Saturday, January 18, 2020

Tactical Short Q4 Recall Conference Call Thursday

Please join Doug Noland and David McAlvany this coming Thursday, January 23rd, at 4:00PM Eastern/ 2:00pm Mountain time for the Tactical Short Q4 recap conference call, "Surviving an Equities Melt Up” Click here to register.

Saturday's News Links

[MarketWatch] Stock market is “eerily reminiscent of January 2018” when stocks suffered rapid correction, technical analyst says

[Reuters] Erdogan calls on Europe to support Turkey's moves in Libya: Politico

[Bloomberg] Fed Plans Shift From Writing Rules to Watching How Banks Behave

[Bloomberg] U.S. Home Prices Rise the Most in 19 Months

[WSJ] China’s Slowing Growth Underlines Stress Facing Its Economy in 2020

[FT] Federal Reserve’s embrace of higher inflation is ‘momentous’ for markets

[FT] Largest US banks double profits in past decade

Weekly Commentary: "This is Insane"

Please join Doug Noland and David McAlvany this coming Thursday, January 23rd, at 4:00PM Eastern/ 2:00pm Mountain time for the Tactical Short Q4 recap conference call, "Surviving an Equities Melt Up” Click here to register. “...Investors kept plowing money into U.S.-listed ETFs. A cool $13.4 billion flowed into the space during the week…, sending year-to-date inflows to $35.2 billion, well ahead of year-ago levels of $8.4 billion.”

Bloomberg: “Global currency volatility has dropped to the lowest level ever recorded.”

Bloomberg: “Bond managers are starting to contemplate the prospect of another decade without a Federal Reserve interest-rate hike.”

Bloomberg: “Forward price-to-earnings ratios for U.S. growth stocks have reached levels only seen in eight months over a span of three decades of data…”

Reuters: “J.P. Morgan Chase posted profit and revenue that smashed through analysts’ expectations on a strong rebound in trading revenue… Bond trading revenue surged 86% to $3.4 billion…”

Bloomberg: “‘This is Insane’: Muni Yields at the Lowest Since Elvis was King.”

We’re witness to historic developments across global financial markets extending far beyond an equities melt-up. U.S. corporate Credit this week traded near the narrowest spreads (to Treasuries) since 2007. Popular Credit default swap (CDS) indices priced this week at pre-crisis lows – investment-grade and high yield. At 46 bps, Goldman Sachs (5-yr) CDS closed the week at the low since 2007. JPMorgan CDS fell five bps this week to 30.6 bps, the low going back to October 2007. A Leveraged Loans index closed Friday at a record high price. European fixed-income CDS ended the week at or near multi-year lows – investment-grade, high-yield and financial. And this week from Bloomberg: “U.S. High-Grade Market Devours Nearly $100 Billion in New Debt.”

This historic financial Bubble is a manifestation of Monetary Disorder and a direct inflationary consequence of an unprecedented global Credit Bubble. There were new data this week from the Institute of International Finance (IIF).

January 13 – Reuters (Marc Jones): “Global debt is expected to climb to a new all-time high of more than $257 trillion in the coming months, the Institute of International Finance estimated…, adding there was no sign of it retreating either. The amount works out at around $32,500 for each of the 7.7 billion people on planet and more than 3.2 times the world’s annual economic output, but the staggering numbers don’t stop there. Total debt across the household, government, financial and non-financial corporate sectors surged by some $9 trillion in the first three quarters of 2019 alone. In mature markets total debt now tops $180 trillion or 383% of these countries’ combined GDP, while in emerging markets it is double what it was in 2010 at $72 trillion, driven mainly by a $20 trillion surge in corporate debt.”

Global debt has been expanding at the most rapid clip since 2016. After ending 2015 at about $210 Trillion, global debt growth has been in parabolic rise to the IIF’s Q1 2020 estimate of $257 Trillion. This historic debt expansion has been across the board, household, corporate, government and financial – “emerging” and developed economies. From Reuters: “All parts of the world are loading up... Household debt-to-GDP have reached a record high in Belgium, Finland, France, Lebanon, New Zealand, Nigeria, Norway, Sweden and Switzerland. Non-financial corporate debt to GDP topped in Canada, France, Singapore, Sweden, Switzerland and the United States. Government debt-to-GDP has also hit an all-time high in Australia and the United States.”

Total global debt ended Q3 2019 at 322% of GDP, up from the year ago 319%. Global government debt rose to 88.3% of GDP, up from 86%. Corporate debt increased to 92.5% from 91.6%, and Household to 60.2% from 59.6%.

Emerging Asia continues to pile it on, boosting Total Debt-to-GDP to 271% (from the previous year’s 262%). China’s Credit Bubble saw Total Debt expand from 297.4% to 308.5% of GDP. China’s Corporate Debt-to-GDP ratio rose to 156.7% from 154.4%, while rapidly expanding government Debt increased from 49% to 53.6%. From Reuters (Marc Jones): “China’s government debt also grew at its fastest annual pace last year since 2009…, and household debt and general government debt are now at all-time highs of 55% of GDP.”

Asia’s debt boom is a particularly alarming accident in the making. With corporate debt rising to a staggering 227% of GDP, total Hong Kong Debt exceeds 500% of GDP (Financial Debt declining to 133.5% of GDP). Singapore’s financial Bubble continues to inflate, with Financial sector borrowings increasing to 187.7% of GDP (up from 184%). Total Singapore debt inflated to 473.5% of GDP from 462.3%. South Korea is also worthy of special attention. With corporate debt jumping to 101.6% from 95.3%, total South Korean debt surged to 325.6% of GDP (up from 304.5%).

From Reuters: “Another potentially risky trend is that the amount of emerging market ‘hard currency’ debt - debt sold in a major currency like the dollar that can become hard to pay back if a crisis hits a local currency’s value - reached $8.3 trillion in Q3 2019, $4 trillion higher than a decade ago.”

The IIF used salient language: “Spurred by low interest rates and loose financial conditions…” Pondering the data, one thought repeatedly comes to mind: These central banks have really done it this time.

January 16 - Bloomberg (Chang Shu and David Qu): “China’s December supply of credit was steady, taking into account a boost from a widening in the data coverage. The headline figure now includes all government bonds, broadened from the previous definition of special government bonds. New loans and other categories of aggregate social financing were broadly stable -- boding well for economic growth support. The monthly increase in aggregate social financing was 2.1 trillion yuan, up slightly from 1.9 trillion yuan in December 2018 on a comparable basis.”

The People’s Bank of China (PBOC) has, once again, revised its tabulation of system Credit, now to include China’s “Treasury” and local government bonds. With the new components, Aggregate Financing expanded $307 billion in December, up from November’s $291 billion and 9% ahead of December 2018 (and up 10.7% y-o-y). For the year, Aggregate Financing surged a historic $3.728 TN, 13.7% ahead of growth from 2018.

By the main categories, Bank (“yuan-denominated”) Loans expanded 12.5% for the year. Booming capital markets continue to provide a stiff tailwind powering huge bond issuance. Corporate Bonds expanded 13.4% in 2019, with Government Bond growth at 14.3% and Asset-Backed Securities surging 31.5%. The contraction of key “shadow banking” categories runs unabated, with Entrusted Loans down 7.6%, Foreign Currency Loans contracting 4.6%, Undiscounted Bankers Acceptances sinking 12.5%, and Trust Loans declining 4.4%.

New Bank Loans expanded $166 billion during December, down from November’s $202 billion but 5% ahead of December 2018. For the year, Loans expanded $2.451 TN – about 4% ahead of 2018 growth. Consumer (chiefly mortgage) Loans continue to power ahead. At $95 billion, Consumer Loans were down slightly from November’s $100 billion expansion but were 40% ahead of December 2018 growth. For the year, Consumer Loans expanded $1.084 TN, or 15.5% - slightly ahead of 2018’s annual expansion. Consumer Loans surged 37% over two years, 66% over three and 139% over five years.

It’s worth noting China’s M2 money supply growth accelerated to 8.7% y-o-y in December, higher than Bloomberg’s consensus estimate of 8.3%. December saw the largest monthly expansion since January, with y-o-y M2 growth the strongest since February 2018’s 8.8%. With Credit booming, China’s economic resilience is no surprise. Ominously, economic growth has slowed markedly in the face of ongoing excess of increasingly unsound money and Credit.

Here at home, further indications of a housing market poised for a big year:

January 17 – Bloomberg (Ana Monteiro): “Groundbreakings on new U.S. homes surged in December to a 13-year high, giving the housing market momentum heading into the new year amid low mortgage rates, solid job growth and optimistic buyers and builders. Residential starts rose 16.9% to a 1.61 million annualized rate after an upwardly revised 1.375 million pace in the prior month… The gain was the biggest in three years and well above all estimates…”

January 16 – CNBC (Diana Olick): “The nation’s single-family homebuilders are feeling very confident about their business in the new year, as high demand and low supply make for a profitable mix. Yet, sentiment in January did slip 1 point on the National Association of Home Builders/ Wells Fargo Housing Market Index to 75, but that is considerably higher than last January, when it was 58. Last month’s reading was a 20-year high.”

January 15 – CNBC (Diana Olick): “It was a seriously strong start to 2020 in the mortgage business for new home loans and refinances. Total mortgage application volume surged 30.2% last week from the previous week… Refinancing led the surge, thanks to a drop in mortgage rates. Those applications jumped 43% for the week and were 109% higher than a year ago… Homebuyers also rushed in, sending purchase application volume up 16% for the week and up 8% from one year ago. Purchase mortgage activity hit the highest level since October 2009.”

And with stocks at record highs and housing markets bubbling, no surprise that the U.S. consumer is both confident and spending.

January 16 – Bloomberg (Max Reyes): “U.S. consumer confidence advanced last week to the highest level in more than 19 years on increased optimism about the economy, personal finances and the buying climate. Bloomberg’s index of consumer comfort rose to 66 in the week ended Jan. 12, the best reading since October 2000, from 65.1… The gain was the eighth in the last nine weeks. A measure of Americans’ views of the economy climbed to the highest since early 2001.”

For the Week:

The S&P500 jumped 2.0% (up 3.1% y-t-d), and the Dow rose 1.8% (up 2.8%). The Utilities surged 3.7% (up 3.4%). The Banks slipped 0.2% (down 2.2%), while the Broker/Dealers jumped 2.5% (up 4.0%). The Transports rose 2.8% (up 3.5%). The S&P 400 Midcaps gained 2.2% (up 1.6%), and the small cap Russell 2000 surged 2.5% (up 1.9%). The Nasdaq100 advanced 2.3% (up 5.0%). The Semiconductors rose 2.7% (up 3.6%). The Biotechs declined 0.5% (up 2.2%). With bullion slipping $5, the HUI gold index fell 1.0% (down 5.4%).

Three-month Treasury bill rates ended the week at 1.5225%. Two-year government yields slipped a basis point to 1.56% (down 1bp y-t-d). Five-year T-note yields declined one basis point to 1.62% (down 7bps). Ten-year Treasury yields were unchanged at 1.82% (down 10bps). Long bond yields were unchanged at 2.28% (down 11bps). Benchmark Fannie Mae MBS yields were little changed at 2.62% (down 9bps).

Greek 10-year yields rose six bps to 1.41% (down 2bps y-t-d). Ten-year Portuguese yields jumped 11 bps to 0.50% (up 6bps). Italian 10-year yields rose five bps to 1.38% (down 4bps). Spain's 10-year yields increased two bps to 0.46% (down 1bp). German bund yields dipped two bps to negative 0.22% (down 3bps). French yields were unchanged at 0.04% (down 7bps). The French to German 10-year bond spread widened two to 26 bps. U.K. 10-year gilt yields sank 14 bps to 0.63% (down 19bps). U.K.'s FTSE equities index rose 1.1% (up 1.8%).

Japan's Nikkei Equities Index gained 0.8% (up 1.6% y-t-d). Japanese 10-year "JGB" yields were little changed at zero (up 1bp y-t-d). France's CAC40 rose 1.1% (up 2.1%). The German DAX equities index added 0.3% (up 2.1%). Spain's IBEX 35 equities index gained 1.1% (up 1.4%). Italy's FTSE MIB index increased 0.5% (up 2.7%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.6% (up 2.4%), and Mexico's Bolsa rose 2.6% (up 5.2%). South Korea's Kospi index advanced 2.0% (up 2.4%). India's Sensex equities index gained 0.8% (up 1.7%). China's Shanghai Exchange declined 0.5% (up 0.8%). Turkey's Borsa Istanbul National 100 index jumped 2.4% (up 6.2%). Russia's MICEX equities index rose 2.3% (up 5.0%).

Investment-grade bond funds saw inflows of $6.624 billion, and junk bond funds posted inflows of $1.730 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.65% (down 80bps y-o-y). Fifteen-year rates increased two bps to 3.09% (down 79bps). Five-year hybrid ARM rates jumped nine bps to 3.39% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 3.99% (down 47bps).

Federal Reserve Credit last week expanded $4.4bn to $4.133 TN, with an 18-week gain of $406 billion. Over the past year, Fed Credit expanded $117bn, or 2.9%. Fed Credit inflated $1.322 Trillion, or 47%, over the past 375 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $11.9 billion last week to $3.420 TN. "Custody holdings" increased $16.5 billion, or 0.5%, y-o-y.

M2 (narrow) "money" supply increased $1.9bn last week to a record $15.432 TN. "Narrow money" surged $1.022 TN, or 7.1%, over the past year. For the week, Currency increased $4.1bn. Total Checkable Deposits fell $37.0bn, while Savings Deposits jumped $32.1bn. Small Time Deposits increased $0.6bn. Retail Money Funds gained $2.0bn.

Total money market fund assets fell $7.2bn to $3.630 TN, with institutional money fund assets down $6.6bn to $2.251 TN. Total money funds gained $581bn y-o-y, or 19.1%.

Total Commercial Paper declined $4.6bn to $1.121 TN. CP was up $55.7bn, or 5.2% year-over-year.

