Friday, December 4, 2020

Weekly Commentary: Monetary Disorder In Extremis

November non-farm payrolls gained 245,000, only about half the mean forecast - and down from October’s 610,000. It was the weakest job growth since April’s employment debacle. U.S. equities rallied on the disappointing news. A few Bloomberg headlines captured the aura: “Stocks Gain as Jobs Miss Boosts Stimulus Bets;” “Fed Case for Fresh Action Gets Stronger on Soft U.S. Jobs Report;” and “Jobs Data Was a ‘Perfect Miss’ for Fed and Aid.”

Bad news has never been more positively received by the stock market. Some analysts are now anticipating the Fed will soon supersize its already massive monthly bond purchases. Chairman Powell’s comments this week did little to dissuade such thinking: “We are going to keep our rates low and keep our tools working until we feel like we really are very clearly past the danger that is presented to the economy from the pandemic.”

The U.S. Bubble Economy structure has evolved into a voracious Credit glutton. There’s a strong case for significant additional fiscal stimulus. The case for boosting monetary stimulus is not compelling. Financial conditions have remained ultra-loose. Credit stays readily available for even the riskiest corporate borrowers, as bond issuance surges to new heights. While formidable, the remarkable speculative Bubble throughout corporate Credit is dwarfed by what has regressed to a raging stock market mania.

Manic November will be chronicled for posterity. Future historians will surely be confounded. It is being called the strongest ever November for equities. Up 12% for the month, the Dow posted its largest one-month advance since January 1987. The S&P500 returned 10.9%, a huge bonanza relegated to small potatoes by the “melt-up” in the broader market. The “average stock” Value Line Arithmetic Index posted an 18.3% advance in November. The small cap Russell 2000 also surged 18.3%, and the S&P400 Midcaps rose 14.1%.

Melt-up dynamics were a global phenomenon – “developed” and emerging markets alike. Major equities indexes were up 25.2% in Spain, 23.0% in Italy, 20.1% in France, 15.0% in Germany, 15.0% in Japan, 10.3% in Canada, and 10.0% in Australia. In EM, equities rose 19.5% in Poland, 15.5% in Russia, 15.4% in Turkey, 14.3% in South Korea, 11.5% in India, 15.9% in Brazil, 13.0% in Mexico and 20.5% in Argentina. The Brazilian real and Colombian peso posted one-month gains of 10%, with the Turkish lira up 8.1%, the Russian ruble 7.2%, the Mexican peso 5.9% and the South Korean won 5.1%.

U.S. stocks powered higher on election results. Both American and global investors were apparently enamored with the prospect of a Biden presidency held in check by a Republican Senate. The unwind of hedges played prominently in the markets' advance. Positive vaccine news then threw gas on the speculative fire.

As equities turned wildly speculative, a historic short squeeze (losses on shorts spurring aggressive self-reinforcing buying to unwind positions) led to major outperformance by lagging sectors. This dynamic coupled with constructive vaccine news incited a major rotation into underperforming stocks, sectors and indices.

The Goldman Sachs Most Short Index posted a November gain of an astounding 28.4% (vs. the S&P500’s 10.9%). The Bloomberg Americas Airlines Index also jumped 28.4%, with the Bloomberg Americas Lodging Index up 25.1%. The NYSE Arca Oil Index surged 32.2%. The KWB Bank Index rose 17.4%, with the NYSE Financial Index and the Broker/Dealers both gaining 16.7%.

From the New York Times: “In a sign that Mr. Biden plans to focus on spreading economic wealth, his transition team put issues of equality and worker empowerment at the forefront of its news release announcing the nominees, saying they would help create ‘an economy that gives every single person across America a fair shot and an equal chance to get ahead.’”

There’s more than a little irony in former Fed chair Janet Yellen shepherding the administration’s efforts to rectify inequality. Reuters quoting Yellen: “There really is a new kind of recognition that you’ve got a society where capitalism is beginning to run amok and needs to be readjusted in order to make sure that what we’re doing is sustainable and the benefits of growth are widely shared in ways they haven’t been.”

Fed policy is singlehandedly the greatest force in propagating inequality, with the past nine months an unimaginable episode of inequitable wealth distribution. Gross monetary mismanagement and financial excess are principle causes of capitalism running amok. And how might egregious Fed stimulus measures now be expected to promote a more equitable and moral allocation of our national wealth across society?

Lost in the discussion is the fact that we’re in the throes of a historic experiment in central bank monetary management. The Fed some years ago abandoned the traditional mechanism of operating chiefly through the banking system with subtle adjustments to reserves and interbank lending rates – a process arguably superior at disbursing resources more proportionately throughout the economy.

Having evolved over the past couple decades, the Fed now executes policy directly through the securities markets. Policy stimulus enters the system chiefly through massive purchases of Treasury and agency securities, creating liquidity excess for financial markets more generally. Moreover, low (now zero) rates foster stimulus effects through the promotion of leveraged speculation and by spurring speculative flows into higher-yielding (riskier) securities and other assets.

This failing central bank experiment has unleashed myriad deleterious processes. Historic speculative Bubble Dynamics have become deeply ingrained throughout the financial markets – equities, Treasuries, agencies, corporate Credit, derivatives, leveraged lending, etc. In the real economy, increasingly oppressive inequality is ravaging the fabric of our society – fomenting deep social and political division along with economic instability. This brutal pandemic will run its course. Meanwhile, a runaway historic financial Bubble poses grave risk to our nation’s future. Inequality creates great risk to social and political stability.

It’s critical to identify and blunt Bubbles early. Wait too long and the mounting risk of reining them in ensures timid policymakers not only acquiesce - but turn increasingly compelled to accommodate Bubble excess. Today, the Fed doesn’t dare concede even the possibility of destabilizing financial excess, fearing any hint of possible policy restraint risks puncturing a fragile economic recovery. In a modern version of “trickle down,” policymakers cling to the notion that booming financial markets will promote broad-based economic gains and associated benefits. It clearly has not and will not. Policy focus almost solely on the unemployment rate is misguided.

There are today extraordinary uncertainties. Markets traditionally hate uncertainty. These days, markets love the certainty of unrelenting, unprecedented monetary stimulus. A frightening acceleration of Covid, economic fragility, fiscal stimulus uncertainty, political risks, rising Treasury yields, etc. all equate to persistent pressure on the Fed to do more.

“U.S. Infections, Deaths, Hospitalizations All Hit Record Highs,” read a dreadful Friday Wall Street Journal headline. Shockingly, daily Covid cases surpassed 228,000 (as reported Friday evening by Bloomberg). Nationwide, hospitalizations now exceed 100,000 and continue their rapid rise. Daily deaths are approaching 3,000. Alarmed by increasingly overwhelmed hospital systems, more states are adopting restrictive measures. Los Angeles and San Francisco Bay Area counties reimposed “stay at home orders”, with the entire state of California on the cusp. From Bloomberg: “Pennsylvania reported 11,763 cases, the second consecutive day of record infections. The number of hospitalizations has increased 10-fold since the start of October.” Alarming pandemic headlines and snippets could go on and on.

December 2 – CNBC (Will Feuer): “The next few months of the Covid-19 pandemic will be among ‘the most difficult in the public health history of this nation,’ Dr. Robert Redfield, the director of the Centers for Disease Control and Prevention, said… Redfield… said that about 90% of hospitals in the country are in ‘hot zones and the red zones.’ He added that 90% of long-term care facilities are in areas with high level of spread. ‘So we are at a very critical time right now about being able to maintain the resilience of our health-care system,’ Redfield said. ‘The reality is December and January and February are going to be rough times. I actually believe they’re going to be the most difficult in the public health history of this nation, largely because of the stress that’s going to be put on our health-care system.’”

The S&P500 gained another 1.7% this week to trade to new all-time highs. But such gains would bore any purposeful day trader (equities or options). The Semiconductors jumped 6.1% this week, increasing 2020 gains to 51%. The KBW Bank Index rose 2.7%, boosting five-week gains to 24.3%, while the Broker/Dealers jumped 3.6% (up 23.1% in five-weeks). The small cap Russell 2000 rose 2.0% this week, with a five-week gain of 23.0%. The Philadelphia Oil Service Index jumped 7.8% and 63.2% over five weeks. The Goldman Sachs Most Short Index gained another 2.9% this week, boosting five-week gains to 33.8%.

