Saturday, January 2, 2021

Weekly Commentary: 2020 Year in Review

Almost 350,000 Americans dead, with the Covid death toll projected to rise another 100,000 by the end of January. Confirmed Covid cases have exceeded 20 million (84 million globally), ending 2020 with new U.S. infections growing by a million every four to five days. The year ended with more than 125,000 Covid patients in overburdened hospitals across the U.S.

There’s no sugarcoating this human tragedy. As a nation, we failed early on to get the pandemic under control. The federal government response was inept – incomprehensibly so. There was a lack of strong and competent leadership. The Trump administration was dismissive and, tragically, Covid-19 became a polarizing issue. State government responses varied from adequate to appalling. Across the country, masks were considered a political statement as the country was consumed by a heated and pivotal election. Disinformation flourished even more so than the virus.

The national lockdown was an enormous burden that, in the end, sure seems like a wasted effort. Lacking leadership, reliable information and the necessary resolve, pandemic mitigation measures were not sustained to the point of ensuring new infections were reduced to more manageable levels. For various reasons, too many failed to take the pandemic seriously. Not that we will ever adopt Chinese-style draconian measures (i.e. door-to-door dragging out of feverish individuals to be transported to makeshift detention centers). But there needed to have been a comprehensive plan ready to execute – with a well-thought-out communications strategy.

The contrast between the depressing health crisis and booming financial markets could not be more stark. Record stock prices. Record IPOs. Record SPACs. Record corporate bond issuance – investment-grade and high-yield. Surging equities volumes, led by online retail trading. The retail trader community’s embrace of call buying drove record options trading volumes.

Tesla’s stock was up more than 740%, as the Nasdaq100 (NDX) returned (price and dividends) almost 49% for the year. With the bears blown to smithereens, there was nothing to restrain desperately overheated markets. Things tend to turn crazy at the end of cycles. 2020 settled into Epic Screwy Crazy.

Stocks were out of the blocks strongly to start 2020, with the S&P500 posting a 5.1% return by February 19th – as the bubbling NDX returned 11.5%. Responding to late-cycle cracks appearing in “repo” and securities funding markets, the Fed the previous September had embarked on aggressive “insurance” stimulus. Injecting liquidity into already speculative markets at record high prices worked only to stoke greater speculative excess. The NDX returned 27% in less than five months (September 27th to February 19th).

There was no mystery surrounding a speculative marketplace’s initial disregard for mounting pandemic risk. Federal Reserve Credit expanded $418 billion between September 11th and February 19th, an unprecedented injection of market liquidity in a non-crisis environment. The Fed-induced Bubble had inflated to precarious extremes – straight into historic health, financial and economic crises. The Fed had exacerbated precarious Bubble excess – that came home to roost in March.

Less than two weeks from equities at all-time highs, the Fed in an unscheduled March 3rd emergency meeting slashed rates 50 bps to 1.0%. Ominously, the NDX sank 3.2% on the Fed’s announcement, with the S&P500 down 2.8%. The market rout was unrelenting, with the Thursday, March 12th market panic called the “Worst Day Since the 1987 Market Crash” and the “Biggest VaR Shock in History.” Perhaps even more alarming, it was the “Worst Week for Credit in Decades.” The Fed dropped rates to zero on March 15th after a second unscheduled emergency meeting. In what must have sparked panic within the FOMC, de-risking/deleveraging only intensified.

The global Bubble was bursting. High-yield U.S. Credit default swap (CDS) prices surged 500 bps in three weeks to 870 bps, the high since the previous crisis. Investment-grade CDS almost tripled to 152 bps, also the high going back to 2009. Huge outflows led to dislocations throughout the ETF complex. From March 5th to March 23rd trading lows, both the iShares High Yield and iShares Investment-Grade bond ETFs dropped about 22%. Bloomberg News responded to dislocation in the municipal debt market with the headline, “A Day of Hell: The Muni Market’s Worst Day in Modern History.” Over 12 chaotic trading sessions, the small cap iShares Russell 2000 ETF collapsed 37%. Runs on prime money market funds were gaining momentum.

Global markets “seized up.” After trading at 6.54% on March 4th, Brazil’s local currency 10-year yields had spiked to 9.43% by March 24th. Dollar-denominated Brazilian yields almost doubled to 5.31%. Trading chaos was not limited to EM. Italian yields surged from 1.00% to 2.42% in two weeks, with Greek yields more than tripling to 3.67%.

