consumer firms, are bracing for a potential economic downturn by shrinking their employee base to streamline operations. Job cuts announced by U.S.-based employers jumped 13% to 33,843 in October, the highest since February 2021…”
December 6 – CNBC (Huge Son): “JPMorgan… CEO Jamie Dimon said inflation could tip the U.S. economy into recession next year. While consumers and companies are currently in good shape, that may not last much longer, Dimon said… Consumers have $1.5 trillion in excess savings from Covid pandemic stimulus programs and are spending 10% more than in 2021… ‘Inflation is eroding everything I just said, and that trillion and a half dollars will run out sometime midyear next year,’ Dimon said. ‘When you’re looking out forward, those things may very well derail the economy and cause a mild or hard recession that people worry about.’”
December 7 – Bloomberg (Molly Smith): “US mortgage rates fell for a fourth week in a row, the longest such stretch of declines since May 2019. The contract rate on a 30-year fixed mortgage eased 8 bps to 6.41% in the week ended Dec. 2, still the lowest since mid-September…”
December 7 – CNBC (Diana Olick): “Lower mortgage rates are pulling some current homeowners back to the refinance market, but not enough to offset the drop in demand from homebuyers… Mortgage applications to purchase a home fell 3% for the week and were 40% lower than the same week one year ago.”
December 7 – Reuters (Saeed Azhar and Noor Zainab Hussain): “The biggest U.S. banks are bracing for a worsening economy next year as inflation threatens consumer demand, according to executives… JPMorgan… Chief Executive Jamie Dimon told CNBC that consumers and companies are in good shape, but noted that may not last much longer as the economy slows down and inflation erodes consumer spending power. ‘Those things might very well derail the economy and cause this mild to hard recession that people are worried about,’ he said. Consumers have $1.5 trillion in excess savings from pandemic stimulus programs, but it may run out some time in mid-2023, he told CNBC. Dimon also said the Federal Reserve may pause for three to six months after raising benchmark interest rates to 5%, but that may ‘not be sufficient’ to curb high inflation.”
December 3 – Wall Street Journal (Yang Jie and Aaron Tilley): “In recent weeks, Apple Inc. has accelerated plans to shift some of its production outside China, long the dominant country in the supply chain…, say people involved in the discussions. It is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam…, and looking to reduce dependence on Taiwanese assemblers led by Foxconn Technology Group. Turmoil at a place called iPhone City helped propel Apple’s shift. At the giant city-within-a-city in Zhengzhou, China, as many as 300,000 workers work at a factory run by Foxconn to make iPhones and other Apple products. At one point, it alone made about 85% of the Pro lineup of iPhones…”
December 4 – CNBC (Lori Ann LaRocco): “U.S. logistic managers are bracing for delays in the delivery of goods from China in early January as a result of canceled sailings of container ships and rollovers of exports by ocean carriers. Carriers have been executing on an active capacity management strategy by announcing more blank sailings and suspending services to balance supply with demand. ‘The unrelenting decline in container freight rates from Asia, caused by a collapse in demand, is compelling ocean carriers to blank more sailings than ever before as vessel utilization hits new lows,’ said Joe Monaghan, CEO of Worldwide Logistics Group. U.S. manufacturing orders in China are down 40%, according to the latest CNBC Supply Chain Heat Map data.”
Fixed-Income Watch:
December 5 – Bloomberg (Greg Ritchie): “Investors watch leveraged loans for the first signs that aggressive central-bank rate hikes are starting to hit companies hard. They also brace for more FTX-like blowouts in the private equity industry and expect investment grade to do well next year. A majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse. Any trouble for leveraged loans would represent a key shift in this credit cycle. For most of this year, buying loans seemed like a smart bet, because they carry floating interest rates and pay higher yields as central banks tighten the money supply.”
December 2 – Bloomberg (Scott Carpenter): “As interest rates rise, so are concerns about the credit quality of the floating-rate loans that back the $1.2 trillion market for collateralized loan obligations. Loans are widely believed to face higher downgrades next year, and according to Amherst Pierpont Securities LLC… Most of the structures feature a guideline that can press them to cut off payments to holders of their riskiest bonds, and maybe even multiple groups of noteholders, if too many of their loans are cut to the CCC tier… ‘If 2022 was a year of interest-rate risk and volatility, then 2023 will be a year of credit risk and fundamentals,’ said Pratik Gupta, head of CLO research at Bank of America Corp.”