Perhaps the single best barometer of epic speculative excess, the Goldman Sachs Short Index has now surged 187% off March lows. Few strategies have proved as fruitful as targeting popular short positions. And over recent weeks, the bears have gone from being terribly impaired to pretty much blown out extinct. Furthermore, the melt-up in heavily shorted stocks unleashed bloody havoc for long/short and other hedge fund strategies, while helping instigate an extraordinary sector rotation.

The pandemic bestowed the Federal Reserve a license to print $3 TN for injection into the markets. The Fed’s pandemic response granted Washington a license to run a $3 TN plus fiscal deficit (without a whiff of market protest). And unparalleled monetary and fiscal stimulus gifted markets a license to partake in egregious speculative excess.

With vaccines on the way, no amount of Covid hardship has been sufficient to break the bullish spell ingrained throughout the securities markets. Zero rates, Trillions of liquidity, and a limitless Fed backstop are as captivating as it gets. And with the Fed ready to do whatever it takes, no degree of economic impairment is going to jeopardize market fervor. From the experience of the past nine-months, markets are highly confident that no number is too big when it comes to monetary stimulus. And going forward, fiscal stimulus shortcomings will surely be remedied by even larger Fed QE liquidity injections.

It’s become an only greater challenge to convince readers that what passes these days as normal is anything but. We reached a number of precarious junctures over recent years - that came and went like the passing of the seasons. But let’s not lose sight of historic crazy: speculative excess is by far the most egregious I’ve witnessed in my over three decades of obsessive market analysis. Not only will it renounce “leaning against the wind” (let alone tighten policy), the Fed is poised to continue injecting $120 billion monthly into Bubble markets as far as the eye can see. In the face of raging asset inflation (i.e. securities and home prices), the Federal Reserve is apparently more likely to boost QE than to tapper. Crazy.

How might all this end? There are facets of Credit Bubble Theory to contemplate. Speculative leveraging is dangerously destabilizing. Increases in leverage (“securities Credit”) create a self-reinforcing liquidity dynamic, whereby speculation fuels higher securities prices, greater liquidity excess and only more feverish speculative zeal. But as I’ve stated repeatedly, the big problem is it doesn’t work in reverse.

The Fed in March faced a major deleveraging event – the piercing of a historic globalized speculative Bubble. After markets scoffed at their initial responses, the Fed was forced to resort to overwhelmingly forceful crisis-fighting measures. These reversed the de-risking/deleveraging dynamic. At that point, the Fed should have scaled back what was clearly exorbitant liquidity measures. Our central bank instead set a policy course that promoted market speculation and speculative leveraging. The closest parallel would be the wild speculative excess in the face of a rapidly deteriorating fundamental backdrop in 1929.

December 4 – Bloomberg (Katherine Greifeld and Lu Wang): “The coronavirus is raging again. Whole states are at risk of closure, November payroll growth was anemic and solvency risk is bubbling back up. That stocks could rally amid such a backdrop should probably, by now, surprise nobody. That it’s happening on the back of firms with the worst balance sheets might. Companies with shakier finances rallied 4.3% over the past five days, beating their sturdier counterparts for a fourth week, the longest streak in 13 months, data compiled by Goldman Sachs Group Inc. and Bloomberg show. Up 25% since the start of October, the weak-credit group is poised for its best quarter of relative performance since the last bull market began in 2009.”

I believe speculative leverage is greater today than prior to March’s near global market meltdown – in Credit, in equities, derivatives, at home and abroad. The next major de-risking/deleveraging episode (odds having increased following speculative “melt-up” dynamics) will demand another massive Fed response. Markets today, of course, enjoy unwavering faith in “whatever it takes.”

But will the Fed be willing to pony up another $3 TN - or even more? Or was the pandemic a unique policy circumstance not to be extrapolated to future crisis responses? Moreover, might the sinking dollar have the Fed thinking twice before flooding the system with Trillions of new dollar liquidity? And it’s worth mentioning recent inklings of inflationary pressures. This week was notable for market indicators (i.e. 10-year “breakeven” rate at an 18-month high) along with elevated PMI Prices components (Services and Manufacturing surveys). Might a combination of rising inflation and Treasury yields, along with a faltering dollar, encourage the revival of some semblance of moderation from our central bank? Heresy, I know.

It’s been a longstanding CBB maxim: monetary inflation is not the solution, it’s central to the problem. M2 “money” supply is up $3.6 TN, or 23% annualized, over the past 39 weeks. We’re witnessing Monetary Disorder In Extremis. This has been a long time coming – with the situation now spiraling out of control. Today’s manias in monetary inflation and market speculation come at a very high cost.

For the Week:

The S&P500 rose 1.7% (up 14.5% y-t-d), and the Dow gained 1.0% (up 5.9%). The Utilities dropped 2.4% (down 2.0%). The Banks jumped 2.7% (down 15.6%), and the Broker/Dealers surged 3.6% (up 25.8%). The Transports gained 1.4% (up 16.9%). The S&P 400 Midcaps rose 1.8% (up 8.8%), and the small cap Russell 2000 jumped 2.0% (up 13.4%). The Nasdaq100 advanced 2.2% (up 43.5%). The Semiconductors surged 6.1% (up 51.0%). The Biotechs rose 2.0% (up 10.9%). With bullion rallying $51, the HUI gold index rallied 4.0% (up 20.9%).

Three-month Treasury bill rates ended the week at 0.07%. Two-year government yields were little changed at 0.15% (down 142bps y-t-d). Five-year T-note yields rose five bps to 0.42% (down 127bps). Ten-year Treasury yields jumped 13 bps to 0.97% (down 95bps). Long bond yields surged 16 bps to 1.74% (down 65bps). Benchmark Fannie Mae MBS yields rose five bps to 1.41% (down 130bps).

Greek 10-year yields declined two bps to 0.63% (down 80bps y-t-d). Ten-year Portuguese yields gained three bps to 0.04% (down 40bps). Italian 10-year yields rose three bps to 0.63% (down 79bps). Spain's 10-year yields increased two bps to 0.08% (down 39bps). German bund yields rose four bps to negative 0.55% (down 36bps). French yields gained four bps to negative 0.31% (down 43bps). The French to German 10-year bond spread was unchanged at 24 bps. U.K. 10-year gilt yields rose seven bps to 0.35% (down 47bps). U.K.'s FTSE equities index jumped 2.9% (down 13.2%).

Japan's Nikkei Equities Index added 0.4% (up 13.1% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.02% (up 3bps y-t-d). France's CAC40 increased 0.2% (down 6.2%). The German DAX equities index slipped 0.3% (up 0.4%). Spain's IBEX 35 equities index gained 1.6% (down 12.8%). Italy's FTSE MIB index declined 0.8% (down 5.6%). EM equities were higher. Brazil's Bovespa index jumped 2.9% (down 1.6%), and Mexico's Bolsa surged 4.9% (up 0.2%). South Korea's Kospi index advanced 3.7% (up 24.3%). India's Sensex equities index rose 2.1% (up 9.3%). China's Shanghai Exchange gained 1.1% (up 12.9%). Turkey's Borsa Istanbul National 100 index added 0.2% (up 16.3%). Russia's MICEX equities index rose 1.3% (up 4.6%).

Investment-grade bond funds saw inflows of $4.809 billion, while junk bond funds posted outflows of $1.393 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined a basis point to a record low 2.71% (down 97bps y-o-y). Fifteen-year rates fell two bps to an all-time low 2.26% (down 88bps). Five-year hybrid ARM rates dropped back 30 bps to 2.86% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 2.94% (down 98bps).

Federal Reserve Credit last week declined $37.2bn to $7.177 TN. Over the past year, Fed Credit expanded $3.158 TN, or 78.6%. Fed Credit inflated $4.366 Trillion, or 155%, over the past 421 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $8.9bn to $3.468 TN. "Custody holdings" were up $50.7bn, or 1.5%, y-o-y.

