Friday, July 17, 2020

Weekly Commentary: Drone Money

Please join Doug Noland and David McAlvany this coming Thursday, July 23rd, at 4:00PM Eastern/ 2:00pm Mountain time for the Tactical Short Q2 recap conference call, “Confirmation of the Global Bubble Thesis.” Click here to register.

In particular, to maintain downward pressure on longer-term interest rates, the Federal Open Market Committee (FOMC) likely will provide forward guidance about the economic conditions it would need to see before it considers raising its overnight target rate. And it likely will clarify its plans for further securities purchases (quantitative easing). It is possible, though not certain, that the FOMC will also implement yield-curve control by targeting medium-term interest rates.” Ben Bernanke and Janet Yellen, Testimony on COVID-19 and Response to Economic Crisis, July 17, 2020.

With highly speculative securities markets having fully recovered COVID losses – and Nasdaq sporting a 17% y-t-d gain – why the talk of more QE? And with 10-year yields at 0.63% and financial conditions extraordinarily loose, what’s the purpose for discussing the pegging of Treasury bond prices (aka “yield curve control”)? Aren’t the markets already conspicuously over-liquefied?

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” Milton Friedman, “The Optimum Quantity of Money,” 1969.

It was Dr. Ben Bernanke that, in the wake of the “tech” Bubble collapse, elevated Friedman’s academic thought experiment to a revolutionary policy proposal. And in this runaway real world experiment, “often repeated” supplanted Friedman’s “will never be repeated” – and it changed everything.

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper‐money system, a determined government can always generate higher spending and hence positive inflation.” Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” 2002.

To be clear, the probability of so-called helicopter money being used in the United States in the foreseeable future seems extremely low… Nevertheless, it’s important that markets and the public appreciate that, should worst-case recession or deflation scenarios occur, governments do have tools to respond.” Ben Bernanke, “What Tools Does the Fed Have Left? Part 3: Helicopter Money,” 2016.

“From what I have seen thus far, Dr. Bernanke is well on his way to creating a place for himself in economic history.” Doug Noland, “Death to the Bubble Poppers,” November 22, 2002.

I didn’t take Bernanke all that seriously when he arrived at the Fed back in 2002. My thinking at the time: How could any central banker openly contemplating using the “government printing press” and “helicopter money” ever be taken seriously?

The raging policy debate in 2002 was how to counter so-called “deflationary forces.” But there was as well the critical issue of the Federal Reserve having failed to safeguard financial stability. The Greenspan Fed actively promoted (and backstopped) the financial markets - while ignoring resulting late-nineties Bubble excess.

It was obvious the Fed had really blown it. That this academic, and recently appointed Fed governor, referred to the “bubble poppers” from the late-twenties and their role in fomenting the Great Depression made it difficult not to be disdainful. I underestimated both the man and the world’s gullibility.

Bernanke 2002: “I think it is extraordinarily dangerous for the Fed to make itself the arbiter of security values. And I think, moreover, that if the Fed tries to, quote, ‘pop bubbles,’ it’s likely that it creates disasters.”

Over his long career, Dr. Bernanke has accumulated a remarkable body of work, replete with historical revisionism and dangerously flawed doctrine. A few Bernanke sentences from 2002, in particular, changed the course of history.

Bernanke: “The first part of the prescription implies that the Fed should use monetary policy to target the economy, not the asset markets. As I will argue today, I think for the Fed to be an ‘arbiter of security speculation or values’ is neither desirable nor feasible… The second part of my prescription is for the Fed to use its regulatory, supervisory, and lender-of-last-resort powers to protect and defend the financial system.”

Clearly, the so-called macro-prudential regulatory framework was an abject failure throughout the mortgage finance Bubble period. Moreover, the resulting catastrophe ensured a momentous transformation in policy doctrine. The Fed turned to directly targeting asset market inflation. And Bernanke’s decision to exploit financial market manipulation as the primary mechanism for (financial and economic) system reflation over time ensured the Fed would evolve into the unqualified “arbiter of security values.” After excoriating the “Bubble poppers,” Bernanke’s Fed unleashed dynamics that would have the Federal Reserve and global central bankers desperately resuscitating Bubble excess some 18 years later.

Milton Friedman never contemplated “helicopter money” being used - not for spending on goods and services in the real economy – for, among other things, to fund Robinhood trading accounts ( helping raise the price level… of Tesla’s stock). Friedman did a lot of thinking over many decades, yet I’m rather confident the thought of the Fed injecting $3 TN into the securities markets over a limited number of weeks never crossed his mind. Ditto the Fed monetizing Trillions of deficit spending in a few months’ time.

Ben Bernanke has never grasped speculative dynamics and financial structure evolution. He fails to appreciate the great danger that was associated with late-twenties speculative leveraging and the impact massive expansion of speculation-related liquidity had on financial and economic structure (especially late in the cycle!). As we’ve been witnessing, central bankers either must develop a policy course to rein in excess – or they will invariably become hostage to it. Future historians will look back at central banks using financial markets as their primary stimulus mechanism with contempt.

Cracks were more discernible this week. New daily U.S. COVID cases surpassed 70,000, with no end in sight. Many states – including economic heavyweights California, Florida and Texas – are being forced to clamp down. Trillions of additional fiscal stimulus will be forthcoming. New infections surged over 1.6 million globally over the past week. The U.S./China cold war chilled markedly. Chinese stocks reversed sharply lower this week, as policymakers confront the dilemma of massive monetary stimulus reigniting a stock market mania. In Europe, EU officials begin a contentious meeting with leadership hoping to muster a COVID stimulus giveaway within a backdrop of sharply lower infections and economic dislocation.

The Shanghai Composite sank 5% this week, with the CSI 300 down 4.4%. An official signaled the People’s Bank of China is not currently inclined to add additional stimulus. Beijing must appreciate that resurgent stock and property Bubbles only add to already acute systemic risks. And with 600 million Chinese earning monthly incomes of less than $140, inequality in China is a festering issue.

A Bloomberg headline from earlier in the week: “A Spate of Bank Runs Breaks Out in China, Fueled by Social Media.” At this point, panic is limited to a few smaller banks, although the entire banking system now faces mounting loan quality issues. The above Bloomberg article includes the ominous sentence: “Confidence in the $43 trillion banking system is eroding among the nation’s more than 1 billion account holders, threatening a cornerstone of China’s rise into an economic powerhouse.”

Banking system vulnerability is a global issue.

July 14 – Wall Street Journal (Ben Eisen and David Benoit): “The largest U.S. banks signaled that the worst of the coronavirus recession is yet to come, opting to stow away tens of billions of dollars to prepare for an expected wave of loan losses… ‘This is not a normal recession,’ said James Dimon, JPMorgan’s chief executive. ‘The recessionary part of this you’re going to see down the road.’ For years after the last financial crisis, banks made big profits lending to consumers and companies eager to take advantage of low interest rates. Heading into the current collapse, Americans had taken on record amounts of auto loans, credit-card debt and student loans. Corporate debt also reached record levels.”

We’re early in the pandemic; early in the crisis; and early the global economic downturn. I would heed Jamie Dimon’s warning. Most loan portfolios will show major deterioration over time. Yet the huge boost to reserves for future loan losses announced this week by the major banks was largely ignored by the markets. No surprise, considering the marketplace has been disregarding the spike in COVID infections and the move by states and municipalities to slow or reverse reopening measures.