December 6 – Bloomberg (Josyana Joshua): “While the year of rising rates is hindering corporate borrowing and hurting investor returns, Wall Street is enjoying a likely record year in the business of trading investment-grade bonds. So far in 2022, an attention-getting $6 trillion of US high-grade bonds have changed hands. That’s 2% more than in all of last year and closing in on the $6.2 trillion traded in 2020, the all-time high, according to… JPMorgan… The frantic pace is unexpected, given how the Federal Reserve’s inflation-fighting rate-rise regime has kept new bond sales to a subdued $1.18 trillion, down 14% from last year…”
China Watch:
December 8 – Wall Street Journal (Keith Zhai and Yang Jie): “A letter from the founder of the world’s largest iPhone assembler played a major role in persuading China’s Communist Party leadership to accelerate plans to dismantle the country’s zero-tolerance Covid-19 policies, according to people familiar... In the letter to Chinese leaders, Foxconn Technology Group founder Terry Gou warned that strict Covid controls would threaten China’s central position in global supply chains and demanded more transparency into restrictions on the company’s workers… Mr. Gou sent the letter a little more than a month ago as Foxconn’s factory in the city of Zhengzhou was rocked by turmoil over Covid restrictions. Chinese health officials and government advisers seized on Mr. Gou’s letter to bolster the case that the government needed to speed up its efforts to ease its tough Covid-19 controls…”
December 7 – Financial Times (Thomas Hale and Tom Mitchell): “China has announced wide-ranging relaxations to President Xi Jinping’s contentious zero-Covid restrictions, including for the first time home quarantine, as further evidence emerged of the economic damage from the pandemic controls. The new measures… were foreshadowed by a meeting of the Chinese Communist party’s politburo that emphasised the importance of stabilising the economy rather than the battle against Covid-19. They include the first explicit endorsement from the central government of isolating asymptomatic or mild coronavirus cases at home rather than at hospitals or centralised quarantine facilities. Some local governments had experimented with similar measures in recent days. The State Council also said people should not have to show proof of a negative test before entering most public places…”
December 7 – Bloomberg (Jacob Gu): “The vast majority of China’s population may eventually contract Covid-19, a senior health-policy adviser warned, as Beijing makes concerted steps toward dismantling its zero-tolerance approach to the virus and living with higher case levels. About 80 to 90% of the Chinese population may eventually be infected with the virus, according to… by Feng Zijian, a former deputy chief at China’s Centers for Disease Control and Prevention. ‘It’s going to be inevitable for most of us to get infected once, regardless of how the Covid-fighting measures are adjusted,’ Feng said… Some 60% of Chinese people may be infected in the first wave, before the curve flattens, Feng predicted. By comparison, about 58% of the US population had been infected by February this year…”
December 7 – CNN (Simone McCarthy): “China’s zero-Covid policy… is now being dismantled as Beijing… released sweeping revisions to its draconian measures that ultimately failed to bring the virus to heel. The new guidelines keep some restrictions in place but largely scrap the health QR code that has been mandatory for entering most public places and roll back mass testing. They also allow some Covid-19 cases and close contacts to skip centralized quarantine… But while the changes mark a significant shift… another reality is also clear: China is underprepared for the surge in cases it could now see… ‘This is a looming crisis – the timing is really bad … China now has to relax much of its measures during the winter (overlapping with flu season), so that was not as planned,’ said Xi Chen, an associate professor at the Yale School of Public Health…”
December 8 – Wall Street Journal (Sha Hua and Liyan Qi): “China’s easing of its zero-tolerance Covid-19 restrictions is likely to open the door to a wave of infections that could cause chaos and upwards of a million deaths, public health experts said… China’s National Health Commission… said it was dropping many of its quarantine and testing requirements, in addition to limiting the use of lockdowns—an acceleration of plans to dismantle the zero-Covid controls amid social unrest and escalating concerns over the health of the country’s economy. The promise of regained freedom sparked celebration among some Chinese, but health researchers cautioned that the consequences for public health could be dire…”
December 5 – Financial Times: “Chinese health authorities have raised concerns about Covid-19 outbreaks among frontline medical staff and migrant workers returning home during the lunar new year holiday, as inadequately prepared rural areas could be overwhelmed by the virus. ‘One of our biggest challenges is how hospitals cope with a surge in infections among doctors and nurses,’ a health official in Guangzhou… told the Financial Times. The official… added that infections among health workers were ‘an important factor’ in a decision last month by officials in Shijiazhuang, the capital of northern Hebei province, to reverse a shortlived experiment with looser ‘zero-Covid’ controls.”