Currency Watch:

For the week, the U.S. dollar index increased 0.3% to 97.606 (up 1.1% y-t-d). For the week on the upside, the Mexican peso increased 0.7%, the Swiss franc 0.4%, the South Korean won 0.2% and the Singapore dollar 0.1%. On the downside, the Brazilian real declined 1.5%, the South African rand 0.7%, the Japanese yen 0.6%, the British pound 0.4%, the Australian dollar 0.3%, the Norwegian krone 0.3%, the euro 0.3%, the New Zealand dollar 0.2%, the Swedish krona 0.2% and the Canadian dollar 0.1%. The Chinese renminbi increased 0.87% versus the dollar this week (up 1.51% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.1% (down 1.3% y-t-d). Spot Gold slipped 0.3% to $1,557 (up 2.6%). Silver dipped 0.2% to $18.073 (up 0.8%). WTI crude fell 50 cents to $58.54 (down 4%). Gasoline declined 0.8% (down 3%), while Natural Gas sank 9.0% (down 9%). Copper gained 1.1% (up 2%). Wheat rose 1.1% (up 2%). Corn increased 0.9% (unchanged).

Market Instability Watch:

January 14 – Wall Street Journal (Daniel Kruger): “One hurdle to a possible fix for recent volatility in the short-term cash markets: hedge funds. Federal Reserve officials are considering a new tool to ease stresses in the market for Treasury repurchase agreements, or repos. Through the repo market, banks and hedge funds borrow cash overnight, while pledging safe securities such as government bonds as collateral. In September, an unexpected shortage of available cash to lend sparked a surge in the cost of repo-market borrowing, prompting the Fed to intervene for the first time since the financial crisis. One potential solution is to lend cash directly to smaller banks, securities dealers and hedge funds through the repo market’s clearinghouse, the Fixed Income Clearing Corp., or FICC. Hedge funds currently borrow through a process called sponsored repo, in which they ask a large bank to act as a middleman…”

January 17 – Bloomberg (Sam Potter and Anchalee Worrachate): “Stocks may be grabbing most of the headlines, but equities aren’t the only asset class in uncharted territory. Global currency volatility has dropped to the lowest level ever recorded. Less than 48 hours after the U.S. and China put pen to paper on a trade deal that reaffirmed an agreement not to devalue their currencies, the JPMorgan Global FX Volatility Index -- which tracks the options market to measure expected price swings -- is trading lower than at any point since it was created almost three decades ago.”

January 14 – Bloomberg (Vivien Lou Chen): “Bond managers are starting to contemplate the prospect of another decade without a Federal Reserve interest-rate hike. Forecasting that far out may seem like a fool’s errand. But the central bank’s inability to push inflation sustainably above its 2% target, even after three 2019 rate cuts amid the strongest job market in 50 years, gives that outlook more weight, they said. The scenario rejects the notion that last year’s easing was a sort of insurance move that could be quickly reversed under an improving economy.”

January 14 – Reuters (High Son): “J.P. Morgan Chase posted profit and revenue that smashed through analysts’ expectations on a strong rebound in trading revenue at the end of 2019. …Fourth-quarter profit rose 21% to $8.52 billion… Profit in the investment bank climbed 48% to $2.9 billion, mainly on trading results. Bond trading revenue surged 86% to $3.4 billion, exceeding the $2.61 billion estimate by roughly $800 million, as fixed-income desks were humming, particularly in securitized products and rates. Stock traders posted a 15% increase in revenue to $1.5 billion, compared with the $1.37 billion estimate.”

January 13 – Wall Street Journal (Akane Otani): “Money managers aren’t expecting much when U.S. companies report their latest quarterly results over the next several weeks. But for the bull market to continue its more than decadelong ascent, they are leaning on one crucial assumption: that corporate earnings growth will pick up over the next couple of quarters… Companies in the S&P 500 are projected to report a 2% decline in earnings in the fourth quarter from the year-earlier period, according to FactSet… If that pans out, it would mark the fourth straight quarter of declining earnings—the longest such streak since a period from 2015-16.”

January 15 – CNBC (Yun Li): “Gold prices, which briefly topped $1,600 last week, could rally to $2,000 an ounce amid heightened political risks, Bridgewater’s co-chief investment officer Greg Jensen told the Financial Times… The manager from the world’s biggest hedge fund cited increased income inequality in the U.S. and rising tensions with China and Iran as uncertainties ahead that will prompt more safe-haven buying… ‘There is so much boiling conflict,’ Jensen told the paper. ‘People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to.’”

January 14 – Bloomberg (Gregor Stuart Hunter): “The risk-on rally that rolled from December right on into the start of 2020 may be due for a breather, according to an increasing number of market analysts… Forward price-to-earnings ratios for U.S. growth stocks have reached levels only seen in eight months over a span of three decades of data, according to Lapthorne… Sundial Capital Research analysts flagged another warning sign in recent days: options buying has overwhelmingly favored calls over puts in U.S. markets this month. ‘As a percentage of total volume, speculative-call buying last week hit a level never seen in the past 20 years, and there was little in the way of protective-strategy volume as an offset,’ said Sundial president Jason Goepfert.”

Trump Administration Watch:

January 15 – Financial Times (Editorial Board): “For a self-declared master dealmaker such as US president Donald Trump, being able to flaunt a trade truce with Beijing may have been the main goal of his long and damaging trade war. For everyone else, it amounts to little more than a hope — and a weak one at that — that things will not get worse. The agreement, signed in Washington…, is billed as ‘phase one’ of a bigger deal. On its own, however, it leaves the US-China trade relationship in a much worse state than when Mr Trump took office. It leaves average tariff levels on both sides at around 20%. Two years ago the average US tariff on Chinese imports stood at 3%; in the other direction it was 8%.”

January 14 – Reuters (Makini Brice and Andrea Shalal): “The United States will maintain tariffs on Chinese goods until the completion of a second phase of a U.S.-China trade agreement, U.S. Treasury Secretary Steven Mnuchin said…, a day before the two sides are to sign an interim deal. Mnuchin told reporters that President Donald Trump could consider easing tariffs if the world’s two largest economies move quickly to seal a follow-up agreement. ‘If the president gets a Phase 2 in place quickly, he’ll consider releasing tariffs as part of Phase 2,’ Mnuchin said.”

January 15 – Associated Press (Paul Wiseman and Joe McDonald): “After 18 months of economic combat, the United States and China are set to take a step toward peace Wednesday. At least for now. President Donald Trump and China’s chief negotiator, Liu He, are scheduled to sign a modest trade agreement in which the administration will ease some sanctions on China and Beijing will step up its purchases of U.S. farm products and other goods. Above all, the deal will defuse a conflict that has slowed global growth, hurt American manufacturers and weighed on the Chinese economy. But the so-called Phase 1 pact does little to force China to make the major economic reforms — such as reducing unfair subsidies for its own companies —that the Trump administration sought when it started the trade war by imposing tariffs on Chinese imports in July 2018.”

January 16 – CNBC: “White House trade advisor Peter Navarro told CNBC… the Trump administration is looking to make progress in ‘phase two’ trade talks with China on U.S. demands that fell short in phase one. The U.S. wants to work on getting China to stop subsidizing its state-owned enterprises, Navarro said…, a day after the U.S. and China signed their phase one deal. Navarro said China needs to stop ‘cyber intrusions.’ ‘It’s just insane that Chinese government officials continue to hack into American businesses and steal trade secrets,’ he added. ‘It’s very destructive to our businesses.’ Navarro said China also needs to curb the flow of illicit fentanyl.”

January 14 – Reuters (Philip Blenkinsop): “The United States, the European Union and Japan proposed new global trade rules… to curb subsidies they say are distorting the worldwide economy, with China their clear target… After meeting in Washington, Japanese Economy Minister Hiroshi Kajiyama, U.S. Trade Representative Robert Lighthizer and EU trade commissioner Phil Hogan said in a joint statement that existing World Trade Organization (WTO) rules were insufficient to tackle market distortions from subsidies.”

January 14 – Wall Street Journal (Bob Davis and Katy Stech Ferek): “The U.S. and China are about to declare a pause in their trade war by signing an initial pact this week, but a continuing battle over technology is bound to keep relations between the two superpowers on edge. The Trump administration’s immediate focus is tightening restrictions on Huawei… The Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said.”

January 11 – Bloomberg (Glen Carey and David Wainer): “Iran and the U.S. stepped back from the brink of open military conflict this week, but underlying tensions that led to a spate of violence in the past month aren’t going away and sanctions pressure on Tehran is climbing even higher. Despite a modest easing of tensions… the Islamic Republic won’t back down from its goal of making the U.S. pay for killing a top general and for the crippling sanctions imposed since 2018, according to a senior Western diplomat. Instead, current and former diplomats and senior Pentagon officials predict the conflict is likely to return to a more common historic pattern: strikes by proxies on the U.S. and allies, cyber attacks and harassment of ships in the Persian Gulf.”

January 15 – Reuters (Andrea Shalal and Susan Heavey): “The U.S. economy is coping with large budget deficits at the moment, but government spending cannot continue to expand at the current rate indefinitely, Treasury Secretary Steven Mnuchin said… ‘At this point the economy can handle these deficits, but there’s no question over time we need to look at these government spending issues. We can’t continue to expand government spending at the rate that we are,’ Mnuchin said.”

January 13 – Reuters (Andrea Shalal, Alexandra Alper, David Lawder, Eric Beech and Kanishka Singh): “The U.S. Treasury Department… dropped its designation of China as a currency manipulator days before top officials of the world’s two largest economies were due to sign a preliminary trade agreement to ease an 18-month-old tariff war. The widely expected decision came in a long-delayed semi-annual currency report, reversing an unexpected move by Treasury Secretary Steven Mnuchin last August at the height of U.S.-China trade tensions.”

January 12 – Reuters (Steve Holland): “The United States and China have agreed to restart semi-annual talks aimed at resolving economic disputes between the two countries, a process abandoned at the start of the Trump administration as a trade conflict between the countries escalated.”

Federal Reserve Watch:

January 14 – Financial Times (Colby Smith): “The Federal Reserve signalled that it plans to maintain its interventions in short-term funding markets at an elevated level, even after a year-end cash squeeze passed without any jump in borrowing costs. The New York arm of the US central bank said… it would only start to cut back its cash injections for the repo market next month, and even then the reduction will be modest. Traders have been wondering when and how the market will be weaned off central bank loans, which began after a surprising jump in overnight borrowing costs in September and were expanded in size in December before the traditionally volatile end to the year… ‘History has shown us that whenever these sorts of programmes are introduced, they tend to last longer than what the Fed expects,’ said Nick Maroutsos, co-head of global bonds at Janus Henderson…”

January 15 – Bloomberg (Steve Matthews and Craig Torres): “The Federal Reserve’s low interest rates, the perception that there is a high bar to future increases and expansion of its balance sheet are helping to lift asset prices, Federal Reserve Bank of Dallas President Robert Kaplan said. ‘All three of those actions are contributing to elevated risk-asset valuations,’ Kaplan told Michael McKee… on Bloomberg Television. ‘And I think we ought to be sensitive to that.’ Kaplan’s views contrast with those of many of his colleagues, who insist the Fed’s resumption of purchases of assets is a technical change that has little or no effect on the value of asset prices.”

January 14 – Reuters (Jonnelle Marte): “U.S. Federal Reserve policymakers are forecasting an ‘almost ideal’ outcome in 2020 where the U.S. labor market will stay strong and inflation will approach the central bank’s 2% target, but officials should remember to consider potential risks, Boston Federal Reserve Bank President Eric Rosengren said…”

January 14 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Kansas City President Esther George, one of the U.S. central bank’s most consistently hawkish officials, said she’s comfortable keeping interest rates on hold ‘for now’ amid a positive outlook for 2020. ‘The U.S. economy is currently doing well, with real GDP growth near trend, unemployment near record lows, and inflation low and stable,] George said… ‘Keeping rates on hold for now is appropriate in my view as we assess the economy’s response to last year’s rate cuts and monitor incoming data.’”

January 12 – Wall Street Journal (Sarah Chaney): “Federal Reserve payments to the U.S. Treasury declined in 2019 to a decade low, as the central bank’s expenses rose and income declined. The Fed sent about $54.9 billion to the government last year, down from $65.3 billion in 2018… The Fed payments to Treasury, called remittances, hit a record in 2015 due to swelling interest income from its huge bondholdings.”

U.S. Bubble Watch:

January 13 – Associated Press (Martin Crutsinger): “The U.S. budget deficit through the first three months of this budget year is up 11.8% from the same period a year ago… The… deficit from October through December totaled $356.6 billion, up from $318.9 billion for the same period last year. Both government spending and revenues set records for the first three months of this budget year but spending rose at a faster clip than tax collections… The Congressional Budget Office is projecting that the deficit for the current 2020 budget year will hit $1 trillion and will remain over $1 trillion for the next decade.”

January 13 – CNBC (Jeff Cox): “The U.S. fiscal deficit topped $1 trillion in 2019, the first time it has passed that level in a calendar year since 2012… The budget shortfall hit $1.02 trillion for the January-to-December period, a 17.1% increase from 2018, which itself had seen a 28.2% jump from the previous year.”

January 11 – Wall Street Journal (Jacob M. Schlesinger): “As Democrats embrace a more activist government, some are flirting with an idea that hasn’t received serious attention since the 1970s: a minimum guaranteed income for all Americans. Entrepreneur Andrew Yang’s presidential candidacy has gained traction with a proposal to give a $1,000 monthly ‘freedom dividend’ to all Americans… No mainstream officeholder has joined Mr. Yang’s call for a universal basic income. But policies to create a kind of basic income—albeit not universal—in the form of a new financial floor for millions of households have drawn backing from other Democrats seeking the White House and many lawmakers. Party leaders are embracing a range of federally backed economic rights, including universal access to health care, college, child care, and broadband.”

January 16 – Reuters: “U.S. retail sales rose for a third straight month in December, with households buying a range of goods even as they cut back on purchases of motor vehicles, which could strengthen the view that the economy maintained a moderate growth pace at the end of 2019. …Retail sales increased 0.3% last month. Data for November was revised up to show retail sales gaining 0.3%... Economists… Compared to December last year, retail sales accelerated 5.8%. Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.5% last month…”

January 16 – MarketWatch (Keith Jurow): “The U.S. housing-market crash a dozen years ago is evidently ancient history for many mortgage lenders. Mortgage underwriting standards have eased considerably in the past couple of years; one of the largest U.S. mortgage originators now offers a jumbo mortgage of up to $1 million with only 10% down if you have a FICO score of at least 760. Borrowers who can scrape up a down payment of between 30% and 40% might be able to receive up to $3 million. One smaller lender is now offering home buyers a loan as high as $2 million with a FICO score as low as 640. This score was considered sub-prime during the bubble years… Such favorable terms indicate a confidence that housing markets are in decent shape and there is nothing on the horizon to worry about… In reality, jumbo mortgages — loans that exceed the guarantees set by Fannie Mae and Freddie Mac — are a jumbo-sized problem.”