Equities are instead predisposed to rally on positive vaccine news. “Risk on” got another boost Wednesday from Moderna’s release of “promising” details from its phase 1 vaccine trials. All 45 of the healthy adults in the trial developed antibody responses. That most vaccine recipients experienced side effects was irrelevant to the markets. At this point, the company does not know if the immune response is adequate to provide COVID immunity – or antibody longevity.

July 17 – San Francisco Chronicle (Peter Fimrite): “Disturbing new revelations that permanent immunity to the coronavirus may not be possible have jeopardized vaccine development and reinforced a decision by scientists at UCSF and affiliated laboratories to focus exclusively on treatments. Several recent studies conducted around the world indicate that the human body does not retain the antibodies that build up during infections, meaning there may be no lasting immunity to COVID-19 after people recover. Strong antibodies are also crucial in the development of vaccines. So molecular biologists fear the only way left to control the disease may be to treat the symptoms after people are infected to prevent the most debilitating effects, including inflammation, blood clots and death. ‘I just don’t see a vaccine coming anytime soon,’ said Nevan Krogan, a molecular biologist and director of UCSF’s Quantitative Biosciences Institute, which works in partnership with 100 research laboratories. ‘People do have antibodies, but the antibodies are waning quickly.’ And if antibodies diminish, ‘then there is a good chance the immunity from a vaccine would wane too.’”

I profess no vaccine expertise. Yet from my reading and listening, I’ll offer a few observations. The general public will question the safety of rapidly developed vaccines. Understandably, at this point trust is thin. And for a disease that causes only mild symptoms for the majority of those infected, a large swath of the population (i.e. young people) will be willing to take their chances. Vaccines with side effects will be a tough sell for many. Moreover, the issue of antibody duration will be crucial – and there could well be little clarity on this issue for vaccines rushed to market early next year.

Markets are content to disregard the risk of vaccine ineffectiveness. After all, COVID resurgence ensures further rounds of fiscal stimulus. Thursday from Nancy Pelosi (via CNBC): “They know there’s going to be a bill. First it was going to be no bill. And then it was going to be some little bill. Now it’s $1.3 trillion. That’s not enough.”

The Federal deficit surged to a record $864 billion in June, crushing April’s $738 billion. The deficit reached an unprecedented $2.74 TN through nine months – and $3.0 TN over 12 months. The CBO had projected a fiscal year deficit of $3.7 TN – though additional stimulus bills could push the deficit closer to $5.0 TN – or approaching 25% of GDP.

People are hurting and deserve help. My issue is we ran enormous deficits even as the economy was booming with the unemployment rate down to 60-year lows. The Fed inflated historic market Bubbles, creating acute financial and economic fragility. Reckless fiscal and monetary stimulus fueled a Bubble Economy replete with deep structural maladjustment.

Years and decades of flawed policies cultivated the current predicament: The real economy will require ongoing massive fiscal spending, while inflated assets Bubbles will demand ongoing massive monetary stimulus. It’s a fuzzy black hole lately coming into clearer focus. Markets – staring maniacally into the abyss – are plagued by visions of endless liquidity and ever higher securities prices. Myriad major problems come with runaway “helicopter money” – although this is a misnomer.

Indeed, the whole notion of “helicopter money” is dangerously flawed. The idle masses, eyes locked skyward, anxiously awaiting the next helicopter drop. Little attention was paid at first to the swarm of Drones zooming by. Suspicions were raised, however, when the choppers began arriving more infrequently and with less bountiful drops. It was at this point when more attention was paid to the fleet of sophisticated drones covertly delivering their monetary cargo to “special interests,” the well-connected and powerful. Anger and desperation grew both with “Drone Money” and the daily jumbo cargo flights to the market exchanges.

For the Week:

The S&P500 gained 1.2% (down 0.2% y-t-d), and the Dow rose 2.3% (down 6.5%). The Utilities surged 4.4% (down 5.3%). The Banks slipped 0.3% (down 35.5%), while the Broker/Dealers gained 2.4% (down 1.6%). The Transports surged 6.3% (down 9.2%). The S&P 400 Midcaps jumped 3.6% (down 11.0%), and the small cap Russell 2000 rose 3.3% (down 11.7%). The Nasdaq100 fell 1.8% (up 21.9%). The Semiconductors were unchanged (up 11.9%). The Biotechs rose 2.3% (up 19.2%). With bullion rising $12, the HUI gold index gained 2.0% (up 31.4%).

Three-month Treasury bill rates ended the week at 0.1025%. Two-year government yields slipped a basis point to 0.15% (down 142bps y-t-d). Five-year T-note yields declined two bps to 0.28% (down 141bps). Ten-year Treasury yields fell two bps to 0.63% (down 129bps). Long bond yields dipped one basis point to 1.33% (down 106bps). Benchmark Fannie Mae MBS yields gained two bps to 1.45% (down 126bps).

Greek 10-year yields slipped a basis point to 1.18% (down 25bps y-t-d). Ten-year Portuguese yields were little changed at 0.42% (down 2bps). Italian 10-year yields dropped six bps to 1.17% (down 24bps). Spain's 10-year yields were unchanged at 0.41% (down 6bps). German bund yields rose two bps to negative 0.45% (down 26bps). French yields were little changed at negative 0.14% (down 26bps). The French to German 10-year bond spread narrowed two to 31 bps. U.K. 10-year gilt yields added a basis point to 0.16% (down 66bps). U.K.'s FTSE equities index rallied 3.2% (down 16.6%).

Japan's Nikkei Equities Index gained 1.8% (down 4.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.03% (up 4bps y-t-d). France's CAC40 rose 2.0% (down 15.2%). The German DAX equities index advanced 2.3% (down 2.5%). Spain's IBEX 35 equities index gained 1.6% (down 22.1%). Italy's FTSE MIB index surged 3.3% (down 13.1%). EM equities were mostly higher. Brazil's Bovespa index rose 2.9% (down 11.0%), while Mexico's Bolsa slipped 0.4% (down 16.6%). South Korea's Kospi index jumped 2.4% (up 0.2%). India's Sensex equities index gained 1.2% (down 10.3%). China's Shanghai Exchange sank 5.0% (up 5.4%). Turkey's Borsa Istanbul National 100 index rose 3.5% (up 3.8%). Russia's MICEX equities index declined 0.9% (down 8.9%).

Investment-grade bond funds saw inflows of $4.531 billion, and junk bond funds posted positive flows of $834 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped five bps to a record low 2.98% (down 83bps y-o-y). Fifteen-year rates declined three bps to 2.48% (down 75bps). Five-year hybrid ARM rates rose four bps to 3.06% (down 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 3.19% (down 94bps).

Federal Reserve Credit last week declined $34.1bn to $6.881 TN, with a 45-week gain of $3.159 TN. Over the past year, Fed Credit expanded $3.108 TN, or 82.4%. Fed Credit inflated $4.070 Trillion, or 145%, over the past 401 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.4 billion last week to $3.405 TN. "Custody holdings" were down $60.4bn, or 1.7%, y-o-y.

M2 (narrow) "money" supply jumped $97.5bn last week to a record $18.522 TN, with an unprecedented 19-week gain of $3.014 TN. "Narrow money" surged $3.687 TN, or 24.9%, over the past year. For the week, Currency increased $3.8bn. Total Checkable Deposits dropped $86.0bn, while Savings Deposits surged $194bn. Small Time Deposits fell $9.6bn. Retail Money Funds slipped $4.8bn.