In the two-week period March 6th to March 20th, the Norwegian krone sank 20.9%, the Mexican peso 17.6%, the Australian dollar 12.8%, the South African rand 11.0%, the British pound 10.9%, the New Zealand dollar 10.2%, and the Swedish krona 9.5%. Levered “carry trades” and myriad hedge fund derivatives strategies were imploding.

Crude oil suffered a one-day 25% decline on March 9th, though that $27 per barrel appeared rather pricey compared to the extraordinary negative $40 experienced during April 20th trading chaos (WTI ended 2020 down 21%). Bitcoin collapsed 41% during the week of March 12th. Gold sank 8.6%, with Silver down 16% and Platinum falling 17%. The Bloomberg Commodities Index suffered a one-week drop of 7.8%.

In the clearest indication of the systemic nature of market dislocation, even the Treasury market fell into disarray. Thirty-year Treasury yields collapsed an incredible 59 bps on March 9th to a record low 0.70%. Deleveraging was fomenting extreme trading anomalies, including sharply widening spreads between “off the run” and “on the run” Treasury securities. The Fed later pointed to illiquidity and dislocation within the Treasury market as a key factor behind the vehemence of their crisis mitigation efforts.

March 12 – Financial Times (Colby Smith and Brendan Greeley): “The Federal Reserve said it would pump trillions of dollars into the financial system in a dramatic attempt to ease stresses in short-term funding and US Treasury markets that have accompanied the spread of the coronavirus. The US central bank is also making changes to its programme of Treasury purchases ‘to address highly unusual disruptions in Treasury financing markets’. For the third time in four days, the Fed’s New York arm announced on Thursday that it would increase the size of its lending in the repo market… this time by multiples of the amounts previously on offer… The Fed would now offer up at least $500bn in three-month loans, beginning immediately, with another $500bn of three-month loans on Friday. It said it would also provide a $500bn one-month loan on Friday that settles on the same day. It also said it would continue to offer $500bn of three-month loans and $500bn one-month loans on a weekly basis until April 13, on top of its ongoing programme of $175bn in overnight loans and $45bn in two-week loans twice per week.”

The Fed saw no option – other than unprecedented, overwhelming, unrelenting “whatever it takes” monetary inflation. The Federal Reserve’s ongoing experiment in underpinning market-based finance had reached a most critical juncture. Nothing else mattered. The Bubble had to be reflated – and the Fed was prepared to fully embrace the previously unimaginable.

Create Trillions of new “money” – and inject this liquidity directly into the markets to reverse de-risking/deleveraging dynamics. Purchases were commenced (directly and through ETF shares) to backstop corporate debt. Old emergency financing facilities from the 2008 crisis were reinstated and new ones created. And, importantly, keep this massive stimulus flowing even in the face of market recovery, record stock prices, and increasingly egregious financial excess. In not many months, the “insurance” stimulus had exacerbated Bubble excess that contributed to global financial collapse that incited unprecedented monetary inflation and even more outrageous speculation and Bubble mayhem.

In only 43 weeks, Federal Reserve Credit inflated $3.206 TN to a record $7.350 TN. Going back to the September 2019 restart of QE, Federal Reserve Assets had surged $3.624 TN, or 97%. We are now in the throes of one of history’s greatest monetary inflations. M2 “money” supply inflated $3.793 TN, or 29% annualized, over 43 weeks to $19.197 TN. A most extreme and destabilizing period of Monetary Disorder is fated.

The most calamitous global pandemic in a century has altered history in ways not to be fully comprehended for years to come. I fear the resulting Scourge of Monetary Inflation will haunt humanity for decades. Fatefully, the pandemic struck in the waning days of a historic global Bubble. Systems – financial, economic, social and political – were unstable and vulnerable. The overwhelming policy response both exacerbated and extended late-cycle “Terminal Phase” excess – at home and globally. From my analytical perspective, it’s been a worst-case scenario beyond anything imaginable.

U.S. Non-Financial Debt (NFD) surged $5.740 TN during the first three quarters of the year, an increase of 188% from comparable 2019 growth. For perspective, NFD expanded on average $1.830 TN annually over the previous decade – and had not previously surpassed $3.0 TN on an annual basis. Outstanding Treasury Securities surged $3.882 TN during 2020’s first three quarters, with year-over-year growth of an astounding $4.329 TN, or 23.3%. After concluding 2007 at about $8.0 TN, Treasury Liabilities (from the Fed’s Z.1) ended September at $25.8 TN.