January 14 – Wall Street Journal (David Benoit and Ben Eisen): “A healthy U.S. economy pushed up profits at America’s biggest banks, allowing them to grow even though falling interest rates made lending less profitable. Consumer borrowing and a rebound in investment-banking revenues propelled JPMorgan… and Citigroup Inc. to double-digit earnings growth in the final three months of 2019. JPMorgan… reported its most profitable year on record. For a while, companies and consumers were telling different stories about the state of the economy. Consumers continued to borrow and spend at a brisk pace, while companies were holding back due to fears that growth was on the wane. A trade deal with China and an improved outlook for the U.S. economy have eased those fears, boosting banks’ businesses that serve corporate clients.”

January 14 – Reuters (Lucia Mutikani): “U.S. consumer prices rose slightly in December even as households paid more for healthcare, and monthly underlying inflation slowed… The… consumer price index increased 0.2% last month after climbing 0.3% in November. The monthly increase in the CPI has been slowing since jumping 0.4% in October. In the 12 months through December, the CPI rose 2.3%. That was the largest increase since October 2018 and followed a 2.1% gain year-on-year in November. The CPI accelerated 2.3% in 2019, the largest rise since 2011, after increasing 1.9% in 2018.”

January 15 – Reuters: “U.S. producer prices edged up in December as a rise in the cost of goods was offset by weakness in services… The producer price index for final demand ticked up 0.1% last month after being unchanged in November… In the 12 months through December, the PPI increased 1.3% after gaining 1.1% in November.”

January 12 – Wall Street Journal (Austen Hufford): “Manufacturers are paying relocation costs and bonuses to move new hires across the country at a time of record-low unemployment and intense competition for skilled workers. Half a million U.S. factory jobs are unfilled, the most in nearly two decades, and the unemployment rate is hovering at a 50-year low… At the same time, Americans are moving around the country at the lowest rate in at least 70 years. To entice workers to move, manufacturers are raising wages, offering signing bonuses and covering relocation costs, including for some hourly positions.”

January 16 – CNBC (Jeff Cox): “The rapid increase of student loan debt has slowed over the past few years, but individual borrower balances aren’t going down mostly because hardly anybody is paying down their loans. Total indebtedness over the past year or so has stopped its meteoric rise, according to a study that Moody’s… Nevertheless, the study showed a number of factors are constraining borrowers from lightening their loads. Outstanding loans total more than $1.6 trillion, more than doubling over the last decade and tripling since 2006.”

January 13 – Wall Street Journal (Marc Vartabedian, Sara Castellanos and Steven Rosenbush): “Large technology companies have long maintained startup-investment programs, but now corporations across many non-tech industries are plowing more money into startups. The increased activity allows companies to keep tabs on nascent technology, have early looks at potential acquisitions and hopefully stave off technological disruption. The number of non-tech corporate venture deals last year reached 256 through Dec. 6, up from 152 in 2009, according to… PitchBook Data Inc. The total value of those deals rose to $8.8 billion from $2.7 billion over the same period…”

January 13 – Reuters (Anirban Sen and Jane Lanhee Lee): “In the months since office-sharing startup WeWork’s botched public debut, mid- and late-stage investors in big start-ups have been pushing for more safeguards in case their firms fail to go public or sell shares at a lower valuation than pre-IPO financing rounds. Fundraising terms are rarely made public, but more than a dozen Silicon Valley-based lawyers, entrepreneurs and venture-capital investors told Reuters that since WeWork’s canceled public offering and other ill-fated IPOs, investors have been securing protections of their original investments in ‘unicorns’ - private companies valued at $1 billion or more.”

January 15 – Bloomberg (Luke Kawa and Sonali Basak): “A private equity giant is warning that more untested companies are due for a reckoning in repeats of WeWork’s abrupt fall from grace. Henry McVey, the head of global macro and asset allocation at KKR & Co., recommends investors stay underweight many high-flying yet unprofitable companies funded by venture-capital firms or in the early stages of growth. The WeWork situation was not a ‘one-off’ occurrence,’ he added in a 2020 outlook report, which didn’t reference any specific companies. A growing number of the co-working company’s peers ‘may have difficulty funding in 2020.’”

January 14 – Bloomberg (Simon Casey): “Such is the extent of the shakeout in the U.S. shale industry that Permian Basin oil production is closer to peaking than many forecasts suggest, according to one energy investor. Adam Waterous, who runs Waterous Energy Fund, regards the sector’s financial position as unsustainable after years of disappointing returns for investors and negative free cash flow. With capital markets now largely shunning shale producers, the impact will begin to show in oil and natural gas output from the largest U.S. oil patch, he said. ‘We think we are at or near peak Permian’ production, Waterous said… ‘The North American oil market has been grossly overcapitalized, which is not sustainable.’”

January 15 – Bloomberg (Martin Z Braun): “New York City is reaping the benefits of a construction boom. The city set a value of $1.38 trillion for its more than one million properties for the fiscal year beginning in July, a $62 billion increase from the prior period, as the value of new construction reached the highest level in the last 10 years… New construction boosted the market value of city property by $14 billion, more than 20% of the increase in market value. Rental apartments account for $4.4 billion, or about 32%, of citywide construction activity.”

January 10 – Bloomberg (Nic Querolo): “The Bay Area’s housing market is cooling off after years of growth fueled by the tech boom. The median price of a house in San Francisco increased just 1.3% from a year earlier to $1.6 million, the smallest gain since 2012, according to… Compass. Prices in Santa Clara County, which includes San Jose and Palo Alto, declined almost 6% to $1.26 million. The housing market in the Bay Area has exploded in recent years, with the tech industry driving a wealth boom that pushed up prices, particularly in San Francisco. A flurry of IPOs in 2019 was expected to continue the momentum…”

Fixed-Income Bubble Watch:

January 15 – Bloomberg: “Investments in fixed income mutual funds expanded in the week ended Jan. 8 for the 31st straight week of inflows, according to the Investment Company Institute. Inflows totaled $20.4 billion, compared with $5.74 billion the prior week.”

January 17 – Bloomberg (Danielle Moran and Mallika Mitra): “The last time municipal-bond yields were this low Dwight D. Eisenhower was the president, Elvis Presley released his second studio album and Grace Kelly married Monaco’s Prince Rainier III. The Bond Buyer’s 20-year index of general-obligation bonds reset at 2.56% this week, the lowest since June 1956... And for some context, that year some $5.4 billion of new long-term bonds were sold, a sum that’s now considered a somewhat slow week… ‘That is insane,’ said Nisha Patel, the director of portfolio management at Parametric…”

January 14 – Reuters (Kate Duguid): “The dawn of the new decade has brought a reprieve for debt-laden companies in the energy sector: Investors are throwing money their way again, for now. Having been largely shut out of capital markets in 2019, low-rated energy firms, some on the brink of default, are racing to secure financing. They are finding willing lenders. Indeed, the first two weeks of the year have brought as many energy junk bond sales as in the last half of 2019, according to… Dealogic… In addition, total return in the oil and gas sector is broadly outperforming the wider high-yield debt market after getting walloped last year.”

January 14 – Wall Street Journal (Julia-Ambra Verlaine and Sam Goldfarb): “A surprise rally in riskier corporate bonds is providing much-needed help to some energy companies with lower credit ratings, allowing them to issue new bonds to push back looming repayment dates. Seven energy companies with speculative-grade ratings sold roughly $6 billion of bonds last week. That is the largest weekly total since September 2014, just before oil prices crashed that November, and it amounted to nearly 60% of total high-yield bond issuance over the five-day period…”

January 17 – Bloomberg (Molly Smith, Tasos Vossos and Olivia Raimonde): “Money managers like KKR & Co. and Guggenheim Partners fear that the party may be nearing an end for the weakest investment-grade corporate bonds. With economic growth relatively stagnant in major global economies, and heightened risk of disappointing earnings and greater regulation in areas like technology, a wave of investment-grade companies could get cut to junk over the next 12 to 18 months… Because BBBs make up more than half the $8.4 trillion investment-grade corporate markets in both the U.S. and Europe, there’s that much more debt at risk of possibly falling to speculative grade. In 1993, BBBs were more like a quarter of the market.”

January 16 – Bloomberg (Adam Tempkin): “Bonds backed by riskier mortgage collateral are set to see issuance double in 2020 for the sixth straight year, according to Angel Oak Capital Advisors. Sales of securities backed by collateral known as non-qualified mortgages should increase to close to $50 billion this year from roughly $25 billion in 2019, Sam Dunlap, senior portfolio manager at the Atlanta-based investment management firm, said… ‘If supply reaches this high, it would indicate the sixth straight year of 100% growth in non-QM issuance,’ Dunlap said.”

China Watch:

January 15 – Reuters (Ryan Woo, Jeff Mason, Andrea Shalal and Dave Lawder): “China will boost purchases of U.S. goods and services by $200 billion over two years in exchange for the rolling back of some tariffs under an initial trade deal signed by the world’s two largest economies, defusing an 18-month row that has hit global growth. While acknowledging the need for further negotiations with China to solve a host of other problems, President Donald Trump hailed the agreement as a win for the U.S. economy and his administration’s trade policies.”

January 13 – Wall Street Journal (Yoko Kubota): “The wheels are coming off the world’s biggest auto market after decades of blistering growth, as a prolonged and unprecedented sales slump partly induced by policy changes closes thousands of dealerships, idles factories and weighs on an already slowing economy. In Tangshan, a city of about 7.6 million in the country’s north known for its steel producers and heavy industry, around five of the 30 dealerships in the Lunan Car Culture Industrial Park have closed in the past year, dealers said. Abandoned furniture sits in empty showrooms, while ‘For Rent’ signs appear behind shuttered glass doors. Similar scenes are unfolding across small and midsize cities like Tangshan that supercharged China’s auto-market expansion in recent years, even as growth was capped in megalopolises like Beijing and Shanghai, where congestion and pollution led the government to place quotas on license-plate issuance.”

January 15 – Reuters (Yawen Chen, Ryan Woo and Lusha Zhang): “China’s new home prices grew at their weakest pace in 17 months in December, with broader curbs on the sector continuing to cool the market in a further blow to the sputtering economy. Average new home prices in China’s 70 major cities rose 6.6% in December, slowing from a 7.1% gain in the previous month... It was the slowest pace since July 2018, and significantly weaker than the 9.7% gain seen in December 2018.”

January 14 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank extended fresh short- and medium-term loans on Wednesday but kept the borrowing cost unchanged, as it seeks to maintain adequate liquidity in a slowing economy and ease a potential crunch ahead of the Lunar New Year… It injected 300 billion yuan ($43.51 billion) via the liquidity tool.”

January 14 – Reuters (Gabriel Crossley): “China’s exports in December rose 7.6% from a year earlier…, signaling a modest recovery in demand as a preliminary trade deal with the United States raised hopes that a prolonged tariff war will be de-escalated. It was the first rise in China’s exports since July 2019 and the fastest growth rate since March 2019.”

January 16 – Reuters (Yawen Chen, Ryan Woo and Stella Qiu): “China’s property investment hit a two-year low in December even as it grew at a solid pace in 2019, adding to recent signs of a slackening in the sector and suggested Beijing might need to offer more stimulus to stabilize a cooling economy. Real estate investment… increased 9.9% in 2019 from the year-earlier period, down from 10.2% in the first 11 months but still outpaced a 9.5% gain in 2018. In December alone, year-on-year growth slowed to 7.3% from 8.4% in November, the weakest pace since December 2017…”

January 12 – Bloomberg: “A distressed Chinese fertilizer company said it may report one of the nation’s biggest-ever annual losses, sparking a slump in its shares and underscoring the challenges faced by some pockets of corporate China… State-owned Qinghai Salt Lake Industry Co. expects to record a 2019 net loss of as much as 47.2 billion yuan ($6.8bn) largely due to asset writedowns, an amount that’s nearly twice as big as the company’s market value and one-seventh the size of its home province in northwest China.”

January 12 – Reuters (David Stanway): “China disposed of around 2 trillion yuan ($289.11bn) in non-performing loans over the whole of last year amid a national campaign to restrict high-risk lending, the country’s banking regulator said… The China Banking and Insurance Regulatory Commission (CBIRC) said… that the total assets of the country’s shadow banking sector had fallen by 16 trillion yuan over the past three years. It said it would continue to ‘dismantle’ the shadow banking sector in 2020 and step up punishments for those that violate regulations.”

January 14 – Reuters (Yimou Lee and Felice Wu): “Taiwan President Tsai Ing-wen urged China… to review its policy towards the island, days after she won a landslide re-election victory, in a rebuke that could fuel further tensions with China. ‘We hope China can understand the opinion and will expressed by Taiwanese people in this election and review their current policies,’ Tsai told reporters…”

January 12 – Financial Times (Editorial Board): “The crushing victory for Tsai Ing-wen in Taiwan’s presidential election has just provided an unwelcome New Year’s present for Xi Jinping… Under Mr Xi, Beijing has stepped up its efforts to end Taiwan’s de facto independence, and to incorporate the island into the mainland. At the weekend, Taiwanese voters delivered their response by re-electing President Tsai — who has enraged Beijing by putting the defence of her country’s sovereignty and democracy at the very centre of her electoral campaign. A year ago, Ms Tsai was in political trouble. But events in Hong Kong have provided the Taiwanese leader with a compelling theme. Hong Kong’s relationship with the PRC — known as ‘one country, two systems’ — was originally held out as a model for the incorporation of Taiwan into the Chinese state, as Mr Xi has noted. However, the popular revolt in Hong Kong allowed Ms Tsai to argue that ‘one country, two systems’ has clearly failed…”

January 13 – Reuters (Huizhong Wu, Lusha Zhang, Judy Hua and Ben Blanchard): “Separatists will ‘leave a stink for 10,000 years’, the Chinese government’s top diplomat said…, in Beijing’s most strongly worded reaction yet to Taiwan President Tsai Ing-wen’s re-election on the back of a message of standing up to Beijing… Chinese State Councillor Wang Yi said the ‘one China’ principle that recognizes Taiwan as being part of China had long since become the common consensus of the international community. ‘This consensus won’t alter a bit because of a local election on Taiwan, and will not be shaken because of the wrong words and actions of certain Western politicians,’ Wang added, in an apparent reference to U.S. Secretary of State Mike Pompeo.”