Total money market fund assets fell $87.4bn to $4.568 TN. Total money funds surged $1.306 TN y-o-y, or 40.1%.

Total Commercial Paper jumped $19.0bn to $1.026 TN. CP was down $115bn, or 10% year-over-year.

Currency Watch:

July 13 – Wall Street Journal (Eva Szalay and Colby Smith): “Escalating political and health risks in the US and rising optimism about the global economic recovery should keep the dollar sliding over the next few months, according to analysts. Large banks turned bearish on the greenback in late May, citing drastic cuts in interest rates and a flood of liquidity unleashed by the Federal Reserve, as it tried to alleviate the economic effects of the pandemic. Since then, the outlook for the dollar has deteriorated further, strategists say. They cite growing concerns over the reopening of the world’s largest economy in the face of a steady increase in Covid-19 cases, as well as increased political threats and a hit from investors exiting safety-seeking bets in the dollar.”

July 16 – Bloomberg (Cormac Mullen and Ruth Carson): “The slump in the dollar is threatening to bring to an imminent end its near-decade-long uptrend against major peers. Deutsche Bank’s Trade-Weighted Dollar Index… has fallen to test the trendline in place since 2011, a break of which would be an important signal for dollar bears. The index has dropped more than 1% so far this month amid weakening demand for havens, an ongoing rally in risk assets and a shift in sentiment toward currencies like the euro and yuan. Dollar strength has been a feature of much of the last 10 years. The trade-weighted basket climbed over 40% from the 2011 low to its recent peak in March… Yet a growing chorus of commentators is calling for the currency to decline, as the global economy attempts to recover from the impact of the pandemic.”

For the week, the U.S. dollar index declined 0.7% to 96.013 (down 0.5% y-t-d). For the week on the upside, the Swedish krona increased 1.8%, the Norwegian krone 1.4%, the euro 1.1%, the Australian dollar 0.7%, the South African rand 0.6%, the Swiss franc 0.3%, the Canadian dollar 0.1% and the Singapore dollar 0.1%. For the week on the downside, the Brazilian real declined 1.1%, the Mexican peso 0.5%, the British pound 0.4%, the New Zealand dollar 0.3%, the Japanese yen 0.1% and the South Korean won 0.1%. The Chinese renminbi increased 0.14% versus the dollar this week (down 0.42% y-t-d).

Commodities Watch:

July 16 – Bloomberg (Eddie van der Walt): “There’s a big shift in the balance of power in the global gold market. A relentlessly expanding physical hoard of bullion stored in London and New York means exchange-traded funds have usurped managed money in the futures market as the key driver of the price of the shiny metal. For much of the grind higher that saw gold break above $1,800 per ounce for the first time in eight years last week, investors in the biggest futures market were reducing their positions. At the same time, ETFs were increasing their holdings to more than 3,000 tons -- the highest total ever recorded. ‘ETFs are definitely the big boys now,’ said David Govett, head of precious metals trading at Marex Spectron. ‘In the past they were certainly a factor, but there were a lot of others too -- funds, CTAs, day traders. But they have become very cautious with the lack of liquidity in the market.’ It’s a radical shift in the market’s structure.”

The Bloomberg Commodities Index slipped 0.2% (down 17.8% y-t-d). Spot Gold added 0.7% to $1,810 (up 19.2%). Silver surged 3.5% to $19.746 (up 10.2%). WTI crude was little changed at $40.59 (down 34%). Gasoline dropped 4.4% (down 28%), and Natural Gas sank 5.6% (down 22%). Copper slipped 0.3% (up 4%). Wheat was about unchanged (down 4%). Corn gained 1.0% (down 12%).

Coronavirus Watch:

July 13 – The Hill (Rebecca Klar): “People who have recovered from COVID-19 may lose their immunity to the virus within months, according to research... The study is the first of its kind examining the antibody levels in confirmed coronavirus patients and evaluating how they change over time. Researchers analyzed immune responses of patients and health care workers at Guy's and St. Thomas’ National Health Service Foundation Trust in London and found that levels of antibodies that destroy the virus quickly declined after peaking several weeks after patients exhibited symptoms. The study found that 60% of the patients had a ‘potent’ antibody response at peak of their battle with the coronavirus. After about two months, however, just 16.7% of the patients had a potent antibody response. In some cases, the antibody response to the virus later became undetectable. ‘People are producing a reasonable antibody response to the virus, but it’s waning over a short period of time and depending on how high your peak is, that determines how long the antibodies are staying around,’ Katie Doores, lead author on the study at King’s College London, told The Guardian…”

July 13 – Reuters (Gayle Issa): “The number of coronavirus infections around the world hit 13 million…, climbing by a million in just five days. … World Health Organization (WHO) chief Tedros Adhanom Ghebreyesus said there would be no return to the ‘old normal’ for the foreseeable future, especially if preventive measures were neglected. ‘Let me be blunt, too many countries are headed in the wrong direction, the virus remains public enemy number one,’ he told a virtual briefing… ‘If basics are not followed, the only way this pandemic is going to go, it is going to get worse and worse and worse. But it does not have to be this way.’”

July 16 – Wall Street Journal (Brianna Abbott and Sarah Krouse): “Over the past week, nearly two dozen states have reported fresh highs in coronavirus cases. Unfortunately, many of the new cases they reported were already several days behind the speeding pathogen’s actual reach. The latest rash of outbreaks in Florida, Nevada, Georgia, Texas and beyond has resurrected one of the early problems that bogged down this country’s initial response to the pandemic in the spring: Many people in coronavirus hot spots are now waiting more than a week, and in some cases several weeks, for test results. Testing-supply shortages and delays can hamstring contact-tracing efforts, complicate decisions on whether to open or close businesses and cloud statistics used to track the virus’s spread.”

July 15 – Wall Street Journal (Melanie Evans, Joseph Walker and Stephanie Armour): “As the pandemic pushes U.S. hospitals in the South and West near capacity, the urgent need for available beds has stranded patients in emergency rooms, scrambled ambulances and forced patients to relocate hundreds of miles to relieve overcrowded wards. In Arizona, hospitals are using a statewide transfer center to move 30 to 50 patients between hospitals each day… In Florida, hospital giant HCA Healthcare Inc. isn’t accepting patients transferred from other overflowing hospitals. In Houston, the daily hunt for empty beds has left critically ill patients to wait hours or days in emergency rooms for vacancies.”

July 14 – Reuters (Ann Saphir): “California Governor Gavin Newsom’s decision… to reimpose restrictions on bars, restaurants, gyms and even ordinary office work to tamp down a surge of coronavirus infections is dimming economic growth prospects for the nation as a whole… The Golden State, with 40 million people, employs more workers than any other state in the nation, and its production of goods and services is about equal to the combined output of Florida and Texas, two others states that have also seen resurgences of the virus.”

July 13 – Wall Street Journal (Sarah Toy): “Just a few months back, some scientists hoped summer conditions might help tamp down coronavirus transmission…. Some of the other coronaviruses that have long circulated in the population tend to peak in colder months and wane in the summer months, and some thought that summer heat and humidity could work to slow the spread of Covid-19. Yet case counts of the novel coronavirus are surging… There are three likely reasons, public-health and infectious-disease experts said. They have to do with the current levels of immunity in the population, how the virus is transmitted and how people behave.”