M2 (narrow) "money" supply gained $12.4bn last week to a record $19.121 TN, with an unprecedented 39-week gain of $3.613 TN. "Narrow money" surged $3.754 TN, or 24.4%, over the past year. For the week, Currency increased $4.1bn. Total Checkable Deposits surged $493.8bn, while Savings Deposits contracted $474.9bn. Small Time deposits fell $7.9bn. Retail Money Funds dipped $2.8bn.

Total money market fund assets slipped $3.8bn to $4.320 TN. Total money funds surged $741bn y-o-y, or 20.7%.

Total Commercial Paper increased dropped $14.7bn to $969bn. CP was down $167bn, or 14.7% year-over-year.

Currency Watch:

For the week, the U.S. dollar index declined 1.1% to 90.805 (down 5.9% y-t-d). For the week on the upside, the Brazilian real increased 4.1%, the South Korean won 2.0%, the Canadian dollar 1.6%, the Swiss franc 1.6%, the Mexican peso 1.4%, the euro 1.3%, the British pound 1.0%, the Australian dollar 0.5%, the Swedish krona 0.5%, the Norwegian krone 0.4%, the New Zealand dollar 0.3%, the South African rand 0.3% and the Singapore dollar 0.2%. The Chinese renminbi increased 0.71% versus the dollar this week (up 6.61% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.7% (down 8.1% y-t-d). Spot Gold rallied 2.9% to $1,839 (up 21.1%). Silver recovered 6.8% to $24.32 (up 35.7%). WTI crude gained 57 cents to $46.09 (down 25%). Gasoline fell 1.4% (down 25%), and Natural Gas sank 10.5% (up 17%). Copper jumped 3.1% (up 26%). Wheat dropped 5.0% (up 3%). Corn fell 3.4% (up 8%).

Coronavirus Watch:

December 2 – CNBC (Will Feuer): “More than 100,000 people are currently in hospitals across the U.S. sick with Covid-19, as the pandemic pushes doctors, nurses and other health workers to their limits. The current number of hospitalized patients underscores the scope and severity of the current phase of the U.S. outbreak. Never before had the number of hospitalized Covid patients surpassed 60,000, according to data compiled by the Covid Tracking Project, which is run by journalists at The Atlantic.”

December 3 – Associated Press (Sam Metz and Ryan J. Foley): “States drafted plans Thursday for who will go to the front of the line when the first doses of COVID-19 vaccine become available later this month, as U.S. deaths from the outbreak eclipsed 3,100 in a single day, obliterating the record set last spring. With initial supplies of the vaccine certain to be limited, governors and other state officials are weighing both health and economic concerns in deciding the order in which the shots will be dispensed.”

November 30 – Bloomberg (Kara Wetzel and David R. Baker): “California is considering a return to stay-at-home orders as hospitalizations from the coronavirus soar, with projections showing that intensive-care demand could exceed capacity in the next month, Governor Gavin Newsom said. Hospitalizations, already nearing a July record, are expected to double or triple by Christmas, Newsom said… A recent surge in cases means health-care systems are poised to become even more strained in the weeks ahead… If infections continue rising at their current rate, the most-populous state will run out of intensive care beds by mid-December… ‘That’s why we are making this point very loudly today,’ Newsom said. ‘If these trends continue, we are going to have to take much more dramatic, arguably drastic action.’”

December 3 – Bloomberg (David R Baker): “California, the first state to tell residents to stay home to fight the coronavirus pandemic, is about to do it again. With cases soaring, Governor Gavin Newsom said he will impose shelter-at-home orders on a regional basis once hospitals start running short of intensive-care capacity. Four of the state’s five areas may hit the threshold within a day or two, he said… Thursday.”

November 30 – New York Times (Jesse McKinley and Luis Ferré-Sadurní): “Warning that New York had entered a ‘new phase in the war against Covid,’ Gov. Andrew M. Cuomo said… the state will implement a barrage of new emergency actions, some of which echo the strict measures taken this spring, to stem a rising tide of infections and deaths. Mr. Cuomo said that the strength of the virus’s second wave has forced the state to rely less on test positivity rates as the determinant for restrictions, and focus more on hospital capacity. On Monday, the governor announced that hospitalizations topped 3,500 over the weekend, a level not seen since May.”

December 2 – Reuters (Aakriti Bhalla and Shubham Kalia): “The mayor of Los Angeles warned… the city was nearing ‘a devastating tipping point’ and ordered residents to stay in their homes and avoid social gatherings in new lockdown measures to rein in a surge in COVID-19 infections. His order here limits nearly all social gatherings of people from more than a single household…, but exempts religious services and protests protected by the constitution. ‘Our City is now close to a devastating tipping point, beyond which the number of hospitalized patients would start to overwhelm our hospital system, in turn risking needless suffering and death,’ Mayor Eric Garcetti said…”

December 3 – Wall Street Journal (Costas Paris): “Pfizer Inc. expects to ship half of the Covid-19 vaccines it originally planned for this year because of supply-chain problems, but still expects to roll out more than a billion doses in 2021. ‘Scaling up the raw material supply chain took longer than expected,’ a company spokeswoman said. ‘And it’s important to highlight that the outcome of the clinical trial was somewhat later than the initial projection.’”

Market Instability Watch:

December 1 – Bloomberg (Sarah Ponczek and Katherine Greifeld): “Global stocks just had their best month ever. Tesla Inc. added $170 billion in two weeks. Newly public Palantir Technologies tripled in a month while companies targeted by short sellers surged 28%. Big numbers are everywhere these days. Dwarfing them all is a speculative frenzy that not only refuses go away but is arguably causing the froth to feed on itself -- hand-over-fist buying in stock options. The craze for equity derivatives among retail traders first surfaced in late summer and after a brief lull is starting to boil over again. Over the last 20 days, an average of more than 20 million call contracts -- bets that stocks will rise -- have traded each day across U.S. exchanges, the highest ever… There was no Thanksgiving slowdown. On a single day before the break, a record 35 million call options changed hands. ‘There is certainly a lot of bullishness, euphoria, FOMO,’ said Chris Murphy, the co-head of derivatives strategy at Susquehanna.”

December 3 – Financial Times (Robin Wigglesworth): “The markets have become too hot to handle. So intense is the frenzied stock-buying that even many of Wall Street’s biggest brokerages and wealth managers are struggling to keep up. Almost every major US brokerage firm… suffered at least one outage in November, according to Downdetector…, as a torrent of trading overwhelmed their websites. Thomas Peterffy, the billionaire founder of Interactive Brokers…, says the current environment is unlike anything he has ever seen before — but understandable. ‘Money is now so easy, why not borrow what you can and put it into stocks? That’s what our customers are doing, and they’re making helluva lot of money,’ he says.”

December 1 – Bloomberg (Katherine Greifeld and Claire Ballentine): “Equity exchange-traded funds have overtaken their fixed-income peers for inflows this year thanks to November’s epic stock rally. After lagging bond funds for most of 2020, ETFs tracking equities lured a record $81 billion last month, bringing their total haul for the year to $196 billion… That catapulted them ahead of fixed-income funds, which attracted $17 billion and have a tally of $192 billion.”

December 2 – Bloomberg (Claire Ballentine): “Wall Street firms are entering the world of exchange-traded funds like never before. Despite a pandemic that’s ravaged global economies, a contentious presidential election and unprecedented stock volatility, a record 14 new issuers entered the market this year… That compares with 10 entrants in 2019 and seven in 2018. Thank two big changes in the $5.2 trillion industry for the bump: new rules that made launches easier and the approval of a breed of funds that partially conceal their holdings -- luring active managers who like to keep their strategies under wraps.”

December 2 – Bloomberg (Ruth Carson and Joanna Ossinger): “One of the year’s biggest spikes in Treasury yields has investors mapping out the impact of rising rates on markets ranging from stocks to corporate bonds. Renewed optimism about U.S. stimulus talks pushed the benchmark 10-year yield to a high of 0.96% on Wednesday, a move which if continued could spark a domino effect across risk assets trading at all-time highs thanks to low interest rates. At issue is whether the jump in yields is accompanied by an economic recovery and moderate levels of inflation that would allow the Federal Reserve to keep rates low.”