Central Bank Watch:

January 12 – Financial Times (Martin Arnold): “When the European Central Bank holds its first rate-setting meeting of 2020 this month, almost half of its governing council will have been members for less than a year… The arrival of former IMF managing director Christine Lagarde to replace Mario Draghi as ECB president in November is only the most obvious part of a changing of the guard at the bank… ‘We are moving from a dovish and experienced team of central bankers to a less dovish and less experienced team of central bankers, so that is a risk for markets,’ said Frederik Ducrozet, global strategist at Pictet Wealth Management.”

EM Watch:

January 13 – Bloomberg (Anirban Nag): “Just two years ago, Prime Minister Narendra Modi was helming an economy expanding 8%, spurring optimism India was on a path to become a major global growth driver. Now, stagflation looms as the economy grinds toward its slowest expansion in more than a decade and inflation spikes above the central bank’s target, driven by higher food prices. Social unrest against a restrictive new citizenship law is yet another challenge.”

January 14 – Financial Times (Arvind Subramanian): “India’s economy is experiencing a sharp slowdown… For several years, analysts and organisations such as the IMF and World Bank have touted India as the fastest-growing major economy, with the world’s brightest medium-term outlook. But in December the Reserve Bank of India, the central bank, cut its forecast for 2019 growth in gross domestic product to 5%. That headline figure actually understates the slowdown. High-frequency indicators show that in the first eight months of the current fiscal year, non-oil exports and imports have fallen, as has production of investment goods. Production of consumer goods and real government tax receipts have both grown by only 1%. And a savage credit crunch has reduced commercial lending to less than Rs1tn in the first six months of this fiscal year, one-seventh its level the previous year.”

January 13 – Reuters: “India’s retail inflation accelerated to 7.35% in December due to high food prices… December inflation was higher than 6.20% forecast…”

January 12 – Bloomberg (Dana Khraiche): “Lebanon’s central bank wants local holders of a $1.2 billion sovereign Eurobond maturing in March to swap into new notes as part of an effort to manage the country’s debt crisis. ‘We are making preemptive proposals that are voluntary’ and dependent on the consent of Lebanese banks, Governor Riad Salameh said… ‘We haven’t taken any decision yet because we don’t have a government.’”

Europe Watch:

January 16 – Financial Times (Tommy Stubbington): “Records have tumbled across eurozone bond markets this week as investors queue to lend to governments, betting that interest rates in the currency bloc will stay at rock bottom for the foreseeable future. Spain amassed €53bn of bids for its new 10-year bond on Tuesday — the most ever for any euro bond — in a sale that raised €10bn. Italy came close to breaking that record with €47bn of orders for its new €7bn 30-year bond, while Belgium, Cyprus and Ireland have all racked up their biggest-ever order books in recent days.”

Global Bubble Watch:

January 15 – Bloomberg (Eric Roston): “The planet is warming faster than at any time in the history of civilization. Five major independent assessments of global temperatures in 2019 each concluded that last year was the second hottest in 140 years of data. The record in 2016 came along with one of the most intense El Nino events ever measured, which has the tendency to push up the average. This year attained the second highest reading without being juiced by major natural variability.”

January 16 – Financial Times (Camilla Hodgson and Billy Nauman): “Financial markets could face upheaval if the risks of climate change are not taken more seriously, McKinsey warned in a report… Even climate-conscious investors, companies and regulators could be wrongfooted as slight increases in global temperatures threaten to create havoc, said the consultancy’s research arm, the McKinsey Global Institute. ‘Markets have been premised on the context of a relatively stable climate,’ said Jonathan Woetzel, one of the report’s authors. ‘But there is an edge where risks can spike, which calls into question the capacity of the system.’”

January 12 – Reuters (Shubham Kalia): “Bank of England Deputy Governor Sam Woods… said that Britain’s financial sector could face a crackdown by regulators seeking to enforce their rules more tightly. ‘I think it’s possible that as we come out of the reform phase, and enter a phase where we’re defending the reforms that have been put in place, that you may see more enforcement activity,’ Woods told the Telegraph…”

January 14 – Bloomberg (Gabriel Crossley): “South Korean leader Moon Jae-in ramped up his commitment to rein in rising property prices…, pledging an ‘endless’ stream of stronger measures if soaring housing prices in some neighborhoods don’t cool. ‘Excess liquidity and low rates around the globe are behind the rise in property prices, drawing speculative money into real estate and causing large price jumps in many countries,’ Moon said. ‘South Korea is showing the same trend.’”

Leveraged Speculation Watch:

January 17 – Bloomberg (Ksenia Galouchko): “A breed of systematic trader acutely sensitive to volatility is charging into U.S. stocks at the kind of pace last seen before ‘volmageddon’ rocked Wall Street almost two years ago. Volatility-targeting funds are doubling down on equities after geopolitical turmoil that threatened to derail the bull market in the end barely slowed it down. These players buy and sell based on price swings, and their leverage -- a measure of exposure to stocks -- now sits at its 81st percentile since 2011, according to Morgan Stanley.”

Geopolitical Watch:

January 15 – Bloomberg (Iain Marlow and Hannah Dormido): “The violent protests and political upheaval that marked 2019 and challenged governments from Hong Kong to Chile is set to stay and is now the ‘new normal,’ according to a global risk firm. Verisk Maplecroft… said in a new report… that it predicts ‘continued turmoil in 2020’ as administrations around the world continue to be surprised by demonstrators and ill-prepared to address the underlying social grievances that spur them. ‘We all need to buckle up for 2020,’ said Miha Hribernik, …head of Asia risk insight for Verisk Maplecroft. ‘The rage that caught many governments off-guard last year isn’t going anywhere and we’d all better adapt.’”

January 12 – Reuters (Parisa Hafezi): “Protests erupted across Iran for a second day on Sunday, increasing pressure on the Islamic Republic’s leadership after it admitted its military shot down a Ukrainian airliner by accident, despite days of denials that Iranian forces were to blame. ‘They are lying that our enemy is America, our enemy is right here,’ one group of protesters chanted outside a university in Tehran…”

January 13 – CNBC (Abigail Ng): “Beijing has been forthcoming about its long-term goals and is the ‘most serious threat’ to the U.S., according to a former U.S. national security advisor. ‘China has been very clear about what its long-term goals are strategically,’ James Jones, who served as NSA under former President Barack Obama, told CNBC’s Hadley Gamble. ‘We need to take that very seriously.’ One Chinese goal is “total control of their own people using technology,’ he said… ‘They’re making astonishing progress to control every single citizen, whatever he or she does.’”

January 16 – Reuters (Ben Blanchard): “A U.S. warship sailed through the Taiwan Strait on Thursday, the island’s defense ministry said, less than a week after Taiwan President Tsai Ing-wen won re-election by a landslide on a platform of standing up to China which claims the island. The ship sailed in a northerly direction through the sensitive waterway and Taiwan’s armed forces monitored it throughout, the ministry said…”

January 16 – CNBC (Holly Ellyatt): “Russia saw extreme political upheaval on Wednesday with constitutional reforms announced by President Vladimir Putin leading to the resignation of government. By the end of the day, Putin had also proposed a new prime minister and political commentary was rife with speculation over the strongman’s strategy and grip on power. The day started with Putin giving his annual address to lawmakers and members of the elite in which he announced a national referendum on the reforms that would seek to limit presidential power and hand more control to parliament. One notable change would be that the Duma (Russia’s parliament), rather than the president, would appoint any prime minister.”

January 16 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “Turkey is beginning to send troops into Libya in support of the internationally recognized government in Tripoli, President Tayyip Erdogan said on Thursday, days before a summit in Berlin which will address the Libyan conflict.”

January 14 – Bloomberg (Karl Maier): “Once again, a U.S.-backed toppling of a longstanding dictator has led to a power vacuum and widespread violence that’s been exploited by a revolving door of militant groups. The scenario that unfolded in Iraq after the 2003 U.S. invasion is replaying in Libya, where warring factions are battling for control of the capital, Tripoli. The conflict has killed more than 2,000 people, forced tens of thousands to flee and opened up the oil-rich country to traffickers of African migrants to Europe. It’s been a mess since NATO helped oust dictator Moammar Qaddafi in 2011.”

January 14 – Financial Times (Michael Peel): “Talks between Libya’s warring parties are finally due to happen in Berlin on Sunday — but it is a sign of the EU’s struggle for relevance that Moscow this week hosted the first international negotiations on the oil-rich country’s fate. Europeans were nowhere to be seen as Russian diplomats sat down with Turkish counterparts on Monday in an attempt to seal a fragile ceasefire in Libya. The gathering foundered on Tuesday after Khalifa Haftar, the military strongman seeking to win control of the country, walked out. But the meeting had already stoked fears that, as in Syria, the EU risks being shut out of efforts to deal with a crisis it sees as crucial to its own security. ‘We do have this pattern emerging: Russia and regional powers are playing us in our own neighbourhood,’ said Kristina Kausch, senior fellow at the Brussels office of the German Marshall Fund of the US, a think-tank.”

Friday, January 17, 2020

Friday Evening Links

[Reuters] Wall Street hits new highs in strongest week since August

[Bloomberg] ‘That is Insane’: Muni Yields at the Lowest Since Elvis Was King

[Bloomberg] Volatility-Targeting Funds Leverage Up at Fastest Since ‘18 Rout

[Bloomberg] Argentina’s Chubut Bonds Tumble as Province Seeks Debt Overhaul

Friday's News Links

[Reuters] China data boosts Wall Street to new record highs

[Reuters] World shares gain as China data fuels bets on growth

[Reuters] Dollar hits eight-month high on yen, yuan buoyed by China GDP

[Reuters] U.S. housing starts race to 13-year high in December

[Reuters] China posts weakest growth in 29 years as trade war bites, but ends 2019 on firmer note

[Reuters] China to roll out more support measures as economy faces pressure -stats head

[Reuters] China's 2019 property investment solid, but first sales drop in 5 years dents outlook

[Reuters] Chinese cities get creative in steadying cooling property markets

[Reuters] U.S. warship transits Taiwan Strait less than week after election

[Bloomberg] Volatility in Currencies Worldwide Slumps to Lowest Level Ever

[Bloomberg] The Debate Over Whether to Call It QE Is Over, and the Fed Lost

[Bloomberg] Deutsche Bank Sees ‘Distressed Debt Cycle’ Beginning in China

[Bloomberg] India’s Banks Face Risk From $13 Billion Telecom Dues, UBS Says

[WSJ] China’s Economic Growth Slows to 6.1% as Trade and Business Confidence Suffer

[WSJ] India’s ‘Ghost Towns’ Saddle Middle Class With Debt—and Broken Dreams

[FT] Eurozone bond auctions enjoy record demand

Thursday, January 16, 2020

Thursday Evening Links

[Reuters] S&P 500 blasts through 3,300 as tech stocks surge

[Reuters] Trump to nominate Shelton, Waller to serve on Fed

[Reuters] China set to post weakest growth in 29 years as trade war bites, investment sputters

[CNBC] Student debt is over $1.6 trillion and hardly anyone is paying down their loans

[MarketWatch] Opinion: Jumbo mortgages are haunting the housing market, and things could get really scary

[Bloomberg] Xi’s Wider Fight With U.S. Is Only Just Beginning After Trade Deal

[NYT] China’s Improving Economic Data Masks Deeper Problems

Thursday's News Links

[Reuters] Stocks near record on trade deal, robust earnings

[CNBC] US retail sales climb in December, and November sales were revised up

[CNBC] Homebuilder optimism slips slightly to start 2020 but is still high

[Reuters] U.S. weekly jobless claims drop more than expected

[Reuters] Doubts linger after U.S. and China sign initial trade deal

[Reuters] Trade deal no panacea for rocky U.S. relations with China

[Reuters] China's home price growth at almost 1-1/2-year low, further softening seen

[CNBC] Trump trade advisor Peter Navarro lists what the US wants from China in ‘phase two’ trade deal

[Reuters] Erdogan says Turkey starting troop deployment to Libya

[CNBC] What’s Putin up to? Here’s what Russia’s political upheaval could mean

[Bloomberg] Tariffs Become New Normal as Trump Moves to Next China Demands

[Bloomberg] U.S. Homebuilder Sentiment Posts Best Two Months Since 1999

[Bloomberg] U.S. Consumer Comfort Reaches Highest Level in More Than 19 Years

[Bloomberg] China Home-Price Growth Accelerates as Curbs Eased

[Bloomberg] Political Turmoil to Be ‘New Normal’ for 2020, Risk Firm Says

[WSJ] U.S. and China Face a Steep Climb to Meet Trade Goals

[FT] The Federal Reserve is the cause of the bubble in everything

[FT] Climate change will reshape markets, McKinsey warns

Wednesday, January 15, 2020

Wednesday Evening Links

[Reuters] S&P 500 near record high after U.S., China sign Phase 1 trade deal

[Reuters] U.S., China reset trade relationship with Phase 1 agreement

[CNBC] Here’s what China agreed to buy from the US in the phase one trade deal

[Reuters] U.S. economy expands modestly but trade tensions weigh, Fed survey shows

[Reuters] Fed's Daly sees inflation reaching 2% goal next year

[Reuters] Putin shake-up could keep him in power past 2024 as cabinet steps aside

[Bloomberg] The $95 Billion Centerpiece of the Trade Deal Is Already In Doubt

[Bloomberg] Crop Markets Show Little Excitement Over U.S.-China Deal

[Bloomberg] Fed Fuels Rise in Risk Assets With Balance Sheet, Kaplan Says

[Bloomberg] KKR Warns of WeWork Redux for Big Names That Can’t Turn Profits

[Bloomberg] New York City Property Values Rise 4.7%

[Bloomberg] Second Hottest Year on Record Capped Warmest-Ever Decade

[WSJ] The Era of Fed Power Is Over. Prepare for a More Perilous Road Ahead.