July 12 – Wall Street Journal (Annie Gasparro and Jaewon Kang): “Grocers are having trouble staying stocked with goods from flour to soups as climbing coronavirus case numbers and continued lockdowns pressure production and bolster customer demand. Manufacturers… say they are pumping out food as fast as they can, but can’t replenish inventories. Popular items such as flour, canned soup, pasta and rice remain in short supply. As of July 5, 10% of packaged foods, beverages and household goods were out of stock, up from 5% to 7% before the pandemic, according to… IRI.”

Market Instability Watch:

July 16 – Bloomberg (Jeanny Yu): “The rally in Chinese shares is unraveling almost as quickly as it began, with losses accelerating Thursday after state media criticized one of the country’s most popular stocks. The CSI 300 Index closed 4.8% lower, its biggest loss since markets reopened in February following the Lunar New Year break… The ChiNext Index, which had earlier this week turned hotter than any benchmark in the world, fell as much as 6.2%. This month’s frenzy in Chinese stocks had pushed the value of the country’s equity market to almost $10 trillion, a level that marked the top of the bubble five years ago. Policy makers have since taken steps to rein in speculation in equities, including effectively withdrawing liquidity from the financial system.”

July 14 – Financial Times (Joshua Oliver): “Fund managers are increasingly nervous about the rush into US tech stocks, with almost three-quarters of investors surveyed by Bank of America describing the popular bet on the sector as the markets’ ‘most crowded trade’. In its monthly survey of investors, who between them manage $570bn, BofA described US tech and growth stocks as ‘the longest ‘long’ of all time’, as no other trade, such as positive bets on US government bonds or on bitcoin, has ever been singled out by such a large proportion of respondents.”

July 13 – Bloomberg (Sarah Ponczek): “Robinhood users can’t get enough of Tesla Inc. Almost 40,000 Robinhood accounts added shares of the automaker during a single four-hour span on Monday… All told this year, Tesla’s market cap has surged by $202 billion, pushing Elon Musk past Warren Buffett in rankings of the world’s wealthiest people and burning shorts who have as much as $20 billion in bets the stock will fall. The stock is trading at 166 times estimated earnings over the next year, 20 times book value and seven times sales.”

July 14 – Bloomberg (Yakob Peterseil): “Beneath the surface of the highest-flying stock markets in the world, animal spirits keep rampaging like rarely seen before. Even as tech investors pause for breath after powering U.S. benchmarks from Covid lows, Inc. is still seeing historic demand for call contracts so bullish they only have an estimated one-in-ten chance of paying off. With the company’s shares up 66% this year, traders are bidding up the price of options that have it jumping another 50% in the next three months. Contracts betting on the online retailer to reach $4,600 by October were among the most-traded calls for that expiry month on Monday. The speculative frenzy is a similar story for Twitter Inc. and Tesla Inc. -- all signs that options traders see value in wagering that the biggest stock winners will keep winning.”

July 16 – Bloomberg (Jesse Hamilton and Rich Miller): “A top Federal Reserve official is issuing a warning about fast-growing and largely unregulated shadow lenders: They were a big factor in why central banks had to save markets earlier this year, and much more needs to be done to assess the risks posed by the sector. The coronavirus crisis has exposed potential weaknesses tied to nonbank financial firms, including excessive leverage, interconnectedness and instances of assets freezing up that investors assumed were akin to cash, according to… Vice Chairman Randal Quarles. Such factors left central banks with no option other than intervening, he said… ‘While extraordinary central bank interventions calmed capital markets, which remained open and enabled firms to raise new and longer-term financing, such measures should not be required,’ Quarles wrote in letter… to his counterparts at other central banks. It’s ‘more important than ever’ to understand the possible threats of nonbanks, he added.”

July 13 – Bloomberg (Justina Lee and Sam Potter): “The near $1 trillion chunk of exchange-traded funds known as smart beta has got a problem: Some of the most popular don’t seem that smart. More than $14 billion this year has flooded into five of these quant strategies, which are wrapped up in an ETF in a bid to blend active and passive investing. Yet about $5 billion of this went to funds that barely deviate from the stock market, according to Bloomberg Intelligence. The smart-beta products with the purest exposures to systematic factors actually recorded outflows.”

July 15 – Bloomberg: “Given the option between tapping a recently soaring stock market for fresh funds or selling debt at a higher cost, China’s cash-hungry firms are making the obvious choice. The divergence in performance between China’s two capital markets has accelerated this month after Beijing encouraged the fastest run-up in stocks since the 2015 bubble burst. Investors are dumping safer assets to buy stocks, triggering another leg higher in corporate yields after a June selloff… The yield spread between higher quality five-year corporate bonds and corresponding government papers widened the most in two years this week. At the same time, the ChiNext Index and the CSI 300 Index of stocks both jumped to the highest since 2015.”

Global Bubble Watch:

July 16 – Reuters (Andrea Shalal): “Global debt surged to a record $258 trillion in the first quarter of 2020 as economies around the world shut down to contain the coronavirus pandemic, and debt levels are continuing to rise, the Institute for International Finance said… The IIF…, said the first-quarter debt-to-GDP ratio jumped by over 10 percentage points, the largest quarterly surge on record, to reach a record 331%.”

July 15 – Reuters (Howard Schneider): “Global consumer confidence registered a record drop from April through June as the economic fallout from the coronavirus pandemic registered in full, and the outlook is dim for a quick rebound, the Conference Board found in its latest survey… The conference board’s index of consumer views plunged from a solidly optimistic reading of 106 at the start of the year to a pessimistic level of 92.”

July 12 – Reuters (Marc Jones): “Companies around the world will take on as much as $1 trillion of new debt in 2020, as they try to shore up their finances against the coronavirus, a new study of 900 top firms has estimated. The unprecedented increase will see total global corporate debt jump by 12% to around $9.3 trillion, adding to years of accumulation that has left the world’s most indebted firms owing as much as many medium-sized countries. Last year also saw a sharp 8% rise… But this year’s jump will be for an entirely different reason - preservation as the virus saps profits. ‘COVID has changed everything,’ said Seth Meyer, a portfolio manager at Janus Henderson… ‘Now it is about conserving capital and building a fortified balance sheet’.”

July 14 – Wall Street Journal (Jason Douglas and Feliz Solomon): “Early data from Europe and Asia suggest the recovery from the economic crisis precipitated by the coronavirus pandemic could take longer than originally hoped, with countries facing a long slog to recover lost jobs and income.”

July 15 – Reuters (Ana Nicolaci da Costa): “One small firm in three around the world was obliged to cut jobs to stay open through the coronavirus pandemic in May, a survey showed…, underlining how hard the outbreak has slammed the world economy.”