December 8 – Financial Times (Ryan McMorrow, Nian Liu and Sun Yu): “Beijing is running out of medical supplies as the Chinese capital combats a rapidly spreading coronavirus outbreak, health workers said, putting stress on limited resources just as authorities lift pandemic restrictions. Clinics designated for Covid-19 patients are quickly filling up and some hospitals in the city of 22mn people have begun rationing ibuprofen and paracetamol. Residents of Chaoyang, the district at the centre of Beijing’s Covid outbreak, have emptied chemists’ shelves of fever-reducing medicine and rapid antigen tests… ‘We have a child with a high fever but all the pharmacies are out of ibuprofen,’ said a Beijing resident... ‘It came too fast, we didn’t have time to prepare.’”
December 6 – Financial Times (Edward White and Andy Lin): “One million Chinese people are at risk of dying from Covid-19 during the coming winter months if President Xi Jinping pursues his pivot to remove strict pandemic controls, new modelling shows. In a stunning reversal after protests against Xi’s zero-Covid policy, Chinese officials have begun dismantling the pandemic control system of lockdowns, mass testing, state quarantine and electronic contact tracing. On Wednesday, authorities for the first time announced that coronavirus patients who were either asymptomatic or had only mild symptoms could isolate at home…, while public venues in many cities would no longer have to check for negative Covid tests. Removal of the restrictions risks sparking an unparalleled ‘winter wave’ of Covid infections that would rapidly overwhelm China’s healthcare system…”
“December 5 – Bloomberg: “The People’s Bank of China injected a record monthly amount into state policy banks in November to help spur infrastructure spending and boost a struggling economy. The central bank added 367.5 billion yuan ($52.8bn) worth of liquidity last month via its pledged supplemental lending tool to policy banks like China Development Bank and Agricultural Development Bank of China… After a lull of two years, the central bank returned to using the PSL tool in September to help the policy banks -- which are less profit-oriented state lenders – provide financing for infrastructure projects…”
December 7 – Bloomberg: “Chinese regulators asked the nation’s biggest insurers to buy bonds being offloaded as retail customers pull their cash from fixed-income investments, according to people familiar with the matter. At a meeting on Wednesday, Chinese regulators told top insurers to backstop the market and buy bonds sold by wealth management units at banks to prevent further volatility, said the people… Some banks also proposed to use their proprietary trading desks to scoop up bonds, one of the people said.”
December 9 – Bloomberg (Wei Zhou): “One of the largest selloffs in China’s onshore corporate bonds continued this week, pushing spreads for three-year notes to their widest in more than a year. But the rally in junk dollar notes carried on, with such debt getting a further boost from economic-reopening prospects. The weakness in firms’ domestic notes is stoking worries in China’s government-debt market as retail investors dump bond-backed wealth-management products for stocks…”
December 6 – Bloomberg (Wei Zhou): “The mood for risk is seeping into every corner of Chinese markets, with policy moves to ease Covid curbs and revitalize the economy boosting stocks and the yuan, while fueling the biggest slump in years for high-grade corporate debt. Yields on most AAA rated domestic corporate bonds jumped at least 10 bps Tuesday… They hit a 13-month high of 3.16% Monday for three-year notes of the same rating, after logging the biggest increase since 2017 last month…”
December 6 – Reuters (Ellen Zhang and Ryan Woo): “China's exports and imports shrank at their steepest pace in at least 2-1/2 years in November, as feeble global and domestic demand, COVID-led production disruptions and a property slump at home piled pressure on the world's second-biggest economy. The downturn was much worse than markets had forecast… Exports contracted 8.7% in November from a year earlier, a sharper fall from a 0.3% loss in October and marked the worst performance since February 2020… The widespread COVID curbs hurt importers too. Inbound shipments were down sharply by 10.6% from a 0.7% drop in October, weaker than a forecast 6.0% decline. The downturn was the worst since May 2020…”
December 6 – Reuters (Liangping Gao and Ryan Woo): “China's services activity shrank to six-month lows in November as widening COVID containment measures weighed on demand and operations, a private-sector business survey showed…, pointing to a further hit to economic growth. The Caixin/S&P Global services purchasing managers' index (PMI) fell to 46.7 from 48.4, marking the third monthly contraction in a row… Companies in the Caixin/S&P survey reported the strongest falls in output and new work for six months, and continued to cut staff as confidence in the outlook for the next 12 months fell to an eight-month low. The rate of job losses was the quickest seen since the survey began in November 2005…”
December 8 – Financial Times (Cheng Leng and Thomas Hale): “A few months after her wedding this year, Lilian Li moved from the south-western Chinese city of Chongqing to an apartment near Beijing’s financial district. But while Chinese newly-weds typically see property ownership as an essential next step after marriage, Li and her husband are instead renting a two-bedroom apartment in the capital for Rmb13,000 ($1,821) per month. To buy an identical apartment, Li and her family would need more than Rmb5mn just for the down payment — the equivalent of more than 30 years’ rent. ‘My husband and I had a deep conversation about the life we want, and we reached an agreement not to buy,’ said Li, 28. ‘We don’t want to owe our parents a massive down payment or to fall heavily into debt.’ Increasing numbers of young Chinese, the main buyers of urban homes, are making the same decision — with potentially far-reaching implications for the nation’s troubled property market.”