China largely matched unprecedented U.S. Credit growth. For the first nine months of the year, China Aggregate Financing expanded an unprecedented $4.535 TN ($504bn monthly). This was 45% higher than comparable 2019 growth. Combining growth in China’s Aggregate Financing with NFD, China/U.S. Credit expanded an astounding $10.275 TN through the first three quarters of 2020, double comparable 2019 growth.

For the first 11 months of 2020, the $5.079 TN expansion of China’s Aggregate Financing was 43% ahead of comparable 2019 and 61% above comparable 2018 Credit growth. Through the end of November, China’s M2 “money” supply surged $4.487 TN (to $33.0 TN), up from comparable 2019’s $1.333 TN expansion.

With U.S. and Chinese Credit systems having come completely off the rails, Credit became unhinged around the globe – “developed” and “developing.” The ECB’s balance sheet expanded $3.2 TN in the final nine months of 2020 to $8.553 TN. In Japan, central bank assets jumped $1.5 TN to $6.888 TN. According to Bloomberg data, “G4” (Fed, ECB, BOJ and Bank of England) central bank balance sheets inflated $8.5 TN in nine months to $23.804 TN (up from $6.429 TN to end 2009). With momentous ramifications, the very foundation of global finance succumbed to unbridled inflationism like never before.

After reversing de-risking/deleveraging, the unprecedented tsunami of central bank liquidity resuscitated the global leveraged speculating community. European sovereign yields collapsed. Ten-year bund yields ended 2020 at negative 0.58%, with Swiss and French yields at negative 0.61% and negative 0.35%. Hopelessly indebted Italy and Greece saw yields end the year near record lows at 0.54% and 0.61%. Even Spain and Portugal’s yields turned negative in December before ending the year positive by a few bps.

With negative-yielding debt globally exceeding a record $18 TN, yield- and performance-chasing liquidity streamed into about every nook and cranny of international finance. Even the weakest EM nations tapped over-liquefied markets to pile on debt crazily.

December 30 – Bloomberg (Sydney Maki): “Emerging-market hard-currency bond sales are heading for another big year in 2021 as governments and companies try to revive growth… Governments will borrow heavily for a second year to fund health-care and poverty relief measures, while pushing the investment needed to reflate their economies. Companies will borrow to cash in on that renewed growth, with loose monetary policy providing the liquidity they need. ‘Our forecast assumes that financing conditions continue to be supportive for both investment grade and high yield,’ Goldman Sachs strategists… wrote earlier this month. But, ‘funding needs come down as the cyclical recovery takes hold.’ Governments and companies from developing economies sold $757.1 billion in dollar- or euro-denominated bonds in 2020, the most in more than two decades of data…”

In the middle of a devastating pandemic, financial conditions loosened dramatically throughout the emerging markets. Equities and bond markets rallied spectacularly. The popular iShares MSCI Emerging Markets Equities (EEM) ETF surged 73% off March lows to end the year at an all-time high (2020 return 17.0%). After sinking 27% in ten sessions back in March, the iShares JP Morgan Emerging Market Bond (EMB) ETF ended 2020 with a return of 5.4%. China’s CSI 300 Index finished the year with a gain of 27.2%, as the growth-oriented ChiNext Index surged 65.0%. South Korea’s KOSPI Index jumped 30.8%, and Taiwan’s TAIEX index rose 22.8%.

With Trillions of newly-created liquidity slushing about the system, U.S. financial conditions loosened spectacularly. Decisively quashing “risk off,” the Fed unleashed a powerful speculative cycle. Indeed, it was a system primed for “blow off” speculative excess following over a decade of extremely loose financial conditions and Federal Reserve market backstops/bailouts. The Goliath ETF complex has been readily nurtured, along with the Herculean options and derivatives universe. The upshot: What in 2020 passed for “investing” was in reality a gargantuan scheme promoting levered and trend-following speculation – the dimensions of which some time ago inflated beyond “too big to fail.”

Retail traders had years to open online trading accounts while enjoying effortless returns. For institutions and the investment management industry more generally, managers more likely to be dismissive of risk (while remaining fully invested) rose briskly through the ranks to control enormous sums of assets. The Fed injected Trillions into a system commanded by potent and deeply embedded speculative impulses (i.e. propensity for trend-following behavior, risk-taking and leveraging, etc.).