July 13 – Bloomberg (Michelle Jamrisko and Ruth Carson): “Singapore’s economy plunged into recession last quarter as an extended lockdown shuttered businesses and decimated retail spending, a sign of the pain the pandemic is wreaking across export-reliant Asian nations. Gross domestic product declined an annualized 41.2% from the previous three months…, the biggest quarterly contraction on record… Compared with a year earlier, GDP fell 12.6% in the second quarter…”

Trump Administration Watch:

July 13 – Wall Street Journal (Chun Han Wong): “The U.S. declared its formal opposition to a swath of Chinese claims in the South China Sea, in an unusually direct challenge to Beijing’s efforts to assert control in the strategic waters. Announcing the policy shift…, Secretary of State Mike Pompeo characterized the decision as an effort to uphold international law against what he called a ‘might makes right’ campaign by China to coerce and intimidate its Southeast Asian neighbors into ceding their interests. While Washington has previously said it sees Beijing’s expansive sovereignty claims over most of the South China Sea as unlawful, the U.S. is now officially rejecting specific Chinese claims for the first time…”

July 14 – Bloomberg (Philip Heijmans and Andreo Calonzo): “The Trump administration’s move to brand most of Beijing’s claims in the South China Sea a violation of international law doesn’t mean much on its own: China has repeatedly refused to acknowledge the 2016 tribunal ruling that the U.S. finally just endorsed. But analysts say they fear it could lead to a miscalculation at sea if it prompts the Communist Party to more aggressively assert its claims, both to rebuff the U.S. and to deter other claimants in Southeast Asia from taking action. China’s campaign to build and later militarize artificial structures intensified after the Obama administration announced a ‘pivot’ to Asia in 2011.”

July 17 – Associated Press (Eric Tucker): “The United States has become overly reliant on Chinese goods and services, including face masks, medical gowns and other protective equipment designed to curb the spread of the coronavirus, Attorney General William Barr said Thursday as he also cautioned American business leaders against promoting policies favorable to Beijing. Barr asserted that China had not only dominated the market on protective gear, exposing American dependence on Beijing, but had also hoarded supplies and blocked producers from exporting to them to countries in need. He accused hackers linked to the Chinese government of targeting American universities and businesses to steal research related to vaccine development, leveling the allegation against Beijing hours after Western agencies made similar claims against Russia.”

July 14 – Politico (Sabrina Rodriguez): “President Donald Trump… signed into law a bill to impose sanctions on Chinese officials, businesses and banks that help China restrict Hong Kong’s autonomy, a move that is likely to worsen already-strained diplomatic ties and prompt retaliation from Beijing. ‘This law gives my administration powerful new tools to hold responsible the individuals and the entities involved in extinguishing Hong Kong's freedom,’ Trump said in a Rose Garden appearance.”

July 14 – Reuters (Eric Beech): “U.S. President Donald Trump… shut the door on ‘Phase 2’ trade negotiations with China, saying he does not want to talk to Beijing about trade because of the coronavirus pandemic. ‘I’m not interested right now in talking to China,’ Trump replied when asked in an interview… whether Phase 2 trade talks were dead. ‘We made a great trade deal,’ Trump said, of the Phase 1 agreement signed in January. ‘But as soon as the deal was done, the ink wasn’t even dry, and they hit us with the plague,’ he said…”

Federal Reserve Watch:

July 13 – Reuters (Kate Duguid): “The Federal Reserve’s $3 trillion bid to stave off an economic crisis in the wake of the coronavirus outbreak is fuelling excesses across U.S. capital markets. The U.S. central bank has pledged unlimited financial asset purchases to sustain market liquidity, increasing its balance sheet from $4.2 trillion in February to $7 trillion today. While the vast majority of these purchases have been limited to U.S. Treasuries and mortgage-backed securities, the Fed’s pledge to bolster the corporate bond market has been enough to spur a frenzy among investors for bonds and stocks. ‘COVID-19 is now inversely related to the markets. The worse that COVID-19 gets, the better the markets do because the Fed will bring in stimulus. That is what has been driving markets,’ said Andrew Brenner, head of international fixed income at NatAlliance.”

July 14 – Reuters (Lindsay Dunsmuir, Jonnelle Marte and Kanishka Singh): “The U.S. economy will recover more slowly than expected amid a surge in novel coronavirus cases across the country, and a broad second wave of the disease could cause economic pain to deepen again, Federal Reserve officials warned… One by one, Fed policymakers have become more downbeat in recent days, resetting expectations on the recovery and cautioning that recent improvements in economic data such as job gains may be fleeting. ‘The pandemic remains the key driver of the economy’s course. A thick fog of uncertainty still surrounds us, and downside risks predominate,’ Fed Governor Lael Brainard said…”

July 16 – Bloomberg (Liz McCormick and Craig Torres): “The Federal Reserve has bought trillions of dollars in Treasuries just to fix the bond market. It may need to buy a lot more to help repair the economy. A surge of new coronavirus cases is clouding the economic outlook in the U.S., and that’s likely to translate into pressure for more action from the Fed -– maybe as soon as this month’s meeting. Fed Governor Lael Brainard hinted as much…, saying the central bank should pivot its policies toward providing longer-run accommodation.”

July 15 – Bloomberg (Matthew Boesler): “The U.S. central bank should consider holding interest rates near zero until inflation is above its 2% target, said Philadelphia Fed President Patrick Harker, echoing his colleague Lael Brainard and signaling a consensus may be building among policy makers. ‘We’ve been saying for a long time that the 2% inflation goal is symmetric, which means we should overshoot it. We were having a difficult time doing that, like all developed economies,” Harker said… ‘I’m supportive of the idea of letting inflation get above 2% before we take any action with respect to the fed funds rate.’”

U.S. Bubble Watch:

July 13 – Associated Press: “The federal government incurred the biggest monthly budget deficit in history in June… The… deficit hit $864 billion last month, an amount of red ink that surpasses most annual deficits in the nation’s history and is above the previous monthly deficit record of $738 billion in April. That amount was also tied to the trillions of dollars Congress has provided to cushion the impact of the widespread shutdowns that occurred in an effort to limit the spread of the viral pandemic. For the first nine months of this budget year, which began Oct. 1, the deficit totals $2.74 trillion, also a record for that period.”

July 13 – Wall Street Journal (Kate Davidson): “The U.S. budget deficit reached $3 trillion in the 12 months through June as stimulus spending soared and tax revenue plunged, putting the federal government on pace to register the largest annual deficit as a share of the economy since World War II. As a share of gross domestic product, the 12-month deficit came to 14% last month, compared with 10.1% in February 2010, when the U.S. was still recovering from the last recession… The Congressional Budget Office has projected the annual deficit could total $3.7 trillion in the fiscal year that ends Sept. 30. But the gap could widen even further if Congress and the White House agree later this month on another round of emergency spending…”

July 14 – Associated Press (Ken Sweet): “With tens of millions of Americans out of work and many businesses shut down or operating under restrictions due to the coronavirus, three of the nation’s biggest banks set aside nearly $30 billion in the second quarter to cover potentially bad loans that were fine only a few months ago. The results from JPMorgan Chase, Wells Fargo and Citigroup… offer perhaps the broadest glimpse yet into how badly the pandemic is impacting the financial health of American consumers and businesses. Bank executives… said they underestimated how long the pandemic would last and its impacts on the overall economy.”

July 14 – New York Times (Emily Flitter, Stacy Cowley and Gillian Friedman): “Three of the nation’s biggest banks revealed… they had set aside billions of dollars to cover potential losses on loans, signaling that they don’t expect consumers and corporations to be able to pay their debts in the coming months as the pandemic continues to gut employment and commerce. Collectively, JPMorgan Chase, Citigroup and Wells Fargo have put aside $25 billion during the second quarter… Bank executives said government aid had so far cushioned the economic fallout from the coronavirus pandemic… These federal programs, meant to help tide Americans over the worst of the crisis, include a $600 weekly supplement to unemployment benefits. But as the programs begin to expire in the coming months, banks expect their loan losses to mount because defaults will probably rise.”