[FT] Truce in the US-China trade war is only partial

Wednesday's News Links

[Reuters] S&P, Dow notch record highs ahead of signing of trade deal

[Reuters] Oil slips on doubts about U.S.-China deal, OPEC outlook

[Reuters] U.S. producer prices barely rise as services remain subdued

[CNBC] Weekly mortgage applications soar 30% as homebuyer demand hits the highest level in 11 years

[CNN] The world is drowning in debt

[Financial Post] Global debt-to-GDP ratio has now hit an all-time high of 322%

[Reuters] Treasury's Mnuchin says U.S. cannot continue to boost spending at current rate-CNBC

[Yahoo/Bloomberg] Fed Announces Plans For Repo Operations Through to Mid-February

[Reuters] China central bank injects $58 billion of loans but keeps rates steady

[RT] Russian government resigns, after President Putin's State-of-the-Nation Address proposes changes to the constitution

[CNBC] The world’s largest hedge fund sees gold rising 30% to $2,000: ‘There is so much boiling conflict’

[Reuters] Taiwan president urges China to review policy after election win

[WSJ] Tech Tensions Simmer in Washington as U.S., China Near Trade Truce

[WSJ] Big Banks Post Big Profits Thanks to Strong U.S. Economy

[WSJ] Energy Companies Seize the Day With Bond Refinancings

[FT] Where next for the renminbi after US-China breakthrough?

Tuesday, January 14, 2020

Tuesday Evening Links

[Reuters] Wall Street dips from record in 'Jason Bourne market'

[CNBC] Yen gains, yuan weakens on report tariffs on China to stay through US election

[Reuters] U.S. to maintain tariffs on Chinese goods until Phase 2 deal: Mnuchin

[CNBC] Phase one trade deal could be less than market hopes: ‘Tariffs have now become a roach motel’

[Reuters] U.S., EU, Japan agree new subsidy rules with China trade in focus

[AP] US-China pact signing to ease tension but leave much undone

[Reuters] Trump administration moves toward blocking more sales to Huawei: sources

[CNBC] The stock market has never been this big relative to the economy, signaling it could be overvalued

[Reuters] Junk-rated energy firms speed to debt markets after 2019 drought

[Reuters] China to ramp up U.S. car, aircraft, energy purchases in trade deal: source

[Reuters] BOJ's Kuroda says won't hesitate to ease further if needed

[Bloomberg] China Tariffs to Stay Put Until After U.S. Vote Despite Deal

[Bloomberg] Fed’s George Says Keep Rates Steady ‘For Now’ to Assess Economy

[Bloomberg] A Decade Without Fed Hikes Comes Into View for Bond Investors

[Bloomberg] The Stronger Yuan Is Sending Waves Through Assets Worldwide

[Bloomberg] Peak Permian Oil Output Is Closer Than You Think, Investor Says

[FT] Federal Reserve to keep repo interventions at elevated levels

[FT] Europe frets over migration as Turkey and Russia gain Libya sway

Tuesday's News Links

[Reuters] Stocks pause after rally, JPMorgan results draw cheer

[Reuters] Yuan soars, stocks scale heights as markets cheer imminent Sino-U.S. deal signing

[Reuters] Oil prices rise ahead of trade deal, likely stock draw

[Reuters] U.S. consumer prices increase moderately in December

[CNBC] Here’s what’s in the phase one China trade deal Trump is signing this week

[Reuters] China to ramp up U.S. car, aircraft, energy purchases in trade deal: source

[CNBC] JP Morgan earnings crush analysts’ estimates as bond trading revenue surges by nearly 90%

[Reuters] China December trade beats forecasts: exports up 7.6%, imports up 16.3%

[Bloomberg] South Korea’s Moon Vows ‘Endless’ Measures to Cap Property Prices

[Bloomberg] How World’s Fastest-Growing Economy Plunged Into Stagflation

[Bloomberg] Inflation Surprises in Europe’s East Back Case for Rate Hikes

[Bloomberg] Market Melt-Up May Have Gone Too Far, Some Measures Indicate

[Bloomberg] How Libya Became the Ultimate Proxy Conflict

[WSJ] Hedge Funds Could Make One Potential Fed Repo-Market Fix Hard to Stomach

[WSJ] How the U.S. and China Settled on a Trade Deal Neither Wanted

[FT] India’s economy faces severe challenges

Monday, January 13, 2020

Monday Evening Links

[Reuters] Wall Street hits record, boosted by trade and earnings optimism

[Reuters] Global debt shattering records: IIF

[Reuters] Fed's Rosengren warns of inflation risks to central bank's 'almost ideal' economic outlook

[AP] US budget deficit running 11.8% higher this year

[Reuters] U.S. government posts $13.3 billion deficit in December

[CNBC] US budget deficit topped $1 trillion in 2019 for the first time in seven years

[Reuters] Fed on hold, but will financial risks matter?

[Reuters] U.S. Treasury removes designation of China as currency manipulator

[Bloomberg] Global Debt-to-GDP Ratio Hit an All-Time High Last Year

[Bloomberg] Fed’s Mission to Control Benchmark Rate May Spur Another Tweak

[WSJ] China’s Auto Market Stumbles After 30-Year Boom

Monday's News Links

[Reuters] Stocks pinned near record highs ahead of U.S.-China trade deal

[Reuters] China's yuan rallies, yen slides ahead of U.S. trade deal

[Reuters] Oil steady on easing U.S.-Iran tensions, eyes on China trade deal

[CNBC] US tensions with Iran could overshadow Washington’s trade fight with China

[Reuters] WeWork debacle has unicorn investors seeking cover

[CNBC] China is the ‘most serious threat’ to the United States, says former security advisor to Obama

[Reuters] Separatists will 'stink for 10,000 years', China says after Taiwan vote

[Reuters] Instant View: India's December retail inflation accelerates to 7.35% year-on-year

[Bloomberg] China State Firm’s $6 Billion Loss Is Among Nation’s Worst Ever

[WSJ] Investors Are Counting on Earnings to Rebound in 2020

[WSJ] Manufacturers Increase Perks to Get New Hires to Move

[WSJ] Corporations Outside of Tech Ramp Up Venture Investing

[WSJ] Beijing Dismisses Taiwan Voters’ Rebuke Over Its Claims to Island

[FT] ECB’s new faces give investors pause for thought over policy shifts

[FT] Billionaires feel the sting of a populist backlash

[FT] Italian politics: Matteo Salvini’s comeback bid

Saturday, January 11, 2020

Saturday's News Links

[Reuters] U.S., China agree to have semi-annual talks aimed a reforms, resolving disputes: WSJ

[Reuters] Iran says its military shot down Ukrainian plane in 'disastrous mistake'

[Reuters] Taiwan President Tsai set to win re-election

[Reuters] Taiwan president tells China they will not give in to threats

[Bloomberg] Earnings Are Set to Drop Again. Investors Seem Fine With That

[Bloomberg] Bay Area Home Prices Stagnant After Seven-Year Tech Bonanza

[Bloomberg] Tsai’s Record Victory Moves Taiwan Further From Xi’s Grasp

[Bloomberg] Iran-U.S. Conflict to Shift Back to Proxies After Threat of War

[Bloomberg] U.S. and China Are on Taiwan Collision Course

[WSJ] Washington, Beijing Agree to New Dialogue to Pursue Reforms, Address Disputes

[WSJ] Minimum-Income Ideas Get Widest Airing in 50 Years

Weekly Commentary: Issues 2020

When I began posting the CBB in 1999, I expected “Bubble” to be in the title for no longer than a year or two. It was to be the “Credit Bulletin,” inspired by Benjamin Anderson’s “Economic Bulletin” from the 1920’s. Yet here we are in 2020 with Bubbles everywhere, including in my blog title. In 1999, I would have said that was an impossibility.

There are many things that proved not as impossible as I had believed. What was deemed acceptable monetary policy badly mutated. Mutant monetary management fundamentally altered the tolerance for debt and deficits. Finance and financial markets were similarly transformed, with yet to be appreciated consequences for (grossly simplifying here) Capitalism, societies and geopolitics.

So many changes, but I’m not changing. In my initial CBB I committed to “calling them as I see them and letting the chips fall where they may.” Let them fall.

“The Bubble will either further inflate or burst.” Regular readers will surely recognize this as what has become an annual ritual of my “Issues” pieces. Some might view it as a cop out; others reminded of Einstein’s definition of insanity. Yet Bubbles do have defined characteristics. They are at their core creatures of increasingly powerful momentum. Stimulus will intensity and broaden inflationary effects while enlarging the overall Bubble scope. Especially in the age of unshackled central banks, the timing of their demise is uncertain. Importantly, however, that they become progressively perilous over time remains a certainty.

This year’s “Bubble Will Inflate or Die” prognosis carries a significantly direr tone than in the past. From a Bubble Analysis perspective, 2019 was an absolute fiasco. Alarmed by faltering Bubbles, central bankers were panicked into prolonging the “Terminal Phase of Bubble Excess” through the reckless administration of additional stimulus. The ECB restarted QE before many even realized the previous program had been concluded. The Fed began the year abruptly abandoning “normalization” and then ended with $400 billion of Q4 QE. Rather than helicopter money, envision fleets of helicopters dropping buckets of propellant on columns of bonfires.

Central banks cut funding costs and afforded speculative financial markets hundreds of billions of additional liquidity. More importantly, global central bankers granted the type of guarantee markets had only dreamed of. Monetary policy will be used early and aggressively to backstop the markets, while no amount of excess would elicit any degree of monetary restraint. The Endless Punchbowl (with free salty snacks) – the “insurance rate cut”.

Bubble markets reacted with a vengeance. Global bond markets experienced a historic “melt-up” with yields collapsing over the summer. Global equities ended the year with a fit of panic buying. Bond and equities bears were squeezed to death. By their nature, speculative blow-offs create acute vulnerability. The final euphoric outburst ensures excessive underlying speculative leverage. Price momentum becomes unsustainable, with the inevitable reversal inciting de-risking/deleveraging dynamics. Some degree of illiquidity is unavoidable. Progressively powerful policy responses become necessary to suppress panic and crisis. Trapped.

The probability of a global crisis during 2020 is the highest since 2008. The nucleus of “The Bubble” in 2008 was in U.S. mortgage finance. “The Bubble” today is global, across virtually all financial assets (sovereign debt, stocks, corporate Credit, and derivatives), real estate (residential and commercial) and private businesses. From a Credit perspective, “The Bubble” has spread to – and corrupted - the foundation of global finance (central bank Credit and sovereign debt).

How can it end other than with a systemic crisis of confidence? Mispricing of U.S. government and corporate securities is unprecedented. The excesses in Chinese finance have moved far beyond any historical Bubble episode (Japan during the eighties and the U.S. mortgage finance Bubble mere kids’ stuff). All the punditry fuss over predicting a year-end S&P500 level seems especially pointless.

What really makes this so dangerous? Markets know that policymakers know the system is acutely fragile. Central bankers are not only trapped, the situation is so dire that they have no choice but to move early and aggressively to ensure Bubbles can’t begin deflating (no corrections or adjustments allowed).

January 5 – Reuters (Ismail Shakil): “New York Fed President John Williams said… it was important for the U.S. Federal Reserve to stick to its 2% inflation target and achieve it even as low global interest rates will likely continue… ‘There’s been a process of going through the stages of grief about a low neutral rate,’ Williams was quoted as saying… ‘These factors are basically the hand we’ve been dealt for the next five to 10 years.’ ‘If inflation continues to underrun our target levels like it has, this downward trend in inflation expectations will likely continue with inflation expectations falling well below target levels,’ he said.”

I’m reminded of a salient point from Adam Fergusson’s masterpiece, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany:” Throughout the unfolding monetary, economic and social catastrophe, Reichsbank officials insisted they were responding to outside forces. They somehow remained oblivious to their central role.

My response to Fed President Williams’ “the hand we’ve been dealt” comment: You’ve not only been the dealer, but also the manufacturer and the stacker of the cards. Slot machine odds have been fixed by your coterie. You may now have issues with casino operations, its patrons and the consequences for the community - but you central bankers own it. And, of course, you will be keen to finger local government officials for the proliferation of crazed gamblers, pawn shops, bail bond outfits, unseemly motels, alcoholism and those run-down schools. Why the unwavering support for ever more commanding casinos?

January 9 – Wall Street Journal (James Mackintosh): “Tesla Inc. shares have doubled in three months, while General Electric Co. shares are up 44%. The pair are the two most valuable loss-making companies, part of a shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market. While Tesla and GE couldn’t be more different, they are exemplars of two trends driving the rising number of loss makers. Tesla shows a desire by investors to back disruptive companies as they build their sales. GE represents a growing number of companies struggling to make money from traditional businesses… The combination of forces has pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%, its highest level since the late 1990s outside of postrecession periods.”

“Mal-investment” is one of these invaluable “Austrian” concepts that is both wonderfully intuitive and exceptionally difficult to quantify (vitally important yet unfitting for econometric models). “Pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%” is sufficient. Imagine the percentage come the next recession.

Stimulus, loose finance and Bubbles ensure market malfunction, price distortions, resource misallocation and malinvestment - all Issues 2020. This fateful experiment in late-cycle stimulus/Bubble extension is prolonging the boom in uneconomic enterprises and scores of businesses that will face dire circumstances when the Bubble inevitably bursts. On the one hand, any tightening of finance will expose cash flow and balance sheet vulnerabilities. On the other, today’s booming wealth-induced demand is unsustainable, exposing a mounting number of businesses to post-Bubble waning demand and altered spending patterns.

Last year provided a hint of underlying fragilities. Junk bonds, leveraged loans and IPOs all suffered convulsions as “risk off” and illiquidity made fleeting appearances. Tesla – the most valuable automobile manufacturer ever or bankruptcy candidate? A matter of market “risk on” or “risk off.” To what extent is Tesla a microcosm of Tech Bubble 2.0, the overall U.S. economy, China’s boom and the global Bubble?