Arguably, the resulting chasm between inflating asset markets and deflating economic prospects was the most extreme since 1929. The U.S. employment rate spiked to 14.7% in April from February’s 3.5% (dropping back to 6.7% by November), as U.S. Q2 GDP collapsed at a 31.4% annualized rate.  We witnessed the specter of long lines, overwhelmed food banks, and millions of Americans suffering food insecurity.

December 31 – Financial Times (Nikou Asgari and Joe Rennison): “Bankers expect a steep drop in corporate fundraising next year after a record borrowing binge in 2020 that helped companies to survive the coronavirus crisis. Global bond issuance surged by nearly a quarter to $5.35tn in the year to December 22 compared with the same period in 2019. The total easily exceeded the annual record, set last year, of $4.35tn…”

December 31 – Bloomberg (Crystal Tse, Katie Roof and Elizabeth Fournier): “A booming market for U.S. initial public offerings shows no sign of slowing in 2021. Around $180 billion was raised from IPOs on U.S. exchanges in 2020, more than double last year’s total and far above the previous high of $102 billion set in 2000… Companies have been emboldened by soaring equity values, especially in the second half, while a proliferation of listings by blank-check firms has also boosted volumes. ‘In a zero interest world, one of the only asset classes that offers the hope of performance that beats inflation is equities,’ said Jeff Zajkowski, head of Americas equity capital markets at JPMorgan…”

The second-half of 2020 marked the emergence of a full-fledged market mania – stoked by retail and institutions alike. What began as a Fed-induced unwind of hedges and short squeeze morphed into securities prices completely detached from reality. Tesla with a market capitalization approaching $700 billion. Scores of IPOs – most with loss-generating businesses – seeing prices more than double on the initial day(s) of trading. The “Robinhood effect” – with booming trading volumes. The craze of call option market speculation.

December 31 – Bloomberg (Gearoid Reidy, Ishika Mookerjee and Sarah Ponczek): “Look at a screen at almost any point in 2020, and chances are you saw something like this: A company that nobody had ever heard of 12 months ago was in the process of trading 20 million shares in a day. Ideanomics Inc., fuboTV Inc., Vaxart Inc. -- names that would’ve elicited a collective ‘who?’ in January are obscure no longer, after seducing the retail day-trader horde whose presence defined the coronavirus era in equities. A mattress maker called Purple Innovation Inc. saw turnover surge 13-fold as it went from $5 to $25 in three months. Blank-check-born Fisker Inc. posted four sessions in which volume topped 40 million shares each. Buttressed by equally huge demand for older names like Eastman Kodak Co. and Carnival Corp., it added up. At a time when headlines were dominated by a raging virus, recession and the fastest-ever bear market, a record $120 trillion of stock changed hands on U.S. stock exchanges this year, up 50% from 2019 to a record. The average Russell 3000 stock saw average daily share volume surge 46% to 1.9 million shares.”

With ominous parallels to some of history’s great speculative manias, market “naysayers” were taken out to the wood shed and shot. The Fed fomented a historic short squeeze. The Goldman Sachs Most Short Index rallied an incredible 200% off March lows, to end the year with a gain of almost 50%. The estimated $38 billion loss suffered by Tesla short positions is surely the biggest ever.

Inequality was an issue in the markets as it was throughout the economy and society. The Fed’s Trillions were a godsend for those with exposure to securities markets – and the riskier the assets the better. The contemporary central bank doctrine of using inflating securities prices as the primary mechanism for system stimulus has been promoting wealth inequality for years now. Inequality took a grievous turn for the worse in 2020 – with our wealth-allocating and deficit-accommodating central bank now irrevocably implanted in political muck.

December 31 – Bloomberg (Devon Pendleton and Jack Witzig): “Billionaires have always traveled in a different orbit than the rest of us. Nicer things, more power, rocket-launching stations. But 2020 threw that gulf into stark relief. While much of the world grappled with soaring unemployment and plunging growth, the 0.001% benefited from unprecedented wealth creation. The world’s 500 richest people added $1.8 trillion to their combined net worth this year and are now worth $7.6 trillion, according to the Bloomberg Billionaires Index. Equivalent to a 31% increase, it’s the biggest annual gain in the eight-year history of the index…”

The Fed as propagator of inequality emerged as a conspicuous issue following its fateful 2020 pandemic measures. In response, the Federal Reserve paid notable lip service to the issue, essentially committing to extreme stimulus measures until the unemployment rate drops back to pre-pandemic, multi-decade lows. While delightful music to the ears of market participants, such a policy course ensures no interruption to the perilous trajectory of systemic inequality. Along with the markets, economy, inflation and inequality, the Fed has added climate change to its directive. Covid was manna to the MMT crowd.