July 16 – Reuters (Fred Imbert): “The number of Americans who filed for unemployment benefits rose more than expected last week as the country continues to grapple with the economic impacts of the coronavirus pandemic. Initial weekly jobless claims came in at 1.3 million for the week ending July 11… It was also the 17th straight week in which initial claims totaled at least 1 million. Initial claims have risen by more than 51 million since late March, when it peaked at 6.867 million… Continuing claims… totaled 17.33 million for the week of July 4… That reflects a drop of 422,000…”

July 13 – CNBC (Diana Olick): “It is the perfect storm for the nation’s homebuilders. A sharp decline in the supply of existing homes for sale, increasing consumer preference for brand-new, high-tech homes with all the amenities for working and schooling, as well as an accelerating flight to the suburbs and exurbs made for remarkable housing demand in June. While the official government count isn’t out until the end of the month, sales of newly built homes jumped 55% annually in June, according to a monthly survey by John Burns Real Estate Consulting…”

July 15 – Bloomberg (Alex Tanzi and Leslie Patton): “Food inflation has arrived, according to newly released data… And that means slimmer profits for many already-ailing restaurants even as diners pay more for meals. Full-service restaurant prices rose a record 0.9% in June from a month earlier. At the same time, home cooking grew costlier: Grocery prices rose 0.7% from the prior month and 5.6% from a year ago, the largest increase since 2011.”

July 14 – Reuters: “U.S. consumer prices increased by the most in nearly eight years in June as businesses reopened, but the underlying trend suggested inflation would remain muted and allow the Federal Reserve to keep injecting money into the ailing economy. The… consumer price index increased 0.6% last month, the biggest gain since August 2012, after easing 0.1% in May. The increase… was driven by rises in the prices of gasoline and food. In the 12 months through June, the CPI climbed 0.6%...”

July 16 – Reuters: “U.S. retail sales increased more than expected in June, but the budding economic recovery is being threatened by a resurgence in new Covid-19 infections and high unemployment. …Retail sales rose 7.5% last month. That was on top of the 18.2% jump in May, which was the biggest gain since the government started tracking the series in 1992. Economists… had forecast retail sales advancing 5% in June.”

July 13 – Bloomberg (Liz Capo McCormick, Emily Barrett and Katherine Greifeld): “The U.S. Treasury has more than just the Federal Reserve in its corner as it battles to contain the cost of financing the nation’s record budget deficit. American money-market funds -- a harbor for the assets of retirees and companies -- have bought the brunt of the roughly $2.2 trillion in bills the government has sold to raise cash for economic stimulus amid the pandemic. The Fed has bought almost none, instead hoovering up hundreds of billions of dollars of notes and bonds.”

July 11 – Wall Street Journal (Rebecca Elliott and Christopher M. Matthews): “When an oil bust takes hold in West Texas, no one is spared: Drilling rigs collect dust, barber chairs sit empty, students drop out of school and lines swell at the food bank. The collapse in the wake of the new coronavirus has been historically brutal. In a matter of weeks, global demand for oil shriveled by more than 20% this spring, as people hunkered indoors and stopped flying and driving. Oil prices crashed. A fracking industry that had pushed American production to a world-leading 13 million barrels a day went into full retreat. And the nation’s hottest oilfield, the Permian Basin, all but shut down overnight.”

July 15 – Bloomberg (Steven Church, David Wethe and Christine Buurma): “California Resources Corp. filed for bankruptcy with a plan to hand ownership to lenders, kicking off what could turn into the next wave of collapses among oil drillers and the businesses that depend on them.”

July 15 – CNBC (Leslie Josephs): “American Airlines… warned about 25,000 front-line employees — roughly 29% of its U.S. mainline workforce — that they could be furloughed this fall, the latest carrier to prepare staff for job cuts as surges in coronavirus cases dash hopes for a quick rebound in travel demand. The airline also urged employees to take new extended leaves that can last up to two years or early retirement packages to get as many people off payroll as possible… American’s revenue in June was down more than 80% than a year ago…”

July 14 – Wall Street Journal (Ben Foldy): “General Motors Co. and Ford Motor Co. are continuing to struggle with keeping workers on the job as coronavirus cases surge nationwide, forcing the auto-making giants to cut shifts, hire new workers and transfer others to fill vacant roles. The absences are hampering efforts to recover from the economic havoc wreaked by the pandemic… A GM assembly plant in Wentzville, Mo., that has been running three shifts to restock the company’s depleted supply of midsize pickups is cutting one of the shifts to better cope with worker absences…”

July 13 – Bloomberg (Paula Seligson and Lisa Lee): “The Federal Reserve’s extraordinary effort to keep credit flowing to companies during the Covid-19 pandemic is also shunting money to banks’ bottom lines. Fees for underwriting blue-chip U.S. company bonds in the first half of the year essentially doubled to more than $7 billion…, after the Fed set up an unprecedented series of programs to support corporate debt markets and slashed interest rates. U.S. companies have rushed to borrow, selling more than $1 trillion of high-grade notes in just a few months, and some of the proceeds have trickled down to banks. That boon underscores how the biggest banks’ roles as financial intermediaries can translate to billions of dollars of profits after borrowing floodgates open.”

July 13 – Wall Street Journal (Alexander Osipovich): “Fallout from the coronavirus has fueled a fresh wave of interest in an unusual investment vehicle with a shaky reputation: the blank-check company. Blank-check companies are essentially big pools of cash, listed on an exchange, whose sole purpose is to do an acquisition. When a blank-check company buys a target firm, the firm gets its spot on the exchange. For the target firm, it is a backdoor way of doing an initial public offering—and with the IPO market rattled by Covid-19 and wild volatility, it has become a more attractive way to go public.”

Fixed-Income Bubble Watch:

July 15 – Bloomberg (Denise We): “The New York University professor who developed one of the best-known formulas for predicting corporate insolvencies has a warning for U.S. credit investors: this year’s spate of ‘mega’ bankruptcies is just getting started. More than 30 American companies with liabilities exceeding $1 billion have already filed for Chapter 11 since the start of January, and that number is likely to top 60 by year-end after businesses piled on debt during the pandemic, according to Edward Altman, creator of the Z-score… Companies globally have sold a record $2.1 trillion of bonds this year, with nearly half coming from U.S. issuers… ‘There was a huge buildup in corporate debt by the end of 2019 and I thought the market would gain some much needed de-leveraging with the Covid-19 crisis,’ said Altman… ‘Now, seems like companies again are exploiting what seems to be a crazy rebound.’”

China Watch:

July 14 – UK Express (Emily Ferguson): “A spokesman for China’s Ministry of National Defence accused the US of trespassing into the adjacent waters and airspace of China’s islands and reefs in the contested South China Sea. …The spokesman said the patrols were detrimental to regional peace and ‘highly provoking’. He warned the Chinese military remained on high alert… Ren Guoquiang said: ‘The United States is a violator of international laws and rules, a disturber of peace and stability in the South China Sea, a destructor of both Chinese and American front-line soldiers’ lives and safety, and a trouble maker for the China-US relationship and military ties.’ ‘The Chinese army will as always take any necessary means to safeguard national sovereignty and security, and maintain stability and peace in the South China Sea.’ He said the actions of the US was an act of ‘highly dangerous provocation’ and urged the county to cooperate with Beijing.”