There are New Paradigm sentiments reminiscent of the Q1 2000 “tech” Bubble Crescendo. After ending 1999 at 3,708 (following a one-year gain of 102%), the Nasdaq100 (NDX) surged another 30% to an all-time high 4,818 on March 24th. The NDX then traded as low as 3,107 in April, 2,897 in May and then down to 2,175 in December. Myths exposed and fallacies revealed. Much of the boom-time demand for technology components, products and services was a direct consequence of the industry’s investment Bubble. Speculative finance reversed, financial conditions tightened, uneconomic companies lost access to finance, and the Bubble burst (not before, of course, one final brutal short squeeze and derivatives-related melt-up).

Current bullishness may even exceed early-2000. Trust in central bankers is far greater. Market pundits highlight fundamentals supportive of an ongoing bull market. The longest economic expansion on record is poised to endure. After an unimpressive 2019, corporate profit growth is to accelerate. The global economy will perk up as the year progresses. Goldilocks with central bank guardianship.

But let’s not pretend that economic activity drives the securities markets. Investment-grade Credit default swaps (5yr Markit CDS) traded Friday at 43.7 bps, right at the low since before the crisis. High-yield CDS is near all-time lows. Goldman Sachs CDS closed the week at 52 bps, down from the 135 bps January 4, 2019 high. Trillion dollar plus (5% of GDP) annual fiscal deficits. Short-term rates at about 1.5%. Ten-year Treasury yields at 1.82%. Thirty-year mortgage rates at 3.64%. A Fed balance sheet exceeding $4.0 TN and inflating. Record stock prices. Why then wouldn’t the economy be expanding and corporate profits growing?

January 9 – Bloomberg (Molly Smith, Michael Gambale, and Hannah Benjamin): “Companies around the globe, concerned that heightened tensions between the U.S. and Iran could roil bond markets, are rushing to borrow cheaply while they still can. Investment-grade firms have sold more than $61 billion of notes in the U.S. through Thursday, double the same period in 2019… Borrowers from around the Asia Pacific region sold more than $28 billion in dollar notes this week, in a record start.”

January 10 – Bloomberg (Hannah Benjamin and Priscila Azevedo Rocha): “Europe’s bond market is wrapping up its biggest week ever, with over $100 billion of new debt sales underscoring its status as a major global funding vehicle. Issuers from China, Indonesia, Japan and the U.S. joined local borrowers in tapping Europe’s super-low funding costs and increasingly mature bond market, helping push sales for the week to 92.5 billion euros ($103bn).”

January 10 – Wall Street Journal (Frances Yoon): “Chinese property companies have kicked off 2020 by selling billions of dollars of longer-dated bonds, capitalizing on a hot market to reduce their heavy reliance on short-term funding. The country’s real-estate groups sold about $8 billion of dollar bonds in the first two weeks of January, according to credit strategists at ANZ.”

So long as financial conditions remain extraordinarily loose, I don’t know why the U.S. economy can’t surprise on the upside. With momentum building throughout 2019, expect some housing market “crazy” this year. “Tech Bubble 2.0” – growing only crazier. Los Angeles Times headline: “Taco Bell Offers $100,000 Salaries and Paid Sick Time.” Good to have that sick leave. Lavish cheap “money” on an overheated economy and one thing is a given: it will be borrowed and spent.

But when things go wrong they will really go wrong. Every passing month ensures maladjusted financial and economic systems only further hooked on unrelenting loose finance. I see a high probability of a 2020 financial accident. And I know most would say this is crazy talk. But we were close in the U.S. last September and January. China began to unravel in the early summer.

ETF Trends (Tom Lyndon): “Last year, fixed income ETFs took in $330 billion in new assets, the second-best year on record. Of that massive tally, bond ETFs accounted for a record $155 billion, prompting some market observers to say 2020 will be even better for bond ETFs. When 2019 came to a close, five of the top 10 ETFs in terms of new assets were bond funds and plenty of others in the fixed income space packed on assets as well.”

The Fed’s Q4 liquidity injections only exacerbated system fragility. Before celebrating apparent stability, our central bank should ponder the ramifications of colossal speculative flows. The liquidity flooding into bond ETFs increases the probability of a destabilizing reversal of flows and resulting illiquidity. The Fed’s $400 billion liquidity add only boosted systemic dependency. The Fed’s has its planned $60 billion monthly QE for the first half. Throw in another crisis scare and the Fed’s balance sheet rather quickly lunges toward $5.0 TN.

January 8 – Financial Times (Hung Tran): “Much attention has been focused on potential stresses in the US repo market. More attention should be paid to the FX swap market, which non-US banks and other entities have relied on for short-term US dollar funding. Recent changes in supply/demand conditions for US dollar funds in that market could make it more susceptible to stresses. In particular, emerging market banks have become more exposed to risk… Meanwhile, non-US banks have relied ever more on the $3.2tn-a-day FX swap market. According to the Bank for International Settlements (BIS), non-US banks have about $14tn of US dollar assets, not all of which are funded with liabilities such as deposits, loans and bond issuance. The FX funding gap — estimated by the IMF to be about $1.5tn — needs to be covered by borrowing in domestic currencies, swapped into US dollars.”

“Repo” markets, “FX swaps,” and money markets – at home and abroad – have all become one monumental trade. Last year’s instability was a harbinger of bigger issues to come. There has never been as much global leveraged speculation. How tens of Trillions of securities are financed and hundreds of Trillions of derivatives structured is in the realm of the murkiest of murky. How many Trillions of “carry trades” (borrow in low/negative rates to lever in higher-yielding securities) have accumulated – in yen, euro, Swiss, etc. How big is the “carry” in Chinese bonds? EM debt – local currency and Dollar-denominated? European peripheral bonds? How levered are trades in low-yielding Treasuries, bunds and JGBs? What is the scope of fixed-income derivatives leverage, with dynamic trading programs feeding buying on the upside – and liquidity crisis lying in wait for the downside?

Loose global finance papers over scores of festering issues. Key Issue 2020: China is a bigger accident in the making than it was this time last year. With accelerated growth of increasingly unsound Credit, systemic risk continues to rise exponentially. Upwards of $4 TN of additional Credit, another year of housing Bubble excess, uneconomic enterprises piling on more debt, resource misallocation and only deeper structural economic maladjustment.

China was forced to again hit the accelerator, and Beijing will be compelled again to move to rein in system Credit excess. Last year’s crack in the small banking sector was a harbinger of liquidity and confidence issues I expect to afflict China’s broader banking system. The repeatedly extended mortgage and apartment Bubbles ensure a dreadful Day of Reckoning. China’s consumer borrowing boom – 2019’s savior - is on borrowed time. And how long can the renminbi withstand such egregious financial and economic excess?

Global currency market instability is an Issue 2020: For the most part, currencies have been seductively sedate. Perilous fault lines lacking pressure relief beckon for caution. My own theory is that a systemic global Bubble with systematic liquidity excess fosters a dysfunctional steadiness. In a world of liquidity and speculative excess backstopped by “whatever it takes” central banking, market reversals have been quickly resolved by eager speculative flows. The traditional dynamic of “hot money” reversals, de-risking/deleveraging, crises of confidence and market dislocation is contained before barely getting started.

Yet it all creates a dynamic where an abrupt bout of risk aversion risks unleashing powerful pent-up global forces. For a while now, I’ve contemplated that this could end with a “seizing up” of global markets – a systemic de-risking/deleveraging dynamic and resulting globalized market illiquidity and dislocation. After witnessing 2019 markets dynamics – the extraordinary correlations between international bond, equities, and derivatives markets, along with interconnected money markets, (synchronized Bubbles) – I have ratcheted up the probability of the “seizing up” outcome. I know, central bankers are there to ensure it can’t materialize. They were there in force in 2019, and their actions only exacerbated excesses and worsened fragilities.

January 3 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “Investors have barely set foot in the new year before getting their first reminder of the risks -- the existential and the more-manageable -- that could derail their plans for 2020. The U.S. airstrike that killed one of Iran’s most powerful generals raised security alerts around the world, and added to anxieties that could dominate markets this year. Money managers blindsided by the 2016 Brexit vote and U.S. President Donald Trump’s election know the price of ignoring politics. Uncertainties stemming from these events are still unresolved -- trade relationships between the U.K. and European Union, and the U.S. and China still hang in the balance -- and other risks are emerging.”

Geopolitical risks - where to begin. From my analytical perspective, geopolitical risks in 2020 are the greatest since WWII. Not appreciated is the role that geopolitics have played of late in perpetuating Bubbles. In the increasingly heated battle for global supremacy, strongmen leaders Trump and Xi are keenly focused on the critical roles played by finance, the markets and economic growth. And I would add that the rise of the strongman leader globally is no coincidence – and it is undoubtedly linked to the instability and insecurities associated with decades of unsound money and Credit (with its recurring booms and busts, growing inequalities and myriad stresses).

Not only have geopolitical considerations perpetuated Bubble excess. As Bubbles have continued to inflate, geopolitical rivalries have grown only more intense. As was abundantly clear in 2019, the risk of confrontation has risen significantly. Meanwhile, highly inflated Bubbles greatly increase the risk of a geopolitical event sparking market dislocation. Don’t let the markets relatively calm response to the past week’s Iranian developments fool you into complacency. Markets are today extraordinarily vulnerable.

Geopolitical is a key Issue 2020. A U.S./Iranian military confrontation is a real possibility. Recent U.S./China calm could prove short-lived. An accident in the South China See is a possibility, as is a mishap with Russia’s increasingly aggressive military. The entire Middle East remains a precarious tinderbox. China could become more confrontational with Taiwan, drawing U.S. ire. There are as well scores of other potential flashpoints.

If there weren’t enough global uncertainties, there are pivotal U.S. elections in November. 2016 elections were crazy; expect crazier for 2020. The President is vulnerable, a vulnerability that would increase in the event of market, economic or climate shocks. Booming markets currently envisage a second Trump term. Things get interesting if a geopolitical event and market disruption throw the election into disarray. Abruptly, the pro-market Trump candidacy could find itself in trouble, boosting the odds for the democrat – potentially an anti-market candidate. With a deeply divided nation in such a volatile environment, November’s election could go down to the wire between two diametrically-opposed agendas.

It’s destined to be a fascinating year. If we’re lucky, I’ll be prognosticating about the risk of a bursting Bubble in Issues 2021. There will surely be unexpected developments that shape market and economic backdrops. There are some more obvious catalysts for piercing global Bubbles. Chinese Credit remains at the top of the list.

Despite today’s amazing bullishness, there is a lengthy list of EM vulnerabilities. There are cracks in India, Indonesia and Turkey, to name a few. Asian finance, in particular, is hopelessly unsound. The huge banking systems in Hong Kong and Singapore offer potential for negative surprises. Similar to Chinese finance, the “offshore” financial centers are accidents in the making. I wouldn’t bet against global money market problems. The world is one serious bout of “risk off” deleveraging away from exposing massive leverage and chicanery. It’s difficult for me to see the year pass without serious market liquidity issues. That’s the way I see Issues 2020. I restrained myself.

For the Week:

The S&P500 gained 0.9% (up 1.1% y-t-d), and the Dow rose 0.7% (up 1.0%). The Utilities increased 0.8% (down 0.4%). The Banks dropped 1.2% (down 2.0%), while the Broker/Dealers rose 1.4% (up 1.4%). The Transports added 0.6% (up 0.7%). The S&P 400 Midcaps slipped 0.2% (down 0.6%), and the small cap Russell 2000 dipped 0.2% (down 0.6%). The Nasdaq100 jumped 2.0% (up 2.7%). The Semiconductors gained 0.7% (up 0.9%). The Biotechs surged 4.3% (up 2.6%). Though bullion gained $10, the HUI gold index dropped 3.0% (down 4.5%).

Three-month Treasury bill rates ended the week at 1.50%. Two-year government yields rose four bps to 1.57% (unchanged y-t-d). Five-year T-note yields gained four bps to 1.63% (down 6bps). Ten-year Treasury yields increased three bps to 1.82% (down 10bps). Long bond yields added three bps to 2.28% (down 11bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.62% (down 9bps).

Greek 10-year yields fell five bps to 1.35% (down 9bps y-t-d). Ten-year Portuguese yields rose four bps to 0.39% (down 5bps). Italian 10-year yields slipped three bps to 1.32% (down 9bps). Spain's 10-year yields jumped six bps to 0.44% (down 3bps). German bund yields jumped eight bps to negative 0.20% (down 1bp). French yields increased two bps to 0.04% (down 7bps). The French to German 10-year bond spread narrowed six to 24 bps. U.K. 10-year gilt yields gained three bps to 0.77% (down 5bps). U.K.'s FTSE equities index declined 0.5% (up 0.6%).

Japan's Nikkei Equities Index gained 0.8% (up 0.8% y-t-d). Japanese 10-year "JGB" yields increased a basis point to zero (up 1bp y-t-d). France's CAC40 was little changed (up 1.0%). The German DAX equities index jumped 2.0% (up 1.8%). Spain's IBEX 35 equities index fell 0.8% (up 0.3%). Italy's FTSE MIB index rose 1.3% (up 2.2%). EM equities were mixed. Brazil's Bovespa index dropped 1.9% (down 0.1%), while Mexico's Bolsa was about unchanged (up 2.6%). South Korea's Kospi index gained 1.4% (up 0.4%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange added 0.3% (up 1.4%). Turkey's Borsa Istanbul National 100 index advanced 4.4% (up 3.7%). Russia's MICEX equities index rose 1.5% (up 2.6%).

Investment-grade bond funds saw inflows surge to $8.193 billion, and junk bond funds posted inflows of $1.121 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped eight bps to 3.64% (down 81bps y-o-y). Fifteen-year rates fell nine bps to 3.07% (down 82bps). Five-year hybrid ARM rates sank 16 bps to 3.30% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 3.95% (down 45bps).

Federal Reserve Credit last week gained $6.9bn to $4.128 TN, with a 17-week gain of $401.7 billion. Over the past year, Fed Credit expanded $111.5bn, or 2.8%. Fed Credit inflated $1.317 Trillion, or 47%, over the past 374 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7 billion last week to $3.408 TN. "Custody holdings" increased $12.2 billion, or 0.4% y-o-y.