December 8 – Reuters (Zhang Yan and Brenda Goh): “China's passenger vehicle sales fell for the first time in six months in November and are expected to stay flat next year, an industry body said…, as demand weakens faster than expected, even as stringent COVID rules are eased. Vehicle sales last month fell 9.5% from a year earlier to 1.67 million units, the first decline since May, according to the China Passenger Car Association (CPCA).”
December 2 – Financial Times (Tom Mitchell, Thomas Hale, Sun Yu and Edward White): “For Chinese football fans watching World Cup matches on television, the first sign there was something amiss was when they realised they could hear the crowds in the stadium, but could not see them on their screens. As nationwide protests against President Xi Jinping’s draconian zero-Covid policy gathered pace last weekend, the censors decided it was too embarrassing to see fans enjoying themselves in crowded stadiums in Qatar, with no one wearing a mask. So after every goal, Chinese television feeds focused only on the players and coaches on the pitch and ignored jubilant fans embracing each other in the stands. It was just one of the many absurdities that, alongside three years of constant lockdowns, mass testing and detention centres for the infected, finally caused public frustrations to boil over.”
Global Bubble Watch:
December 6 – Bloomberg (Andrew Atkinson): “The world economy is facing one of its worst years in three decades as the energy shocks unleashed by the war in Ukraine continue to reverberate, according to Bloomberg Economics. In a new analysis, economist Scott Johnson forecasts growth of just 2.4% in 2023. That’s down from an estimated 3.2% this year and the lowest — excluding the crisis years of 2009 and 2020 — since 1993.”
Europe Watch:
December 9 – Bloomberg (Zoe Schneeweiss): “Germany’s public-sector budget deficit will increase to 4.5% of gross domestic product next year, more than twice as much as originally estimated, Der Spiegel magazine reported, citing finance ministry documents. According to the ministry’s calculations, the deficit will then narrow to 2% in 2024 and 1.5% in the following two years…”
EM Crisis Watch:
December 4 – Wall Street Journal (Chelsey Dulaney): “Some of the world’s poorest economies embraced borrowing in their own currencies as a shield from painful swings in the U.S. dollar. Now that strategy may be coming back to bite. Debt issued by emerging-market governments and companies in their local currency reached $12.5 trillion in 2021, according to… Bank of America that excludes China’s enormous borrowings in the yuan. That compares with $4 trillion in foreign-currency debt. The fate of local-currency debt has become a key stumbling block in debt-restructuring negotiations in Ghana, Sri Lanka and Zambia. And it is forcing investors, policy makers and economists to rethink what an emerging-market debt crisis looks like.”
December 7 – Bloomberg (Shinhye Kang and Kyungji Cho): “The Bank of Korea is ready to provide more liquidity to stabilize short-term money markets if needed, Deputy Governor Lee Sang-hyeong said, as officials seek to head off a year-end cash crunch… The BOK would provide the additional infusion via repo transactions, he said. Although the strains in Korea’s credit market have shown signs of easing in recent days, Lee’s comments underscore the fragility of the recovery. Following the default of a property developer, yields on short-term debt surged to their highest since the global financial crisis.”
December 8 – Reuters (Marco Aquino): “Peru swore in a new president… after a day of political drama that saw leftist leader Pedro Castillo arrested after his ousting from office in an impeachment trial following his last-ditch bid to cling to power by dissolving Congress. Ignoring Castillo's attempt to shut down the legislature by decree, lawmakers moved ahead with a previously planned impeachment trial, with 101 votes in favor of removing him, six against and 10 abstentions.”
December 8 – Reuters (Gibran Naiyyar Peshimam): “Pakistan's foreign exchange reserves held by the central bank fell $784 million to $6.7 billion as of Dec. 2…, as the country struggles to meet external financing needs. The drop means the reserves have fallen further from November's barely one month of import cover, even as it battles decades of high inflation and scrambles to secure International Monetary Fund (IMF) funds.”