Global Bubble Watch:

November 30 – Financial Times (Gavyn Davies): “Early in the Covid-19 pandemic, it became clear that the global economy would require a massive extension of public and private debt to avoid an extraordinarily deep and persistent depression. Because this unprecedented explosion in debt provided a ‘bridge’ over the collapse in world output, corporate bankruptcies and economic hardship for households have been significantly mitigated… Nevertheless, this year’s surge in borrowing has been called the largest wave in a great ‘debt tsunami’. The Institute of International Finance recently reported that the ratio of global debt to gross domestic product will rise from 320% in 2019 to a record 365% in 2020. The IIF concludes starkly: ‘more debt, more trouble’. Financial markets have ignored these warnings. Global equities have reached new highs and credit spreads have been narrowing, almost as if extreme debt is a good, not a bad, economic development.”

November 29 – Financial Times (David Randall): “World stock markets dipped on Monday to close a record-breaking month as the prospect of a vaccine-driven economic recovery next year and further central bank stimulus measures eclipsed immediate concerns about the spiking coronavirus pandemic. November’s record 12.6% leap added approximately $6.7 trillion - or $155 million a minute - to the value of world equities… Many European markets wrapped up their best month ever, with France up 21% and Italy almost 26%. The Nikkei’s 15% leap in Japan was its best month since 1994.”

December 1 – Bloomberg (William Horobin): “The resurgence of the coronavirus pandemic has dramatically weakened the global recovery and it could get a lot worse if governments withdraw support too soon or fail to deliver effective vaccines, the OECD warned. Cutting its 2021 global growth forecast to 4.2% from 5% in September, the… organization said a pattern of outbreaks and lockdowns is likely to continue for some time with rising risks of permanent damage.”

November 29 – Financial Times (Joe Rennison): “Debt investors are betting that some of the companies most damaged by coronavirus will manage to avoid bankruptcy. Bonds issued by low-rated companies in the US have rallied 7% this month, one index of triple C bonds shows — the biggest jump in more than four years. In Europe, junk bond yields have fallen from over 8% in March to almost 3% as prices have risen, with November providing the bonds’ best performance since April.”

November 30 – Reuters (Julie Gordon): “Canada’s budget deficit is forecast to hit a historic C$381.6 billion ($293.9bn) on COVID-19 emergency aid, with the federal government eyeing C$100 billion in stimulus to be rolled out once the virus is under control, the finance department said… The forecast deficit is 11.2% higher than projected in July… Total federal debt is now set to top C$1.12 trillion this year.”

November 29 – Financial Times (John Flint): “When bankers got too clever and our businesses too complex, we all suffered the consequences. The 2008 financial crisis touched so many of us because the banks were woven into all our lives. Society was exposed to risks it didn’t understand, and we all paid the price via government-backed bailouts. Today, warning signs are flashing again. Some of the elements are familiar: huge, growing companies relied on by the rest of society that will do grave damage if they fail, or deliver poor outcomes for their customers. But this time it is the technology sector rather than the financial that is leaving us all exposed.”

December 2 – Financial Times (Marietje Schaake): “The desire to curb Big Tech has gone global. One reason for this is that giants such as Amazon, Apple and Alibaba have become so large that they are setting norms and standards for hundreds of millions of people around the world. Technology is not a sector any more but rather a layer that impacts on all other sectors, ranging from media to agriculture, from transport to financial services. Powerful, data-driven companies increasingly challenge the position of governments themselves. European and American regulators have shown a growing willingness to curtail national champions. Now this seems to extend to China too, after Alibaba’s founder Jack Ma’s long-anticipated $37bn initial public offering of online micropayment giant Ant Group was last month halted by regulators.”

December 2 – Bloomberg (Matthew Brockett): “A housing frenzy at the bottom of the world is laying bare the perils of ultra-low interest rates. At a packed auction room in Wellington, New Zealand’s capital city, houses are selling for hundreds of thousands of dollars above their government valuations. A young couple hoping to buy their first home -- a basic three-bedroom dwelling built in the 1950s -- are forced to bow out as the bidding approaches NZ$1.2 million ($850,000). ‘The housing market at the moment is quite ferocious,’ says auctioneer Darryl Harper. ‘Interest rates historically have never been lower, so it’s easy for buyers to borrow money.’”

Trump Administration Watch:

December 2 – Bloomberg (Erik Wasson and Billy House): “House Speaker Nancy Pelosi and Senate Democratic leader Chuck Schumer Wednesday threw their support behind using a $908 billion bipartisan stimulus proposal as the foundation for a new round of negotiations with congressional Republicans and the White House. Their endorsement of the plan drawn up by a group of House and Senate lawmakers as a basis for a deal marks the first public retreat from their backing of a much larger $2.4 trillion pandemic relief package -- and could break six months of standoff in time to get a bill passed before the end of the year.”

November 29 – Reuters (Steve Holland): “White House senior adviser Jared Kushner and his team are headed to Saudi Arabia and Qatar this week for talks in a region simmering with tension after the killing of an Iranian nuclear scientist. A senior administration official said on Sunday that Kushner is to meet Saudi Crown Prince Mohammed bin Salman in the Saudi city of Neom, and the emir of Qatar in that country in the coming days.”

November 29 – Reuters (Parisa Hafezi): “Iran will give a ‘calculated and decisive’ response to the killing of its top nuclear scientist, said a top adviser to Iran’s supreme leader, while a hardline newspaper suggested Tehran’s revenge should include striking the Israeli city of Haifa.”

November 28 – Reuters (Lisa Barrington): “U.S. aircraft carrier USS Nimitz was deployed to the Gulf this week, days before the killing of Iran’s top nuclear scientist, although the U.S. Navy said… the deployment was not related to any specific threat. ‘There were no specific threats that triggered the return of the Nimitz Carrier Strike Group,’ Commander Rebecca Rebarich, spokeswoman for the U.S. Navy’s Bahrain-based Fifth Fleet, said…”

December 3 – Bloomberg: “President Donald Trump isn’t letting his election loss stop him from beating up on China. On Wednesday alone, his administration restricted travel visas for members of the Chinese Communist Party and banned cotton imports from a military-linked firm it accused of ‘slave labor.’ He’s also expected to soon sign a bill passed by the U.S. House of Representatives that could ultimately lead to Chinese companies getting kicked off American exchanges. The question now is just how bad things could get in the next seven weeks before President-elect Joe Biden takes over. Trump’s administration faces a mid-December deadline to name banks who do business with officials accused of undermining Hong Kong’s autonomy, and could sanction others…”

November 29 – Reuters (Alexandra Alper and Humeyra Pamuk): “The Trump administration plans to add China’s top chipmaker SMIC and oil giant CNOOC to a blacklist of alleged Chinese military companies, escalating tensions with Beijing before President-elect Joe Biden takes office, according to sources… The Department of Defense (DOD) is poised to designate four more Chinese companies as owned or controlled by the Chinese military, bringing the total number to 35.”

December 2 – Reuters (Patricia Zengerle): “The U.S. House of Representatives passed a law to kick Chinese companies off U.S. stock exchanges if they do not fully comply with the country’s auditing rules, giving President Donald Trump one more tool to threaten Beijing with before leaving office. The measure passed the House by unanimous voice vote, after passing the Senate unanimously in May, sending it to Trump, who the White House said is expected to sign it into law.”

December 1 – Bloomberg (Joe Light): “President Donald Trump is running out of time to do what hedge funds and other investment firms with big ownership stakes in Fannie Mae and Freddie Mac have wanted since he took office: put the mortgage giants on a path to exiting government control. While Trump has long vowed an overhaul of the companies, he’s made little progress in four years… Fannie and Freddie’s regulator, Federal Housing Finance Agency Director Mark Calabria, wants to make sweeping changes before President-elect Joe Biden is sworn in -- but Calabria can’t pull the trigger without the blessing of Treasury Secretary Steven Mnuchin. It’s hard to see Mnuchin and Calabria having enough time to actually end Fannie and Freddie’s federal conservatorships before Trump steps down… Even a partial shift could translate into windfalls for hedge funds.”