M2 (narrow) "money" supply gained $3.5bn last week to a record $15.428 TN. "Narrow money" surged $1.003 TN, or 7.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dropped $43.5bn, while Savings Deposits surged $60.8bn. Small Time Deposits were little changed. Retail Money Funds declined $6.4bn.

Total money market fund assets added $5.7bn to $3.638 TN, with institutional money fund assets down $4.1bn to $2.258 TN. Total money funds gained $571bn y-o-y, or 18.6%.

Total Commercial Paper slipped $0.5bn to $1.126 TN. CP was up $53bn, or 4.9% year-over-year.

Currency Watch:

January 10 – Financial Times (Eva Szalay in London and Colby Smith): “Unusual patterns in the dollar during the latest flare-up in tensions between the US and Iran suggest that the currency may have lost its traditional role as a retreat in times of stress. Typically, the dollar jumps, along with gold, when bouts of geopolitical nerves strike. But after the US assassination of Iranian military commander Qassem Soleimani last week the currency barely budged… This flip in the traditional behaviour of the world’s most important reserve currency has left some market-watchers puzzled.”

For the week, the U.S. dollar index increased 0.5% to 97.356 (up 0.9% y-t-d). For the week on the upside, the Mexican peso increased 0.6%, the South Korean won 0.5%, and the Singapore dollar 0.1%. On the downside, the Japanese yen declined 1.2%, the Swedish krona 1.1%, the Brazilian real 1.0%, the Australian dollar 0.7%, the Norwegian krone 0.6%, the New Zealand dollar 0.5%, the South African rand 0.5%, the Canadian dollar 0.4%, the euro 0.4% and the British pound 0.2%. The Chinese renminbi increased 0.67% versus the dollar this week (up 0.63% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 0.5% (up 0.9% y-t-d). Spot Gold gained 0.7% to $1,562 (up 2.9%). Silver slipped 0.3% to $18.105 (up 1.0%). WTI crude dropped $4.01 to $59.04 (down 3.3%). Gasoline sank 5.1% (down 2%), while Natural Gas rallied 3.4% (up 1%). Copper gained 1.0% (up 1%). Wheat jumped 1.8% (up 1%). Corn slipped 0.2% (down 1%).

Market Instability Watch:

January 5 – Bloomberg (Ranjeetha Pakiam and Justina Vasquez): “Gold surged to its highest since 2013 as rising tensions in the Middle East stoked demand for havens, with Goldman Sachs… seeing more room to run. Palladium extended gains to a fresh record. Bullion neared $1,600 an ounce after Tehran said it would no longer abide by any limits on its enrichment of uranium following the killing of General Qassem Soleimani.”

January 7 – Bloomberg (Claire Ballentine): “Welcome to the big time, bond ETFs. Long overlooked as the younger sibling of equity exchange-traded funds, strategies focused on corporate or government debt took in more than $150 billion in the U.S. last year, the most on record and just shy of the sum netted by their stock counterparts. It was the biggest annual leap for bond ETFs since 2014, boosting assets to more than $800 billion…”

January 7 – Wall Street Journal (Julia-Ambra Verlaine): “Low-rated U.S. companies are borrowing cash as 2020 kicks off, taking advantage of persistently low interest rates. Companies with junk ratings have sold $850 million of debt through Tuesday…That is on track to exceed issuance in the opening days of 2019, when high yield debt totaled $1.5 billion over the first two weeks of January… The U.S. high-yield market now totals around $1.2 trillion…, raising concerns that companies will struggle to repay investors if interest rates rise.”

Trump Administration Watch:

January 6 – Reuters (Jeff Mason): “U.S. President Donald Trump on Sunday stood by his threat to go after Iranian cultural sites, warning of a ‘major retaliation’ if Iran strikes back for the killing of one of its top military commanders… Asked about potential retaliation by Iran, Trump said: ‘If it happens, it happens. If they do anything, there will be major retaliation.’”

January 8 – Bloomberg (Sarah Ponczek): “President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records. The rebound from an overnight rout that topped 1.5% has some investors breathing a sigh of relief, but another cohort point to mounting signs that the comeback is a sign of complacency among bulls. ‘This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself,’ Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, told Bloomberg… ‘It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.’”

January 6 – Financial Times (Chloe Cornish and Andrew England): “When Donald Trump ordered the air strikes that killed Qassem Soleimani he took his highest-stakes gamble yet as he ramps up pressure on Iran and seeks to counter the Islamic regime’s regional influence. For years, Washington had viewed Soleimani as its arch-nemesis. The commander of Iran’s elite Quds force cultivated a network of Iranian proxies across the Middle East that the Trump administration accuses of attacking American targets and destabilising the region. But rather than weaken the influence of Tehran and its proxies in Iraq, the US president’s decision to eliminate Soleimani as he left Baghdad airport threatens to strengthen it, Iraqis and western analysts said. ‘Trump has accelerated Soleimani’s work in Iraq,’ said one Iraqi official. ‘They created a mess because they couldn’t understand Iraq.’”

January 9 – Reuters (Alexandra Alper and Doina Chiacu): “U.S. President Donald Trump… said his administration will start negotiating the Phase 2 U.S.-China trade agreement soon but that he might wait to complete any agreement until after November’s U.S. presidential election. ‘We’ll start negotiating right away Phase Two. It’ll take a little time,’ Trump told reporters… ‘I think I might want to wait to finish it till after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal.’”

Federal Reserve Watch:

January 4 – Reuters (Howard Schneider): “The U.S. Federal Reserve still has enough clout to fight a future downturn, but policymakers should state in advance the mix of policies and policy promises they plan to use to get the most bang for their buck, former Fed chief Ben Bernanke said… In an address to the American Economics Association, Bernanke pushed back on the notion that central banks have lost influence over the economy, and laid out his thoughts about how the Fed in particular could change its monetary policy ‘framework’ to be sure that is not the case.”

January 9 – Bloomberg (Christopher Condon): “Former Treasury Secretary Lawrence Summers dismissed the optimism of former Federal Reserve Chairman Ben Bernanke, who recently said the central bank could likely fight off the next recession despite the low level of interest rates. Bernanke’s speech was ‘a kind of last hurrah for the central bankers,’ Summers said… ‘He argued that monetary policy will be able to do it the next time,’ Summers said. ‘I think that’s pretty unlikely given that in recessions we usually cut interest rates by 5 percentage points and interest rates today are below 2%.”

January 8 – Bloomberg (Craig Torres): “One of the Federal Reserve Board’s top economists said a U.S. recession could drive both short- and longer-term Treasury yields close to zero, limiting the tools the central bank has to aid the economy. Michael Kiley, a deputy director in the Fed Board’s financial stability unit, said even a moderate recession in the U.S. ‘may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.’ The research was published on the Fed Board’s website…”

January 9 – Wall Street Journal (Michael S. Derby): “In a speech in Madison, Wis., Federal Reserve Bank of St. Louis President James Bullard said, ‘The current baseline economic outlook for 2020 suggests a reasonable chance that the soft landing will be achieved’ after the central bank lowered interest rates three times in 2019 to cushion the economy against a possible downturn. He told reporters after his speech ‘we should wait and see what the effects are’ before tweaking monetary policy again. Speaking on Fox Business…, Federal Bank of Minneapolis President Neel Kashkari also said he sees no reason to alter the current course of monetary policy. He told the network he’d hold steady ‘for the foreseeable future, the next six months, next year, but it will depend.’ He added he would be in the camp of favoring ‘more accommodation’ if ‘inflation continues to weaken or inflation expectations continue to slide.’”

January 3 – Reuters (Ann Saphir and Howard Schneider): “The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary Daly said…, and may need a new policy framework to lift inflation back up to the Fed’s 2% goal. ‘We don’t have a really good understanding of why it’s been so difficult to get inflation back up,’ Daly said at the annual American Economics Association meeting…”

U.S. Bubble Watch:

January 8 – New York Times (Jim Tankersley and Jeanna Smialek): “The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon. Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record. Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.”

January 7 – CNBC (Jeff Cox): “The U.S. trade deficit fell more than expected in November ahead of negotiations with China that cooled the simmering tariff battle between the two sides. The shortfall in goods and services declined to $43.09 billion for the month, below the $43.6 estimate… That represented the lowest deficit since October 2016. That was down sharply from $46.9 billion in October…”

January 4 – New York Times (Neal E. Boudette): “The auto industry has been on a roll for a decade, and its resurgence shows few signs of coming to a halt — at least for now. Strong employment, low interest rates and robust consumer confidence combined last year to extend a record run of auto sales. Americans are also continuing to buy ever bigger cars, at prices escalating faster than the overall inflation rate. And they are taking on more debt to do so. Nationwide, automakers sold more than 17 million new cars and light trucks in 2019… It was the fifth straight year of sales exceeding that figure, a distinction never achieved before.”

January 5 – Wall Street Journal (Andrew Ackerman): “Times are good for U.S. banks. The industry is highly profitable, lending is up and the number of problem institutions—those found to have deficiencies in their businesses—is the lowest since early 2007, according to the Federal Deposit Insurance Corp. Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building. ‘It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,’ former FDIC Vice Chairman Thomas Hoenig said…”

January 7 – CNBC (Diana Olick): “The average rate on the 30-year fixed mortgage fell to the lowest level since October this week, at 3.69%... That has an already competitive housing market heating up even more. Open houses, which are usually pretty rare the first week in January, were plentiful in markets across the nation this year, as buyers hope to get in before the competition gets even worse. Buyer sentiment in the housing market remained high in December, according to a monthly survey from Fannie Mae — the Home Purchase Sentiment Index.”

January 5 – Wall Street Journal (Nicole Friedman): “Home sales are slowing in wildfire-prone areas of California as insurers retreat from high-risk regions, say real-estate agents and homeowners. Insurance companies have continued to reduce their wildfire exposure in the past two years after paying more than $24 billion for California wildfire losses in 2017 and 2018. Home insurers have declined to renew policies for tens of thousands of homeowners across the state, and regulators expect more nonrenewals in the coming months. Real-estate agents say potential buyers are having difficulty obtaining insurance and are backing out of purchases or lowering their offers…”

January 6 – New York Times (Doug Cameron): “Boeing Co. is examining plans to raise more debt to bolster finances strained by the mounting fallout from the grounding and halted production of its 737 MAX… The aerospace giant isn’t running out of cash, but costs associated with the MAX crisis are rising, leading to the prospect of borrowing more money. Boeing plans to halt production of the plane this month, lowering some costs but pushing back the likely date at which payments for finished planes would resume.”

Fixed-Income Bubble Watch:

January 6 – Wall Street Journal (Paul J. Davies): “The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies. In the U.S. at the start of December, some 2.5% of leveraged loans were trading at less than 70% of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD… Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuance of structured loan funds known as collateralized loan obligations, or CLOs, which have been the biggest group of lenders in recent years.”

January 10 – Wall Street Journal (Matt Wirz and Tom McGinty): “When Party City Holdco Inc. reported a large decline in quarterly earnings in November, holders of the retailer’s junk-rated debt scrambled to sell. Buyers were hard to find, and prices cratered by as much as 50% before recovering some of the loss… It was the largest price move since Party City issued the debt. Such violent price swings were commonplace last fall in the riskiest segment of the roughly $2.4 trillion market for corporate bonds and loans rated below investment-grade, analysis of trade data by the Journal shows, striking a sharp contrast to the relative calm in most markets at the time.”

January 6 – Associated Press (Dee-Ann Durbin): “The U.S. dairy industry, the largest in the world, is under severe pressure as the consumption habits of Americans shift. Borden Dairy Co. filed for bankruptcy protection, the second major U.S. dairy to do so in as many months. Borden produces nearly 500 million gallons of milk each year… It employs 3,300 people and runs 12 plants across the U.S.”

China Watch:

January 8 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “China’s Vice Premier Liu He, head of the country’s negotiation team in Sino-U.S. trade talks, will sign a ‘Phase 1’ deal in Washington next week, the commerce ministry said… Liu will visit Washington on Jan. 13-15, said Gao Feng, spokesman at the commerce ministry. Negotiating teams from both sides remain in close communication on the particular arrangements of the signing, Gao told reporters…”

January 7 – CNBC (Evelyn Cheng): “China remains vague on how much the country will increase purchases of U.S. farm goods, considered a critical part of a trade agreement with Washington. Han Jun, vice minister of agriculture and rural affairs, confirmed to Chinese financial news site Caixin that import quotas for wheat, corn and rice will not increase. ‘These are global quotas. We will not adjust them just for one country,’ Han told Caixin…”

January 4 – Bloomberg: “China pledged to step up measures to shore up its troubled banks and small businesses while continuing a crackdown on shadow banking and property speculation, in a difficult balancing act that risks exacerbating a build up in bad debt at its traditional lenders. As concerns mount over the state of China’s $45 trillion financial system, the nation’s central bank and its top financial regulator used the year’s first weekend to unveil fresh details on how to combat risks amid the slowest economic expansion in three decades. The People’s Bank of China, which has been reluctant to prime the stimulus pumps too much, said on Sunday that it would ‘resolutely win the battle’ against increasing financial risks, underscoring its role as a lender of last resort while directing local governments to step up front-line support.”

January 8 – Reuters (Lusha Zhang and Ryan Woo): “Soaring pork prices that nearly doubled in December over a year ago kept inflation at a seven-year high despite government efforts to ease meat shortages caused by a disease outbreak… Surging inflation adds to challenges for communist leaders who are trying to shore up slowing economic growth and resolve a tariff war with Washington. The price of pork rose 97% over a year earlier despite increased imports of China’s staple meat and the release of thousands of tons from government stockpiles. Food prices rose 17.4% and overall consumer inflation was 4.5%, well above the ruling Communist Party’s official target of 3%. That matched November’s inflation, the highest since 2012.”

January 8 – Bloomberg: “Car sales in China continued to fall in December, capping a second straight annual drop, though a slowing pace of declines suggests the world’s biggest market may be close to a bottom. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles fell 3.6% last month from a year earlier to 2.17 million units…”

January 9 – Bloomberg: “In what’s now become a new normal for the $815 billion-plus Chinese offshore-debt market, at least seven borrowers defaulted in 2019. About $3.6 billion of bonds went into default last year, up from $3.3 billion the year before… The 2019 tally spanned a state-owned commodity trader to a onetime Coca-Cola Co. acquisition target. And with nearly half of the supply of stressed bonds -- those with yields of at least 15% -- coming due this year, the ranks of defaulters is expected to swell.”