Japan Watch:
December 9 – Bloomberg (Yoshiaki Nohara, Yuko Takeo and Stephanie Flanders): “The Bank of Japan should review its policy with gradual adjustments in mind once the new leadership team is formed next spring, according to Takehiko Nakao, one contender to replace Governor Haruhiko Kuroda. After a decade of ultra-loose monetary policy, there’s been a build up of side effects including damage to the nation’s fiscal discipline, less active banks, and a much cheaper yen that may warrant a deeper look, he said. ‘They should review the side effects and the possible change of policy framework once the leadership is changed,’ Nakao said…”
Social, Political, Environmental, Cybersecurity Instability Watch:
December 6 – Reuters (Susan Heavey and Caroline Humer): “The United States is experiencing the highest levels of hospitalizations from influenza that it has seen in a decade for this time of year, the head of the U.S. Centers for Disease Control and Prevention (CDC) said… CDC Director Rochelle Walensky added that U.S. hospital systems also continue to be stressed with a high number of patients with other respiratory illnesses such as respiratory syncytial virus (RSV) and COVID-19.”
December 6 – Bloomberg (Josh Saul): “The attacks that left two electrical substations in North Carolina riddled with gunfire and knocked out power to 45,000 homes and businesses underscores the fragility of US grids, experts said… ‘From this incident, it appears that the electrical grid continues to be extremely vulnerable,’ said Jon Wellinghoff, chief executive officer of GridPolicy Consulting Inc. and former chairman of the Federal Energy Regulator Commission.”
Leveraged Speculation Watch:
December 5 – Financial Times (Robin Wigglesworth): “The Blackstone Real Estate Income Trust made headlines for the wrong reasons last week. But Blackstone also has a similar investment trust focused on corporate debt that has yet to come under similar scrutiny. We suspect that will change. While BREIT buys real estate, the Blackstone Private Credit Fund (BCRED) lends money to companies. Despite only celebrating its first birthday in February, BCRED had amassed a $50bn portfolio of corporate loans as of Oct. 31… That makes it nearly as big as Pimco’s Total Return Fund… (though if you take out leverage, BCRED’s net asset value is about $22bn).”
Geopolitical Watch:
December 6 – Financial Times (Demetri Sevastopulo): “The Pentagon plans to deploy more fighter jets, bombers and other military assets to Australia, as the US enhances its alliance in the face of ‘dangerous and coercive’ Chinese actions in the Indo-Pacific. Defence secretary Lloyd Austin said the allies agreed to ‘deepen our defence co-operation’ after a meeting in Washington… with his Australian counterpart, Richard Marles. Australian foreign minister Penny Wong and US secretary of state Antony Blinken also took part in the meeting. ‘We committed ourselves to concrete steps to deepen our co-operation in both diplomacy and defence,’ Austin said. ‘China’s dangerous and coercive actions throughout the Indo-Pacific, including around Taiwan, and toward the Pacific Island countries and in the East and South China Seas, threaten regional peace and stability.’”
December 5 – Financial Times (Samer Al-Atrush, Maiqi Ding, Edward White and James Kynge): “President Xi Jinping will this week pay his first visit to Saudi Arabia in six years as part of efforts to boost China’s relations with the Gulf region, five months after the US warned Beijing that it would not cede the Middle East to it or anyone else. Xi will meet King Salman bin Abdulaziz al-Saud and Crown Prince Mohammed bin Salman, the kingdom’s day-to-day ruler in Riyadh, and attend two summits with Arab and Gulf leaders… The Chinese president’s visit… underscores China’s desire to boost links in a region that is traditionally seen by Washington as falling under its sphere of influence.”
December 8 – Reuters (Aziz El Yaakoubi and Eduardo Baptista): “Saudi Arabia and China showcased deepening ties with a series of strategic deals on Thursday during a visit by President Xi Jinping, including one with tech giant Huawei, whose growing foray into the Gulf region has raised U.S. security concerns. King Salman signed a ‘comprehensive strategic partnership agreement’ with Xi, who received a lavish welcome in a country forging new global partnerships beyond the West. Xi's car was escorted to the king's palace by members of the Saudi Royal Guard riding Arabian horses and carrying Chinese and Saudi flags… The Chinese leader held talks with Crown Prince Mohammed bin Salman, de facto ruler of the oil giant, who greeted him with a warm smile. Xi heralded ‘a new era’ in Arab ties.”