Biden Administration Watch:

December 1 – CNN (Gregory Krieg, MJ Lee and Sarah Mucha): “President-elect Joe Biden and his transition team are preparing for an early, all-out push to pass an ambitious new stimulus bill, while also drawing up plans for a flurry of executive actions aimed at delivering on campaign promises and undoing the Trump administration's efforts to undermine key government agencies. Biden will be inaugurated in January with a pressing mandate to confront simultaneous and interwoven public health, economic and racial crises. At the same time, his team will take over the work of spearheading one of the most complicated, politically fraught mass vaccination campaigns in American history. Biden's agenda for his first 100 days in office will… center on two key avenues of action: the passage of a broad economic aid package and, where legislation is not necessary, a series of executive actions aimed at advancing his priorities. Containing the Covid-19 pandemic, launching an economic recovery and tackling racial inequality are his most urgent priorities, transition officials say.”

November 30 – Financial Times (James Politi): “Joe Biden… on Monday announced an economic team that sought to balance experienced Democratic policymakers who will be well-received by markets and business with more progressive economists. The nominees included Janet Yellen, the former Fed chair, as Treasury secretary, and Neera Tanden, a former senior aide to Hillary Clinton and president of the Center for American Progress think-tank, as budget director. Wally Adeyemo, the president of the Obama Foundation and a former international economic official, was tapped to be deputy Treasury secretary. Combined with the expected selection of Brian Deese, a BlackRock executive, to be director of the National Economic Council, the picks signalled Mr Biden’s preference for pragmatic centre-left policymakers in his effort to spur the US recovery amid the pandemic shock, at a time when his ambitions will be limited by a closely divided Congress.”

November 30 – New York Times (Jim Tankersley, Jeanna Smialek and Alan Rappeport): “President-elect Joseph R. Biden Jr. formally announced his top economic advisers on Monday, choosing a team that is stocked with champions of organized labor and marginalized workers, signaling an early focus on efforts to speed and spread the gains of the recovery from the pandemic recession. The selections build on a pledge Mr. Biden made to business groups two weeks ago, when he said labor unions would have ‘increased power’ in his administration. They suggest that Mr. Biden’s team will be focused initially on increased federal spending to reduce unemployment and an expanded safety net to cushion households that have continued to suffer as the coronavirus persists and the recovery slows. In a sign that Mr. Biden plans to focus on spreading economic wealth, his transition team put issues of equality and worker empowerment at the forefront of its news release announcing the nominees, saying they would help create ‘an economy that gives every single person across America a fair shot and an equal chance to get ahead.’”

December 1 – Wall Street Journal (Jon Hilsenrath and Nick Timiraos): “Joe Biden’s economic team is taking shape with plans to remake the Trump administration’s approach to economic relations overseas, with a distinction: agreement with President Trump’s assertion that globalization has been hard on many Americans but differences on how to address it. The distinction shows Mr. Trump likely will have a lasting impact on the direction of U.S. economic policy, even though the incoming administration is trying to alter important parts of it. For many years, peaking in the 1990s, mainstream Democrats and Republicans championed globalization and trade agreements with China, Mexico and others as developments that would make Americans better off. Economists said that there would be winners and losers as the U.S. imported and exported more, but that the trade-offs would be manageable.”

December 1 – Financial Times (James Politi): “Janet Yellen warned of ‘more devastation’ if the US failed to address the economic fallout from the coronavirus pandemic and its disproportionate toll on low-income families as she was introduced by Joe Biden as the next Treasury secretary. The former Fed chair… said the combination of lost lives, lost jobs and shuttered small businesses amounted to an ‘American tragedy’ that needed to be quickly tackled. Her comments were delivered amid doubts that Mr Biden will be able to implement his sweeping economic agenda, which calls for a big boost to government spending, partially funded by higher taxes on businesses and wealthy households.”

December 1 – Reuters (Aakriti Bhalla, Shubham Kalia and Patrick Graham): “Joe Biden will not immediately cancel the trade agreement that President Donald Trump struck with China nor take steps to remove tariffs on Chinese exports, the New York Times… quoted the U.S. president-elect as saying.”

December 1 – Reuters (Tim Ahmann and Nandita Bose): “President-elect Joe Biden’s treasury secretary nominee Janet Yellen said… the United States is experiencing a historic crisis due to the coronavirus pandemic and its economic fallout that requires urgent action to avert a ‘self-reinforcing’ downturn. Yellen… spoke at an event in Delaware where Biden formally introduced his top economic policy advisers… ‘It’s an American tragedy and it’s essential that we move with urgency. Inaction will produce a self-reinforcing downturn, causing yet more devastation,’ Yellen said.”

December 1 – Wall Street Journal (Nick Timiraos and Kate Davidson): “The Treasury Department’s decision last month not to renew a suite of emergency Federal Reserve lending programs touched off a partisan fight over whether and how the Biden administration should be allowed to use the programs. Lawmakers pressed Treasury Secretary Steven Mnuchin over his decision at a hearing Tuesday with Fed Chairman Jerome Powell before the Senate Banking Committee. It was their first joint appearance since last month’s decision, which drew a rare objection from the Fed. The Fed and Treasury had mostly collaborated smoothly over providing emergency support to financial markets until Mr. Mnuchin said on Nov. 19 that he wouldn’t extend the facilities because he believed he lacked the authority to do so, a legal opinion that isn’t shared by the Fed.”

December 2 – Bloomberg: “The U.S. should ratchet up its demands of China to include equal access for companies and media, stricter monitoring of Beijing’s activities at the United Nations and preventive action to safeguard American interests in technology and finance, a bipartisan panel told Congress… A 575-page report by the U.S.-China Economic and Security Review Commission… characterized the world’s second-largest economy as a threat to the current international order that has American values at its core. It added China’s leaders view those values as a barrier to the country’s external ambitions and an existential threat to their rule. ‘Chinese leaders’ assessment of the United States as a dangerous and firmly committed opponent has informed nearly every facet of China’s diplomatic strategy, economic policy, and military planning in the post-Cold War era,’ the panel said.”

Federal Reserve Watch:

December 1 – Financial Times (James Politi): “Jay Powell… has warned Congress that the rise in coronavirus cases could ‘prove challenging for the next few months’ even as encouraging news on vaccine development has boosted the outlook for the economy in the medium-term. …Mr Powell reiterated that the US central bank was ‘committed to using our full range of tools’ to help the recovery but declined to point to any specific future action. The Fed chairman did, however, stress that the economic outlook remained ‘extraordinarily uncertain’… ‘The rise in new Covid-19 cases, both here and abroad, is concerning and could prove challenging for the next few months. A full economic recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities,’ Mr Powell said.”

November 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairman Jerome Powell said the central bank’s actions to backstop a range of credit markets after the coronavirus convulsed Wall Street this past spring had unlocked almost $2 trillion to support businesses, cities and states. In testimony…, Mr. Powell said the Fed’s unprecedented steps to stabilize financial markets had largely succeeded in restoring the flow of credit from private lenders.”

December 2 – Bloomberg (Steve Matthews, Matthew Boesler, and Catarina Saraiva): “The Federal Reserve is in no hurry to taper its massive bond buying program, Chair Jerome Powell said…, though he didn’t signal that the U.S. central bank was ready to ramp it up either. ‘Our priority remains supporting the economy until we are really well through this,’ Powell told the House Financial Services Committee…, stressing the central bank’s determination to battle Covid-19. ‘We are going to keep our rates low and keep our tools working until we feel like we really are very clearly past the danger that is presented to the economy from the pandemic.’”

December 1 – Financial Times (Colby Smith and Tommy Stubbington): “A measure showing financial market expectations for future US inflation has risen to its highest level in 18 months… The 10-year ‘break-even’ rate, which is derived from prices of US inflation-protected government securities, hit 1.83% on Tuesday, higher than at any point since May last year. Meanwhile, a swap rate that measures expectations for the average level of inflation over five years, five years from now, has jumped to 2.25% — above the 2% inflation target that the US Federal Reserve has for years persistently failed to achieve.”

December 3 – Bloomberg (Laura Litvan and Steve Matthews): “The Senate confirmed Christopher Waller to serve on the Federal Reserve Board, but the status of President Donald Trump’s second nominee, Judy Shelton, remained in limbo amid opposition from Democrats and some Republicans. Senators voted 48-47 to put Waller on the U.S. central bank, concluding a confirmation process that had been dragged out for months because of controversy surrounding Shelton, who was nominated by Trump at the same time.”