December 31 – Bloomberg (Prashant Gopal): “Record-low mortgage rates were supposed to make it easier for homebuyers. Instead, they’ve helped push affordability to a 12-year low. Buyers in the fourth quarter needed to spend almost 30% of the average wage to afford a typical house, the biggest share for any three-month period since 2008, according to… Attom Data Solutions. Low borrowing costs, now below 3% for a 30-year loan, have spurred a buying frenzy, driving up prices across the country as shoppers compete for a shrinking supply of listings. During the pandemic, prices have increased faster than earnings, leaping by double digits in 79% of the 499 counties included in the report. More than half of those counties are now less affordable than their historic averages, Attom said…”

Our younger citizens hoping to purchase homes will now be forced to take on the risk of even larger debt loads. The FHFA (Federal Housing Finance Agency) Housing Price Index surged to a 10.2% y-o-y gain in October, the strongest housing inflation since September 2005’s cycle peak 10.7%. Housing Bubbles have re-inflated. In ways both glaring and subtle, Monetary Disorder is aggravating already corrosive inequity between the haves (assets) and the have nots.

The issue of “sound money” is viewed as hopelessly archaic, a reality that my 20 plus years of CBBs has failed to alter. The challenge to warning of the myriad pernicious dangers associated with Monetary Inflation is made no easier by markets creating Trillions of added perceived wealth. The Fed is almost universally lauded for its crisis response. With memories of 2008 having faded completely away, there are these days only advocates for asset inflation.

Geopolitical tensions mirrored heightened social stress. U.S./China relations deteriorated alarmingly – and likely irreversibly. Two superpower rivals head-to-head battling over trade, technology, finance and global influence. Especially with Beijing wresting control of Hong Kong, Taiwan became a potential flash point. The “China virus” only inflamed growing anti-China sentiment. Tensions with Iran risked boiling over. The Russians appeared to have orchestrated the most significant hacking operation in years. The UK and European Union mustered a last-minute “Brexit” deal. From Beijing to Brussels to Washington, governments around the world raised the specter of cracking down on the powerful technology oligopolies.

Climate change became increasingly difficult to dismiss. A brutal hurricane season, flooding, drought and a devastating West Coast fire season. Tens of millions of Americans were directly impacted.

2020 was such an emotional year. I am grateful to not have suffered the grief so many confronted with the loss of loved ones and dear friends. For me, frustration and anger were for the most part still overshadowed by sadness. My fears for our future are being realized. Writing that our nation “lost its innocence” would be both cliché and imprecise. But we did lose our tolerance. We lost objectivity and sound judgment. We sacrificed our cohesion as fellow Americans, as we doggedly fragmented into vitriolic political partisanship. Too many times in 2020 I was reminded of the quote, “We had to destroy the village in order to save it,” from the Vietnam War.

What these days passes as patriotism leaves me discouraged. It’s a terrible reality I’m sickened to document: Our nation is not what it was or what we expect it to be. A dark underbelly has been exposed. Fringe elements – on both the left and right – have been emboldened. They are undeserving of the attention and voice they have been afforded. At this point, it’s up to the great silent majority to rise up and safeguard our cherished American values.

Not without justification, we lost faith in our government and institutions. As an increasingly insecure society, we gravitated to conspiracy theories and disinformation. What had been relegated to the fringe made alarming headway within the mainstream. We’ve contrived too many enemies: the media, rival politicians, law enforcement, the scientific community… Is our future one of adversary “red” and “blue” communities, business establishments, schools and houses of worship? The likes of Dr. Anthony Fauci and Bill Gates have been villainized – their families threatened. Lying, deceit and character assassination were elevated to a national ethos. The election and especially its aftermath have been a national disgrace. We witnessed in 2020 the worst nationwide social strife in decades. The popular support for social justice offers hope.

Washington completely botched the crisis response – restrictions, testing, PPE and so on – and we’re paying a dreadfully steep price. The private sector rose to the challenge with new vaccines in record time. And after a characteristically rocky start, hopefully the smooth distribution of vaccines will in the coming months see a return to some semblance of normalcy.

But I worry about these deepening scars. I lament the further corrosive damage inflicted upon our fragile society from Trillions of monetary inflation. “When Money Dies…” History informs us that societies become increasingly susceptible to degeneration, instability and unpredictability. I am confident we will meet the major challenge posed by the coronavirus. I have less faith in our capacity to recover from epic monetary inflation and resulting financial and economic debasement. History informs us that inflationism proves extremely difficult to remedy. I have faith in the American people, but reckless borrowing and “money printing” is placing our future in great jeopardy.