January 9 – Financial Times (Sun Yu): “When China’s bond issuers run into trouble, investors face an increasingly tough task in extracting any returns. Bond defaults across the world’s second-biggest economy are rising, with more borrowers failing either to repay creditors’ initial investments, or make regular interest payments. Typically, some investors can find a way to hold on to so-called distressed debt and recover scraps of cash… Now, though, returns are shrinking. In 2016, 46% of borrowers in default made some sort of principal or interest payments to bondholders, according to Wind… Last year, that total dropped to 13%.”

January 7 – Bloomberg (Shirley Zhao): “China’s Communist Party issued new rules for state-owned enterprises, giving it greater control of companies that span industries from energy to banking and telecommunications. Wholly or majority state-owned companies must ‘integrate party leadership into every part of company governance,’ according to rules published Sunday on the central government’s website.”

January 8 – Financial Times (Jamil Anderlini): “Of the official announcements posted on the website of China’s embassy in Sweden over the past year, nearly two thirds are vituperative attacks on individual Swedish journalists, politicians and other public figures. ‘Some people in Sweden shouldn’t expect to feel at ease after hurting the feelings of the Chinese people and the interests of the Chinese side,’ was one typical, mildly threatening, outburst. The embassy in Sweden has been the most aggressive exemplar of China’s new ‘wolf-style diplomacy’ over the past year or so. But it is far from the only one.”

January 6 – New York Times (Raymond Zhong): “At first glance, the bespectacled YouTuber railing against Taiwan’s president, Tsai Ing-wen, just seems like a concerned citizen making an appeal to his fellow Taiwanese. He speaks Taiwanese-accented Mandarin… His captions are written with the traditional Chinese characters used in Taiwan, not the simplified ones used in China. With outrage in his voice, he accuses Ms. Tsai of selling out “our beloved land of Taiwan” to Japan and the United States. The man, Zhang Xida, does not say in his videos whom he works for. But other websites and videos make it clear: He is a host for China National Radio… As Taiwan gears up for a major election this week, officials and researchers worry that China is experimenting with social media manipulation to sway the vote.”

January 8 – Wall Street Journal (Chun Han Wong and William Kazer): “Fallout from Hong Kong’s unrest is galvanizing resistance against China on another front: Taiwan. Protests in Hong Kong against Beijing’s encroachment have inspired widespread sympathy across the self-ruling island of Taiwan, a longstanding subject of tension in the region that is both claimed by Beijing and supported by the U.S. with arms sales and unofficial political ties. Sympathies in Taiwan for Hong Kong have transformed the political fortunes of the island’s leader, President Tsai Ing-wen, whose ruling party advocates a Taiwanese identity separate from China and is seen as traditionally pro-independence. She has vocally supported the Hong Kong protesters in her campaign for re-election this Saturday, contrasting herself with her main rival—who is seen as friendly with Beijing—by casting her administration as a bulwark against China’s authoritarian influence.”

Central Bank Watch:

January 5 – Bloomberg (Rich Miller and Christopher Condon): “The U.S. and the euro area face daunting economic challenges in a world of low inflation and interest rates and central banks alone don’t have the tools to cope. That’s the message delivered to the American Economic Association’s annual meeting… by former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen. ‘I believe that for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion’ if it acts comprehensively to avoid a deflationary malaise, Draghi said… ‘The euro area still has space to do this, but time is not infinite,’ he added.”

EM Watch:

January 6 – Bloomberg (Subhadip Sircar): “With credit growth at multi-year lows, Indian lenders have been binging on sovereign debt. With the government set to borrow more, the move is fraught with risk. Bond holdings as a proportion of aggregate deposits stood at about 29% in the two weeks ended Dec. 20, way higher than the 18.25% mandated by the central bank... That leaves banks exposed to losses if yields climb on higher federal borrowings.”

January 8 – Bloomberg: “India’s budget deficit could widen to 3.8% of gross domestic product in the current fiscal year, breaching a target of 3.3%... The law allows the government to exceed the target by as much as half a percentage point… The government can also miss its target if it faces acts of war, a collapse in farm output, or the economy is undergoing structural reforms with unanticipated fiscal implications.”

January 9 – Bloomberg (Divya Patil): “It’s the last thing India’s stricken credit markets need: a record debt bill. Companies must repay an unprecedented 5.9 trillion rupees ($83bn) of local notes this year, just as corporate defaults spike. Many firms are already struggling after economic growth slumped to its weakest since 2009.”

January 7 – Financial Times (Stephanie Findlay): “India’s economy is set to grow at 5% in the current financial year compared with a year earlier, its slowest pace in 11 years… Cooling private consumption, slowing industrial activity and stagnant investment have all hit the country’s growth… Over the past year New Delhi has made a series of reforms to combat a crisis in the shadow banking sector and counter the slowdown…”

January 9 – Bloomberg (Fathiya Dahrul and Harry Suhartono): “Policyholders at Indonesia’s state-owned PT Asuransi Jiwasraya are looking to the government to rescue the scandal-hit insurer, which has uncovered a $2 billion hole in its books. The crisis affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia’s audit board said…”

Europe Watch:

January 7 – Associated Press (Pan Pylas): “Inflation across the 19-country eurozone spiked to a six-month high in December even before the recent jump in oil prices in the wake of escalating U.S.-Iran tensions… Prices increased across the board during December, helping the annual rate of inflation to rise to 1.3% from the previous month’s 1%. Though inflation is at its highest level since June, when it was also 1.3%, it remains way below the European Central Bank’s goal of just below 2%.”

January 8 – Financial Times (Tommy Stubbington): “Eurozone governments are on course to raise less cash from bond investors in 2020 than any year since the financial crisis, even as the European Central Bank hoovers up fresh supply and borrowing costs hover near record lows. Analysts at JPMorgan estimate that net supply of euro-area sovereign bonds this year will come to €188bn, the lowest since 2008. That figure, based on issuance plans published by national debt agencies, is derived from €762bn of bond sales over the year, while €574bn of existing bonds mature. The drop in new borrowing, down about 4% from 2019, comes at a time when ultra-low bond yields… have cut the cost of funding for governments across the world, prompting calls for them to abandon restraint in spending.”

January 7 – Reuters (Michael Nienaber): “German industrial orders fell unexpectedly in November on weak foreign demand and a lack of major contracts…, suggesting that a manufacturing slump will continue to curtail growth in Europe’s largest economy… Contracts for German goods decreased by 1.3% from the previous month, posting the steepest drop since July…”

Japan Watch:

January 6 – Reuters (Daniel Leussink): “Japan’s services sector saw its deepest contraction in more than three years in December as business activity took a hit from weak demand at home and abroad… The final seasonally adjusted Jibun Bank Japan Services Purchasing Managers’ Index (PMI) fell to 49.4 in December from 50.3 in November…”

Global Bubble Watch:

January 8 – Reuters (David Lawder): “The World Bank… trimmed its global growth forecasts slightly for 2019 and 2020 due to a slower-than-expected recovery in trade and investment despite cooler trade tensions between the United States and China… In its latest Global Economic Prospects report, the World Bank shaved 0.2 percentage point off of growth for both years, with the 2019 global economic growth forecast at 2.4% and 2020 at 2.5%.”

January 6 – Financial Times (Monica Erickson): “Individuals and institutions alike have grown very fond of high-quality US corporate bonds, which are prized for their relative safety. But after a long rally, these bonds now pose greater risk than many may realise. The duration of this class of assets — its interest-rate risk — has increased to near record highs, while spreads over the yield of equivalent Treasuries have fallen to near record lows. A pick-up in interest rates, depending on its speed and longevity, could significantly push down prices across the market, which totals over $7tn, accounting for just over a quarter of the total US bonds outstanding. That could happen even without a deterioration in credit quality.”

January 8 – Reuters (Martin Petty and Colin Packham): “Australian authorities urged another mass evacuation across the heavily populated southeast on Thursday as a return of hot weather fanned huge bushfires threatening several towns and communities.”

Leveraged Speculation Watch:

January 7 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped to a fourth annual loss in the last five years as his bearish bets misfired amid the longest-running equities bull market in history. The Odey European Inc. hedge fund finished 2019 down 10.1% despite a late rally in December…”

January 7 – Bloomberg (Katherine Burton): “Ray Dalio suffered his first annual loss since 2000 in his most prominent fund. Bridgewater Associates Pure Alpha II fund fell 0.5% last year, even as many of his peers posted some of their best returns since 2008. It was the fourth time he has lost money in a calendar year since starting Pure Alpha II in 1991…”

January 7 – Bloomberg (Melissa Karsh): “Hedge funds rebounded in 2019, gaining 9% after posting a loss the year before. The results were nothing to celebrate -- the S&P 500 Index returned 32% last year in the longest-running bull market in history. Last year’s performance may put further pressure on an industry struggling to keep investors from bolting. Hedge funds saw $82 billion of outflows through November, more than twice the amount for all of 2018, according to eVestment data. The industry is now on pace to record more closures than startups for a fifth straight year, according to Hedge Fund Research Inc.”

Geopolitical Watch:

January 5 – Reuters (Parisa Hafezi): “Iran announced on Sunday it would abandon limitations on enriching uranium, taking a further step back from commitments to a 2015 nuclear deal with six major powers, but it would continue to cooperate with the U.N. nuclear watchdog… ‘Iran will continue its nuclear enrichment with no restrictions .... and based on its technical needs,’ a government statement cited by television said.”

January 8 – Reuters (Babak Dehghanpisheh and Ahmed Aboulenein): “Iran spurned U.S. President Donald Trump’s call for a new nuclear pact and its commanders threatened more attacks as the Middle East remained on edge following the U.S. killing of an Iranian general and Tehran’s retaliatory missile strikes. Potentially stepping up international pressure on Tehran, U.S. officials said they believed a Ukrainian passenger plane that crashed in Iran was brought down accidentally by Iranian air defenses hours after Iran launched its missiles attacks.”

January 3 – Reuters (Polina Ivanova): “Russia’s Foreign Minister Sergei Lavrov spoke with his Iranian counterpart Mohammad Javad Zarif over the phone on Friday to discuss the killing of Iran’s military chief Qassem Soleimani… ‘Lavrov expressed his condolences over the killing,’ the statement said. ‘The ministers stressed that such actions by the United States grossly violate the norms of international law.’”

January 4 – Reuters (Ryan Woo): “The United States should stop abusing the use of force and seek solutions via dialogue, China’s foreign minister said, after a U.S. air strike in Baghdad on Friday killed Iran’s most prominent military commander. The risky behavior of the U.S. military violates the basic norms of international relations and will worsen tensions and turbulence in the region, China’s Foreign Minister Wang Yi told his Iranian counterpart Mohammad Javad Zarif…”

January 6 – CNBC (Joanna Tan): “President Donald Trump threatened Sunday to slap sanctions on Iraq after its parliament passed a resolution calling for the government to expel foreign troops from the country. Tensions in the Middle East spiraled last week after Trump called for a U.S. airstrike in Baghdad that killed a top Iranian general, Qasem Soleimani. …The U.S. president said: ‘If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever. It’ll make Iranian sanctions look somewhat tame.’ ‘We have a very extraordinarily expensive air base that’s there. It cost billions of dollars to build. Long before my time. We’re not leaving unless they pay us back for it,’ Trump said.”

January 5 – Reuters (Ahmed Rasheed, Ahmed Aboulenein and Jeff Mason): “Iraq’s parliament called… for U.S. and other foreign troops to leave as a backlash grows against the U.S. killing of a top Iranian general, and President Donald Trump doubled down on threats to target Iranian cultural sites if Tehran retaliates. Deepening a crisis that has heightened fears of a major Middle East conflagration, Iran said it was taking another step back from commitments under a 2015 nuclear deal with six major powers.”

January 9 – Associated Press (Samya Kullab and Qassim Abdul-Zahra): “Iraq’s caretaker prime minister asked the U.S. secretary of state to start working out a road map for an American troop withdrawal from Iraq…, signaling his insistence on ending the U.S. military presence despite recent moves to de-escalate tensions between Iran and the U.S. Adel Abdul-Mahdi made the request… with Secretary of State Mike Pompeo… He also told Pompeo that recent U.S. strikes in Iraq were an unacceptable breach of Iraqi sovereignty and a violation of the two countries’ security agreements. The Iraqi leader asked Pompeo to ‘send delegates to Iraq to prepare a mechanism to carry out the parliament’s resolution regarding the withdrawal of foreign troops from Iraq’…”

January 8 – Financial Times (Kathrin Hille and Christian Shepherd): “There was a funfair atmosphere when Tainan Air Base in south Taiwan opened its doors to the public one Saturday morning in October. Multicoloured banners fluttered in the breeze, children pushed to get a front row spot and a ‘flying tigers’ team of pilots looped their planes overhead. But the motivation behind the display is deadly serious. Concerns are building in both Taipei and in the US — the unofficial guarantor of the island’s security — that China could be moving closer to launching the attack which it has been threatening for 70 years. ‘Militarily, the other side has been doing [its] homework for a couple of decades. The threat is real,’ says Enoch Wu, a Taiwanese former special forces office... ‘The [People’s Liberation Army] will achieve a certain credible capability to give that option to Beijing and say, here is that button you can push.’”

January 8 – Financial Times (Andrew England): “’Keep your hands off Libya’ was the blunt message delivered by Ghassan Salame, the frustrated UN envoy, when asked this week what he had to say to the foreign powers fuelling a civil war in the north African state. It is a sentiment shared by millions of Libyans whose devastated nation challenges war-torn Syria for the unwanted title of being home to the world’s most internationalised conflict. And there have been signs this week that it was about to get worse. On Sunday, Recep Tayyip Erdogan, Turkey’s president, announced that Turkish troops had been deployed to support the besieged UN-backed government in Tripoli. Hours later, General Khalifa Haftar, who triggered the conflict by launching an offensive on the Libyan capital in April, seized Sirte, a strategically and symbolically important port city. Both moves signalled a dangerous escalation.”