July 15 – New York Times (Steven Lee Myers): “China… sharply criticized President Trump’s moves to strip Hong Kong of its preferential trading status with the United States and clear the way for new sanctions on officials and companies there, vowing to retaliate with punitive measures of its own. The response from the Ministry of Foreign Affairs in Beijing promised to continue a pattern of tit-for-tat punishments that have accompanied the sharp downward turn in relations between the two countries on a variety of fronts, from trade to technology to human rights. China was swift to criticize Mr. Trump’s latest actions, which he announced at a rambling White House news conference... Those moves, along with his remarks, underscored the extent to which relations with Beijing have become intertwined with the American presidential election.”

July 16 – Reuters (Huizhong Wu and Gabriel Crossley): “China said… it will stick to the Phase 1 trade deal it reached with the United States earlier this year but warned that it will respond to ‘bullying’ tactics from Washington, as relations continue to deteriorate… Relations between Beijing and Washington are at the worst in decades as they clash on multiple fronts including China’s handling of the coronavirus outbreak, the new national security law in Hong Kong, trade and the accusations of human rights crimes in Xinjiang.”

July 14 – Bloomberg: “Social media-fueled rumors about banks collapsing are popping up at an unprecedented frequency in China, forcing regulators and even the police to step in to calm depositors. Just since the past month, worried savers have descended on three banks to withdraw funds amid rumors of cash shortages that were later dismissed as false. Over the weekend customers rushed to a bank in the northern Hebei province to take out money, prompting local regulators to publicly vouch for the soundness of its lenders as the police halted the run. Confidence in the $43 trillion banking system is eroding among the nation’s more than 1 billion account holders, threatening a cornerstone of China’s rise into an economic powerhouse. After several bailouts and the first bank seizure in more than two decades last year, the coronavirus outbreak and its economic fallout have exacerbated an already shaky situation in the world’s largest banking system.”

July 14 – Reuters (Xiangming Hou, Ryan Woo and Rong Ma): “Two lenders in eastern China have asked the central bank to relax the way in which it assesses capital adequacy, people with direct knowledge of the matter said…, adding that the central bank and local regulators had encouraged the move. The lowering of one indicator of capital health would free up funds at small and mid-sized banks for loans to support the economy amid the coronavirus crisis, the two sources said. The lower it is, the easier it is for us to meet the regulatory requirement for capital adequacy,” one of the people said.”

July 12 – CNBC (Evelyn Cheng): “China’s central bank isn’t planning much more stimulus for the country as its economy recovers from the coronavirus shock, policymakers said. ‘(Some recent) policies and measures were made in response to the coronavirus outbreak, and once they completed their mission they have exited,’ Guo Kai, deputy director of the monetary policy department of the People’s Bank of China, told reporters…”

July 14 – Bloomberg: “China’s policy makers have sent another warning to property and stock investors in an attempt to prevent the formation of asset bubbles that could dilute their efforts to fund the economic recovery. The municipal government of Shenzhen, the tech hub where home prices have seen the biggest surge in two years in recent months, tightened the rules on property transactions... That came after a cautious liquidity operation by the People’s Bank of China, in which some central bank funding was withdrawn from the banking system for the month. The moves signal a careful balance being enacted by Chinese authorities as they try to keep a steady credit supply to businesses struggling to recover from the post-Covid slump, while avoiding a repeat of asset bubbles seen in previous rounds of stimulus.”

July 13 – Bloomberg: “Three months after China started to emerge from its coronavirus restrictions, its army of shoppers that help power the global economy are still nervous of travel, reticent to spend and forming habits that may change the face of consumption permanently… ‘Leading indicators suggest retail sales should have continued to recover in June,’ according to a report from Bloomberg Economists Chang Shu and David Qu. ‘Even so, the revival in consumption probably remains a long way off, given changes in behavior to the detriment of contact-intensive services, as well as stress in the labor market and dented incomes.’”

July 15 – Financial Times (Melanie Evans, Joseph Walker and Stephanie Armour): “China’s headline economic data… showed growth of 3.2% in the second quarter, a strong rebound from the first three months of the year when the country reported its first contraction since the end of the Cultural Revolution in the mid-1970s. That puts the overall decline for the first half of the year at just 1.6% — an enviable performance compared with most big economies still struggling with the pandemic that began in the central Chinese city of Wuhan. The ‘fundamentals’ of China’s growth ‘have not changed and will not change’, state media quoted President Xi Jinping as saying…”

July 15 – Reuters (Huizhong Wu and Gabriel Crossley): “China’s industrial output rose 4.8% in June from a year earlier…, expanding for the third straight month and offering some relief to an economy trying to regain its footing from the shock of the coronavirus outbreak earlier in the year… Fixed asset investment fell 3.1% in the first half of the year from the same period last year, compared with a forecast 3.3% fall and a 6.3% decline in the first five months of the year.”

July 13 – Reuters (Stella Qiu and Gabriel Crossley): “China’s imports in June rose for the first time since the coronavirus crisis paralysed the economy… Beijing has doled out aggressive stimulus to support domestic demand even as a resurgence in coronavirus infections around the world has raised questions about the strength of a rebound in global economic activity. China’s imports in June rose 2.7% from a year earlier…, confounding market expectations for a 10% drop. They had fallen 16.7% the previous month. Exports also rose unexpectedly, up 0.5%...”

July 11 – Reuters (Lusha Zhang, Cheng Leng and Ryan Woo): “China’s banks should brace for a big jump in bad loans due to coronavirus-induced economic pain, the financial regulator said…, noting the deterioration of asset quality at some small and mid-sized financial institutions was accelerating. China’s Banking and Insurance Regulatory Commission said… profit growth would slow sharply at some banks while others could see profits decline. If banks were to make the minimum amount of provisions for their non-performing loans, which some have yet to do, profits for the sector would fall by more than 350 billion yuan ($50bn), the statement said.”

July 15 – Bloomberg (Yvonne Yue Li): “A Wuhan-based jewelry maker said officials in China are investigating allegations the Nasdaq-listed company used fake gold bars to secure loans from Chinese financial institutions. Reports in Chinese media in the past month raised questions about whether Kingold Jewelry Inc. had pledged 83 tons of gold that mainly consisted of copper alloy to secure loans. According to a report by the Chinese news outlet Caixin, the issue was flagged when some of the supposed gold was sent for quality checks earlier this year after the company failed to pay interest on a loan.”

Central Bank Watch:

July 16 – Financial Times (Martin Arnold): “The European Central Bank has left its monetary policy on hold and committed to keep buying trillions of euros in bonds until it judges the economic crisis caused by the coronavirus pandemic to be over. The decision by the ECB governing council… means that the central bank has hit pause after four months of ramping up its monetary stimulus… ECB president Christine Lagarde said that although there had been a ‘significant but uneven recovery’ in recent weeks, there was still ‘exceptional uncertainty’ that was weighing on consumer spending and business investment. She said ‘price pressures are expected to remain extremely subdued’ and this meant ‘ample monetary stimulus remains necessary to safeguard the recovery’.”