December 1 – Bloomberg (Davide Scigliuzzo): “The Covid-19 crisis could be worse than the Great Recession for companies that had high levels of indebtedness at the start of the outbreak, according to economists at the Federal Reserve Bank of New York. Firms in industries most affected by the pandemic such as tourism, travel and hospitality could grow as much as 10% more slowly than in ordinary times if the current crisis plays out in a similar way to the economic decline of 2007 to 2009, Kristian Blickle and João Santos wrote… Research from the two economists shows that companies with higher levels of debt experienced 3% slower growth during the Great Recession compared to less-indebted peers… The sharper contraction in growth that could materialize during the Covid-19 crisis is due to the combined effect of record levels of corporate indebtedness at the outset of the pandemic and the sharp revenue declines during the course of 2020, the economists said.”

November 30 – Reuters (Ann Saphir): “Dallas Federal Reserve Bank President Robert Kaplan… said he expects strong economic growth in the second half of next year once newly developed COVID-19 vaccines get rolled out widely, but with cases surging now he sees a ‘very difficult’ next three to six months. ‘If we can see the resurgence moderate, I think you’ll continue to see growth in the fourth quarter, and you might even see growth in the first quarter of next year, but right now, the trends at least in the virus don’t look like they are moderating,’ Kaplan told Reuters… ‘So we’re bracing ourselves here.’”

U.S. Bubble Watch:

December 2 – Bloomberg (Alex Tanzi): “About 76 million Americans expect someone in their household to suffer a drop in income over the next few weeks… according to the latest Census Bureau survey. The figure… is up by almost 11 million compared with the late-August edition. Part of the increase likely stems from the looming end of federal income support for people hit by the coronavirus slump. While some measures to help the unemployed have already wound down, two more programs -- which extended the duration of jobless benefits, and expanded them to include gig workers and freelancers -- are both due to lapse on Dec. 26.”

December 2 – Reuters (Howard Schneider and Ann Saphir): “Federal Reserve officials saw ‘little or no growth’ in four of their 12 U.S. districts and only modest growth elsewhere in recent weeks amid a rapidly spreading health crisis and the impact of a recession that has devastated some businesses and families even as many others thrive… While some sectors like manufacturing did well, signs of stress mounted. ‘Banking contacts in numerous Districts reported some deterioration of loan portfolios, particularly for commercial lending into the retail and leisure and hospitality sectors,’ Fed officials reported.”

November 30 – CNBC (Stephanie Landsman): “The U.S. may be on the cusp of a double-dip recession. Economist Stephen Roach believes surging coronavirus cases are disrupting Wall Street’s hopes for a V-shaped recovery. ‘With the infection rate soaring right now, a still vulnerable U.S. economy is likely to experience further lockdowns,’ the Yale University senior fellow told CNBC… Even though he believes the lockdowns won’t be as severe as they were last spring, Roach warns the damage will be undeniable. ‘That’ll lead to a temporary relapse in the economy probably in the first quarter,’ said Roach… ‘We’ve had those relapses in 8 of the last 11 business cycle upturns, and I don’t think this one is an exception to that rule.’”

December 3 – CNBC (Jeff Cox): “New jobless-claim filings last week reached their lowest level of the pandemic crisis, providing a sign that hiring is continuing if at a slower pace. First-time claims for unemployment benefits totaled 712,000 last week, compared with 787,000 a week earlier and the Dow Jones estimate of 780,000… Continuing claims also fell sharply, dropping 569,000 to 5.52 million.”

November 28 – CNBC (Lauren Thomas): “Traffic at stores on Black Friday fell by 52.1% compared with last year, as Americans by and large eschewed heading to malls and queuing up in lines for shopping online, according to… Sensormatic Solutions. For the six key weeks of the holiday season this year, traffic in retail stores is expected to be down 22% to 25% year over year…”

December 3 – Yahoo Finance (Zack Guzman): “According to the Department of Labor’s latest report, which breaks out the insured unemployment rate… at the state level through November 14, California topped Hawaii with the nation’s worst insured unemployment rate at 7.3% for the first time since August. Hawaii’s rate of 7.1% was second-worst for the second week in a row… Nevada jumped up to third with an insured unemployment rate of 6.7%, while Alaska and Massachusetts rounded out the five worst states at 6.4% and 6%...”

December 2 – Reuters (Lucia Mutikani): “U.S. private payrolls increased less than expected in November as soaring new COVID-19 infections led to a wave of business restrictions, adding to signs of slowing economic activity as a turbulent year winds down… Private payrolls rose by 307,000 jobs last month after increasing 404,000 in October. Economists polled by Reuters had forecast private payrolls would rise by 410,000 in November. The slowdown in hiring last month was across all industries.”

December 2 – CNBC (Diana Olick): “Thanksgiving week isn’t usually a popular time for homebuying, but most economic numbers this year are incomparable, especially in the pandemic-spiked housing market. Mortgage applications to purchase a home jumped 9% last week from the previous week… Purchase applications were a stunning 28% higher from a year ago.”

December 3 – Reuters (Pete Schroeder): “A potential wave of bankruptcies and a collapse in the commercial real estate market in the United States could weigh heavily on smaller banks, a regulatory panel said… in an assessment of risks to financial stability from the pandemic. The annual report from the Financial Stability Oversight Council urged regulators to remain vigilant for weaknesses across markets, pointing to March turmoil in short-term funding markets as an example of where problems can flare up.”

December 3 – Bloomberg (Jan-Henrik Förster and Francine Lacqua): “JPMorgan… co-head of global mergers and acquisitions says it will be a short Christmas holiday for investment bankers, with global dealmaking resurgent as the year draws to its close. Deals are rising across all regions and industries, Dirk Albersmeier said… A ‘strong political desire’ to create national champions in Europe is spurring consolidation in sectors including banking, he said. Cross-border transactions are being driven by health-care, technology and industrials companies. ‘It clearly won’t be a long Christmas break for M&A bankers,’ Albersmeier said. ‘There are absolutely no signs of this pace slowing down.’ The value of global transactions has risen more than a third to $1.8 trillion since July…”

December 1 – Bloomberg (Natalie Wong): “Manhattan hasn’t had this much available office space since 2003, according to… Colliers International. The availability rate rose to 13.5% in November, with more companies looking to sublease their offices, Colliers said. The pandemic has emptied out Manhattan offices and prompted companies to reconsider how much space they need as they try to trim costs.”

December 3 – Bloomberg (Michael Sasso and Andre Tartar): “The Chicago Loop Alliance, which promotes the downtown core, rolled out a Back-to-Work website in early October encouraging workers to put on slacks again and try returning to the office. Its hope was short-lived. Covid-19 came roaring back in Chicago within weeks… ‘The hard push to get people to come back has definitely softened, for now,’ said Jessica Cabe, a spokeswoman for the group. In recent weeks, foot traffic at downtown merchants was down by around 70% in U.S. cities including Chicago and San Francisco, according to smartphone data…”

December 3 – Wall Street Journal (Alexander Gladstone): “November bankruptcy filings in the U.S. hit a 14-year low, driven by a decline in individuals filing for protection from creditors as they continue to enjoy the benefits of eviction moratoriums and other government assistance stemming from the coronavirus pandemic. Total bankruptcy filings amounted to 34,440 for the month, the lowest monthly total since January 2006, according to… Epiq Systems Inc.”

December 1 – Wall Street Journal (Peter Grant): “U.S. employees started heading back to the office in greater numbers after Labor Day but that pace is stalling now, delivering another blow to economic-recovery hopes in many cities. The recent surge in Covid-19 cases across the country has led to an uptick in Americans resuming work at home after some momentum had been building for returning to the workplace… Floor after floor of empty office space is a source of great frustration for landlords and companies, which have invested millions of dollars in adapting building plans and developing new health protocols to make employees comfortable with a shared location. About a quarter of employees had returned to work as of Nov. 18, according to Kastle Systems, a security firm that monitors access-card swipes in more than 2,500 office buildings in 10 of the largest U.S. cities. That rate is up sharply from an April low of less than 15%...”

December 2 – Wall Street Journal (Lingling Wei, Bob Davis and Dawn Lim): “In February 2018, Beijing’s chief trade negotiator was in Washington to try to avert a trade war. Before meeting his U.S. counterparts, he turned to a select group of American business executives—mostly from Wall Street. ‘We need your help,’ Vice Premier Liu He told guests gathered in a hotel near the White House… They included BlackRock Chief Executive Larry Fink, David Solomon, then Goldman Sachs Group’s second-in-command, and JPMorgan Chase & Co.’s Jamie Dimon, there as chairman of the Business Roundtable lobbying group. Looking for allies in trade talks with the Trump administration, Mr. Liu dangled a prize, the people say: Beijing offered to give U.S. financial firms a new opportunity to expand in China.”

November 30 – Wall Street Journal (Christopher M. Matthews): “Exxon Mobil Corp. is retreating from a plan to increase spending to boost its oil and gas production by 2025 and preparing to slash the book value of its assets by up to $20 billion, as the struggling company reassesses its next decade. The Texas oil giant, which has lost more than $2.3 billion over the first three quarters of this year…, released a reduced spending outlook… for the next five years. It now plans to spend $19 billion or less next year and $20 billion to $25 billion a year between 2022 and 2025. It had previously planned to spend more than $30 billion a year in capital expenditures through 2025.”

December 1 – Bloomberg (Romy Varghese): “West Covina, California, which sold $204 million of pension bonds in July, is at the fiscal brink because of its ineffective management and raiding of reserves, according to… State Auditor Elaine Howle. The southern Californian city of about 105,000 residents helped cover salary and benefit costs for its public safety workers by siphoning from reserves… The city, which has about $227 million in outstanding municipal debt, has made ‘questionable’ financial decisions, has likely understated the impact of the coronavirus pandemic and doesn’t have a fiscal recovery plan, raising the risk of bankruptcy…”

November 29 – Wall Street Journal (Erin Ailworth and Alberto Cervantes): “The 2020 hurricane season is set to officially close Monday, and this year surpassed 2005 as the busiest ever on record with 30 named storms forming over the Atlantic basin. The season, which officially runs from June 1 to Nov. 30, set a record-breaking pace almost from the start, ending with Hurricane Iota, the season’s first Category 5 storm. The previous record-holding year, 2005, had 28 storms…”

Fixed Income Watch:

November 30 – Wall Street Journal (Frances Yoon): “Companies and governments have issued a record $9.7 trillion of bonds and other debt this year, as extraordinary support from the Federal Reserve and other central banks has fueled a borrowing bonanza. The total covers the year to Nov. 26 and includes nearly $5.1 trillion of corporate bonds, as well as some kinds of loans, including riskier leveraged loans, according to Refinitiv. Both figures already exceed those for any prior full year. More broadly, the Institute of International Finance recently said global debt had risen $15 trillion to $272 trillion in the first nine months of this year, and is set to hit $277 trillion by year-end…”

December 4 – Bloomberg (Prashant Gopal, Christopher Maloney and Shahien Nasiripour): “The Federal Reserve has handed U.S. mortgage lenders their best year ever. Nobody knows that better than Shant Banosian, the industry’s first billion-dollar salesman. By his own count, the loan officer is personally set to originate a staggering $1.5 billion of home loans by year’s end from his office outside of Boston… Set alight by the Fed’s low interest rates and bond purchases, the mortgage industry is on fire. Lenders this year are projected to originate $4.1 trillion of loans, eclipsing the 2003 high, thanks mostly to borrowers refinancing to reduce their house payments…”

December 3 – Bloomberg (Paula Seligson): “Companies with the lowest junk ratings are bringing new deals to capitalize on a rampant rally that’s seen borrowing costs drop to six-year lows… Investors are flocking to CCCs, bonds most at risk of default, as nearly $17 trillion of negative-yielding debt globally forces money managers to take their chances on cuspier credits. The average CCC bond yields 7.71%, the lowest since September 2014, while the broader junk market has also rallied to match an all-time low borrowing cost of 4.56%...”

December 3 – Bloomberg (Paula Seligson): “A growing number of junk-rated corporations including Delta Air Lines Inc. and Royal Caribbean Cruises Ltd. are losing money even before they pay interest and other necessary expenses like taxes. They’re covering those costs with cash they still have and with more borrowing in the bond and loan markets… In the latest quarter, the number of junk-rated corporations that borrow in U.S. dollars and lost money before paying interest and other required expenses, known as having negative Ebitda, reached an eye-popping 47… That’s nearly double the level in the second quarter, out of a universe of about 600 borrowers.”

December 2 – Bloomberg (Lara Wieczezynski): “Cano Health’s loan to fund a dividend payment was one of four loans to launch Wednesday, boosting this week’s volume to 28 deals for $17.1 billion. It’s the busiest week for launches by volume since the week ended Feb. 7 with 38 deals for $28.4b… The S&P/LSTA Leveraged Loan Price Index rose to 95.30 on Wednesday from 95.19, the highest since Feb. 27.”

China Watch:

November 29 – Reuters (Winni Zhou and Andrew Galbraith): “China’s property market is the biggest ‘grey rhino’ - a very obvious yet ignored threat - in terms of financial risks, given it is so deeply intertwined with the financial industry, the head of the country’s banking regulator said. Guo Shuqing, …chairman of the China Banking and Insurance Regulatory Commission (CBIRC) and party chief of the country’s central bank, made the comments in a collection of articles by policymakers on China’s 14th Five-Year Plan… Loans related to the property market currently account for 39% of total bank loans in China - to say nothing of a large amount of bonds, equities and trust investments with exposure to it, Guo said. ‘It’s safe to say that the property market is currently the greatest grey rhino in terms of financial risks,’ he was quoted as saying.”

November 28 – Reuters (Kevin Yao): “China must not monetize its fiscal deficit and should build a ‘firewall’ between fiscal and central bank funds to ward off risks, central bank governor Yi Gang was cited as saying… A virus-induced slump in China’s economy earlier this year sparked a debate among Chinese economists over whether the central bank should monetize the fiscal deficit by buying government bonds… ‘We must implement an independent financial budget management system of the central bank and prevent the monetization of fiscal deficit,’ Yi was quoted as saying. China should build a ‘firewall’ between fiscal and central bank funds to prevent the central bank taking on enterprises’ credit risks, Yi said.”

November 29 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank surprised markets on Monday with an injection of medium-term cash into the banking system, in what traders and analysts viewed as a move to calm nerves rattled by a string of recent bond defaults. The People’s Bank of China (PBOC) injected 200 billion yuan ($30.4bn) through one-year medium-term lending facility (MLF) loans to financial institutions on Monday…”

November 30 – Bloomberg (Tian Chen): “Some of China’s smaller banks are finding it increasingly difficult to borrow from each other, another sign that rising corporate defaults are starting to infect the financial system. The cost of one-year interbank debt -- a lifeline for small and medium lenders -- was at 3.34% on Monday, or about twice what it was in April. The yield is now 39 bps higher than the rate offered by the People’s Bank of China on its medium-term loans, the widest gap since July 2018. China’s smaller lenders rely on cash from other banks because they don’t have direct access to liquidity offered by the central bank. A series of high-profile credit defaults have recently made China’s larger lenders more cautious in handing out funds. Brokerages and insurers are also grappling with a volatile market for short-term borrowing.”

December 3 – Bloomberg: “Rising defaults by China’s state firms are showing the need for bond investors to be much savvier about those borrowers -- no easy feat in a country where government decisions and business operations lack transparency. Five state-linked companies -- from a coal miner to a top chipmaker and an auto firm… -- have defaulted for the first time in the onshore bond market this year. That’s the most since 2016. In the secondary market, the average yield of more than 700 riskier bonds of local state-owned enterprises jumped to 17% from 13.4% after a payment failure by Yongcheng Coal & Electricity Holding Group Co.”

December 1 – Bloomberg: “Demand for Chinese debt is falling amid investor concern over a string of defaults by state firms and the pressure of U.S. sanctions on some of the nation’s firms. Chinese companies issued $9.9 billion of new dollar bonds in November, the lowest in seven months and down 52% from October’s total… The decline accelerated last week, when just $660 million was sold, the smallest amount since May. China’s onshore credit market was roiled last month by the defaults of a state-owned coal producer and prominent chipmaker, which sent yields higher and challenged the long-held view that the government would bail out such firms.”