Europe Watch:

July 17 – Financial Times (Mehreen Khan, Sam Fleming and Jim Brunsden): “European leaders’ attempt to agree a €750bn economic recovery package to overcome the damage wrought by Covid-19 was in disarray in the early hours of Saturday morning after a summit in Brussels was suspended in acrimony… Negotiations at the summit — leaders’ first physical meeting since February — are set to resume at 11am Brussels time on Saturday. Diplomats said that much of the ire at the summit table was directed at Mark Rutte. The Dutch prime minister’s insistence on a national veto over the spending of recovery money led to tensions with other capitals that boiled over during an ill-tempered late-evening dinner.”

July 12 – Financial Times (Mehreen Khan): “Europe’s ‘frugal’ governments are pushing for cuts to Brussels’ planned €750bn coronavirus recovery package and the EU’s next-term budget, heralding tough discussions among the bloc’s leaders at a summit this week. As governments engage in intense diplomacy before Friday’s meeting, the overall size of the EU’s Covid-19 response has emerged as a major battleground for member states who have been at loggerheads since the commission tabled the proposal in late May. Diplomats told the Financial Times that fiscally conservative capitals are demanding cuts to the European Commission’s €750bn fund called ‘Next Generation EU’ and want to further reduce the bloc’s upcoming €1.07tn budget as their price for doing a deal at the summit.”

July 13 – Bloomberg (Sonia Sirletti): “Italian banks have the highest portion of loans to industries suffering the most from the coronavirus pandemic, making their capital buffers more vulnerable to any deterioration in asset quality. Credito Emiliano SpA, Banco BPM SpA, BPER Banca SpA and Unione di Banche Italiane SpA top the list of more than 100 European banks exposed to industries badly hurt by the crisis, according to a research conducted by Eric Dor, director of economic studies at the IESEG School of Management…”

EM Watch:

July 11 – Bloomberg (Kartik Goyal and Suvashree Ghosh): “Indian banks, which are already struggling with one of the world’s worst bad-loan ratios, are set to face more pain as the coronavirus pandemic slams growth, the central bank’s chief warned, urging lenders to gird up their defenses. ‘The economic impact of the pandemic, due to the lockdown and the anticipated post-lockdown compression in economic growth, may result in higher non-performing assets and capital erosion of banks,’ Reserve Bank of India Governor Shaktikanta Das said… ‘A recapitalization plan for state-run and private banks has, therefore, become necessary.’”

July 14 – Bloomberg (Divya Patil): “India’s shadow banks are benefiting from a drop in borrowing costs after government stimulus steps, but the troubled sector faces more challenges ahead as the economy reels from the pandemic. The lenders’ borrowing costs declined in June for a second straight month… But the fall is primarily because of easy cash conditions in the nation’s banking system and not because businesses have strengthened, according to Sundaram Asset Management Co. ‘India’s economic outlook is uncertain, and chances are high financial health of these companies deteriorates further,’ said Dwijendra Srivastava, chief investment officer for debt at Sundaram Asset.”

July 16 – Reuters: “Turkish state banks have doubled their short foreign currency positions in six weeks to $8.3 billion (6.61 billion pounds) to help defend the lira, their largest direct intervention for years, according to four banking sources and industry data. The combined short positions of the state banks, shown in data from financial sector regulator BDDK, adds to more than $90 billion of central bank intervention since last year by bankers’ estimates for a total of about $100 billion used to support the Turkish currency.”

Japan Watch:

July 14 – Bloomberg (Jon Herskovitz): “China’s projection of its military might into Asian waters and North Korea’s modernization of its ballistic-missile arsenal pose risks to Japanese and regional security, the Japanese Ministry of Defense said. In its annual white paper…, the ministry accused China of ‘relentlessly’ pushing its way toward uninhabited East China Sea islands claimed by the two countries, saying it was becoming ‘a matter of grave concern.’ The ministry also accused China of spreading disinformation about Covid-19.”

Leveraged Speculation Watch:

July 15 – Bloomberg (Sam Potter): “The next time you encounter a hedge fund manager blaming central bankers for their performance woes, resist the urge to roll your eyes: They just might have a point. A new study delivers some of the strongest evidence yet directly connecting the malaise of the fast-money investor with monetary efforts to fend off economic disaster. Alexei Orlov of the U.S. Securities and Exchange Commission and Massimo Guidolin of the Bocconi University in Italy tested 10 investing strategies against 18 unconventional monetary policy announcements from the Federal Reserve and European Central Bank between 2008 and 2016. The result: They found monetary policies are directly hitting more than half of the strategies, and indirectly whiplashing virtually the entire industry.”

July 15 – Bloomberg (Masaki Kondo): “While bets on steepening yield curves are growing in popularity, money can also be made in countries that already have one and that’s drawing investors Down Under. Thanks to Australia’s yield-curve control policy, its bonds have the steepest curve among major sovereign markets… Investors can exploit that difference by borrowing at lower shorter-term rates and investing higher up the curve. For example, a trader could employ a ‘carry-and-roll’ strategy, borrowing over a short time period at relatively cheaper rates and putting the proceeds into longer-term higher-yielding bonds. Players then earn ‘carry’ from the bond’s coupon and ‘roll’ from its capital appreciation as the note slides down the curve toward maturity.”

Geopolitical Watch:

July 15 – Reuters (Ann Wang): “Taiwan’s air, sea and land forces conducted live-fire exercises simulating the repulsion of an invading force…, with President Tsai Ing-wen saying it showed their determination to defend the democratic and Chinese-claimed island. F-16 and domestically made Ching-kuo fighter jets launched strikes and tanks raced across inland scrub, firing shells to destroy targets on the beach. About 8,000 personnel took part in drills…”

July 14 – Wall Street Journal (Alastair Gale and Chieko Tsuneoka): “It was the kind of provocation that has become familiar to Japan. On June 18, a Chinese submarine passed within a few miles of Japan’s territorial waters near the island of Amami-Oshima. Tokyo mobilized three destroyers and surveillance aircraft to make sure it didn’t stick around. Breaking precedent, Japanese Defense Minister Taro Kono publicly identified the submarine as Chinese and said the incident was part of a pattern of China’s assertiveness that includes a recent border clash with Indian troops and a push to tighten its grip on Hong Kong. China’s ascent has reshaped security policies across the Asia-Pacific region… Nowhere has the impact been stronger than in Japan. Its military is now one of the world’s best-equipped and trained, increasingly visible on exercises around the globe.”

Friday Evening Links

[Reuters] S&P 500 ends higher as traders weigh stimulus and virus worries

[Reuters] EU leaders deadlocked over COVID recovery plan after a day of haggling

[CNBC] Coronavirus live updates: California outlines strict guidelines to reopen schools; testing remains a challenge

[SF Chronicle] With coronavirus antibodies fading fast, vaccine hopes fade, too

[Reuters] For first time, world records one million coronavirus cases in 100 hours: Reuters tally

Friday Afternoon Links

[Reuters] S&P 500 ticks higher as investors weigh stimulus against virus worries

[Reuters] Treasury's Mnuchin open to blanket forgiveness for smaller business relief loans

[CNBC] Coronavirus live updates: BlackRock’s Fink, two governors urge people to wear masks as new cases spike

[Reuters] Flight to suburbs boosts U.S. homebuilding, but COVID-19 surge erodes consumer sentiment

[CNBC] Texas officials order extra body bags, mortuary trucks as state braces for rising coronavirus deaths