November 30 – Bloomberg: “China plans to impose ‘special and innovative regulatory measures’ on financial technology behemoths such as Jack Ma’s Ant Group Co. to eliminate monopolistic practices and strengthen risk controls. Advances in technology have brought tremendous change to the financial sector, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Party Secretary of the central bank, wrote in an article outlining regulations over the next five years. It was cited in the official Shanghai Securities News.”

December 2 – Financial Times (Hudson Lockett): “China’s credit rating agencies are standing by their triple A scores for troubled state-owned enterprises, even as a series of defaults reverberates through the country’s $4tn corporate debt market. Just five Chinese companies out of more than 5,000 have been downgraded to below double A ratings by domestic rating agencies since Yongcheng Coal and Electricity Holding Group… kicked off a spate of defaults last month… Double A ratings are crucial in China as groups with lower ratings cannot issue publicly traded debt. More than 98% of the outstanding bond issuance in the country is backed by issuers graded double A or higher.”

December 1 – Bloomberg: “A spate of defaults among China’s state firms is darkening the outlook for local government financing vehicles, a sector that has never experienced a bond failure. LGFVs, which build and operate infrastructure projects across China, shelved 24.4 billion yuan ($3.7bn) of domestic bond sales in November as demand weakened. Yields on the firms’ three-year AA rated bonds rose to a two-year high of 4.36% on Nov. 11.”

December 1 – Reuters (Scott Murdoch): “Shares of Evergrande Property Services fell marginally on their Hong Kong debut…, shedding initial gains as the spinoff of China’s second-largest property developer struggled to shake off worries about debt and competition. Concerns about the financial health of its parent, China Evergrande Group, have clouded Hong Kong’s third-largest listing of the year, with China’s most indebted developer planning to use half the $1.8 billion raised for its own debt repayment.”

November 30 – Reuters (Gabriel Crossley): “Activity in China’s factory sector accelerated at the fastest pace in a decade in November, a business survey showed on Tuesday, as the world’s second-largest economy recovers to pre-pandemic levels. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 54.9 from October’s 53.6…”

December 2 – New York Times (Austin Ramzy and Tiffany May): “Joshua Wong, a prominent pro-democracy activist in Hong Kong, was sentenced… to more than a year in prison for his role in a protest last year, the latest blow to the city’s embattled political opposition. To critics of the government, Mr. Wong’s prison sentence is an attempt to muzzle one of the most globally recognized figures of the city’s resistance to Beijing’s encroachment… Mr. Wong was sentenced to 13 and a half months in prison, while Agnes Chow, a fellow activist, received 10 months. Ivan Lam… was sentenced to seven months.”

Central Bank Watch:

December 1 – Bloomberg (Jana Randow, Carolynn Look and Alexander Weber): “The European Central Bank should focus on keeping financial conditions at current levels through the crisis rather than announcing a blockbuster stimulus package that beats market expectations, according to Executive Board member Isabel Schnabel. …Schnabel confirmed that more support is likely because the pandemic will be more protracted than expected. ‘This has to be reflected in our policy decisions,’ she said…”

EM Watch:

December 3 – Bloomberg (Mario Sergio Lima): “Brazil’s economic growth fell short of market expectations in the third quarter, and that was largely before a new jump in Covid-19 cases and a reduction in emergency aid started to pour cold water on the recovery. Latin America’s largest economy surged 7.7% from the previous quarter…, but still less than the 8.7% expected by analysts.”

Europe Watch:

December 2 – Reuters (Jan Strupczewski): “Poland’s and Hungary’s veto of the European Union’s 1.8 trillion euro financing package has plunged the bloc into a battle that threatens to damage both its economy and unity at a time when it is already struggling to cope with the COVID-19 pandemic. The 27-nation bloc faces a dilemma over how to resolve the stand-off and has just a few days to avert a serious crisis.”

Japan Watch:

November 28 – Bloomberg (Isabel Reynolds): “Support for Japanese Prime Minister Yoshihide Suga’s government slid for the second straight month… The premier’s support fell five percentage points to 58% -- a new low -- in a survey carried out by the Nikkei newspaper and TV Tokyo between Nov. 27-29. About 48% of respondents said they disapproved of his government’s handling of the virus, up from 35% a month earlier…”

Leveraged Speculation Watch:

December 1 – Bloomberg (Nathan Crooks): “Ray Dalio turned to class and power struggles in the latest installment of his ongoing series on the changing world order, wondering if the U.S. is at a tipping point that could move it from what he says is ‘manageable’ tension to a full-blown revolution. ‘People and politicians are now at each other’s throats to a degree greater than at any time in my 71 years,’ Dalio wrote... ‘How the U.S. handles its disorder will have profound implications for Americans, others around the world, and most economies and markets.’ The billionaire… encouraged his readers to think about class issues that can become inflamed during stressful periods, as the struggle over wealth and power tends to be the ‘biggest thing affecting most people in most countries through time.’”

December 2 – Bloomberg (Miles Weiss): “It was an unusually quick exit, even for Wall Street: Anthony Scaramucci’s fund of funds disclosed an investment with Bridgewater Associates in May and pulled all of its capital by the end of September. SkyBridgeMulti-Adviser Hedge Fund Portfolios LLC divested a $100 million investment in Bridgewater’s Pure Alpha Fund II during the third quarter… SkyBridge also cashed out the bulk of a $50 million allocation made during the second quarter to Renaissance Technologies’s Institutional Equities Fund… Bridgewater and Renaissance, two of the world’s biggest hedge fund managers, struggled to generate a return for outside clients this year… Pure Alpha II, Bridgewater’s flagship macro fund, slumped 19% through Nov. 5, while the long-biased Renaissance Institutional Equities Fund tumbled about 20% through October.”

December 1 – Bloomberg (Stephen Spratt): “Hedge funds have chopped short positions in long-dated Treasury bonds that were at record levels just weeks ago, in a move that drove the yield curve to the flattest levels since August. Fast-money traders pulled bets in futures on higher long-end yields at the fastest pace since the first quarter in the week to Nov. 24…”

Geopolitical Watch:

December 3 – Reuters (Brenda Goh and Se Young Lee): “Some damage to Sino-U.S. ties is ‘beyond repair’ amid a new wave of Trump administration measures to counter China, Chinese state media warned, amid growing rancour underlined by an ugly Twitter spat between a U.S. senator and Chinese journalists… In an editorial, the government-backed China Daily said it viewed as ‘worrisome signs’ Washington’s decision to limit visitor visas for members of the Chinese Communist Party and their families and a ban on Xinjiang cotton imports. ‘Even if the incoming administration has any intention of easing the tensions that have been sown, and continue being sown, some damage is simply beyond repair, as the sitting U.S. president intends,’ the paper added.”

December 1 – Reuters (Kirsty Needham): “China’s WeChat social media platform blocked a message by Australia Prime Minister Scott Morrison amid a dispute between Canberra and Beijing over the doctored tweeted image of an Australian soldier. China rebuffed Morrison’s calls for an apology after its foreign ministry spokesman Zhao Lijian posted the picture of an Australian soldier holding a bloodied knife to the throat of an Afghan child… The United States called China’s use of the digitally manipulated image a ‘new low’ in disinformation.”

Friday Evening Links

[Yahoo/Bloomberg] Stock Rally Reaches New Highs on Stimulus Optimism: Markets Wrap

[Reuters] Treasuries -Yields soar as grim jobs report boosts stimulus hopes

[AP] Gripped by surging pandemic, US employers cut back on hiring

[Yahoo/Bloomberg] U.S. States Reach Records; Europe Pushes Vaccines: Virus Update

[CNBC] Stay-at-home order issued for San Francisco Bay Area, ahead of state mandate

[CNBC] Covid live updates: CDC says some reinfection is expected; Biden pushes Trump, Congress to act on stimulus

[Reuters] Fed Chair Powell held flurry of calls with Mnuchin in October

[Reuters] Pompeo slaps visa restrictions on Chinese accused of quashing dissent

[Yahoo/Bloomberg] Mortgage Industry Roars to Record Year, Courtesy of the Fed

[Yahoo/Bloomberg] California’s Miserable Year Ending In Drought, Fire and Darkness