If not for (somewhat less) reckless bouts of monetary inflation around the globe, the U.S. dollar index would surely have suffered more than its 6.8% 2020 decline. As a typical consequence of excessively loose financial conditions, November saw a record $84.8 billion goods trade deficit (Current Account Deficits quickly inflated to 2008 levels). Gold jumped $380, or 25%, to end the year at $1,899. Silver surged 47% to $26.41, with Copper up 26%, Platinum 11%, and Palladium 26%. With monetary inflation reigniting speculative zeal, Bitcoin inflated more than 300% to surpass $29,000.

It was truly a year for the history books. The Chinese proverb (“curse”): “May you live in interesting times.” When I look back on the year, I personally feel incredibly grateful. As a father and husband, I am thankful for my family’s good health, positive attitudes and resilience. As an analyst chronicling “History’s Greatest Financial Bubble” – it simply could not be a more fascinating environment. I’m excited for the challenges presented by the new year – and am incredibly blessed to have this opportunity to think and write during such extraordinary times. And I am thankful to have you readers. Thank you!

For the Week:

The S&P500 rose 1.4% (up 16.3% y-t-d), and the Dow gained 1.3% (up 7.2%). The Utilities jumped 2.3% (down 0.6%). The Banks rose 1.6% (down 13.6%), and the Broker/Dealers added 0.2% (up 30.3%). The Transports were little changed (up 14.7%). The S&P 400 Midcaps declined 0.4% (up 11.8%), and the small cap Russell 2000 fell 1.5% (up 18.4%). The Nasdaq100 advanced 1.4% (up 47.6%). The Semiconductors jumped 1.6% (up 51.1%). The Biotechs dropped 3.3% (up 13.3%). Though gold bullion added $15, the HUI gold equities index declined 0.5% (up 23.8%).

Three-month Treasury bill rates ended the week at 0.0575%. Two-year government yields were unchanged at 0.12% (down 145bps y-t-d). Five-year T-note yields were little changed at 0.36% (down 133bps). Ten-year Treasury yields slipped a basis point to 0.92% (down 100bps). Long bond yields declined two bps to 1.65% (down 74bps). Benchmark Fannie Mae MBS yields fell five bps to 1.34% (down 137bps).

Greek 10-year yields declined two bps to 0.62% (down 81bps in 2020). Ten-year Portuguese yields fell three bps to 0.03% (down 41bps). Italian 10-year yields dropped four bps to 0.54% (down 87bps). Spain's 10-year yields declined three bps to 0.05% (down 42bps). German bund yields fell two bps to negative 0.57% (down 38bps). French yields declined three bps to negative 0.34% (down 46bps). The French to German 10-year bond spread narrowed one to 23 bps. U.K. 10-year gilt yields dropped six bps to 0.20% (down 63bps). U.K.'s FTSE equities index declined 0.6% (down 14.3%).

Japan's Nikkei Equities Index jumped 2.9% (up 16.0% in 2020). Japanese 10-year "JGB" yields added one basis point to 0.02% (up 3bps y-t-d). France's CAC40 gained 0.5% (down 7.1%). The German DAX equities index rose 1.0% (up 3.5%). Spain's IBEX 35 equities index declined 0.5% (down 15.5%). Italy's FTSE MIB index increased 0.5% (down 5.4%). EM equities were higher. Brazil's Bovespa index gained 1.0% (up 2.9%), and Mexico's Bolsa rose 1.6% (up 1.2%). South Korea's Kospi index added 2.4% (up 30.8%). India's Sensex equities index gained 1.7% (up 15.8%). China's Shanghai Exchange jumped 3.3% (up 13.9%). Turkey's Borsa Istanbul National 100 index surged 3.6% (up 29.1%). Russia's MICEX equities index advanced 1.6% (up 8.0%).

Investment-grade bond funds saw inflows of $5.905 billion, and junk bond funds posted positive flows of $1.711 billion (from Lipper).

Federal Reserve Credit last week declined $8.5bn to $7.350 TN. Over the past year, Fed Credit expanded $3.229 TN, or 78.3%. Fed Credit inflated $4.540 Trillion, or 162%, over the past 425 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week fell $8.5bn to $3.491 TN. "Custody holdings" were up $92.4bn, or 2.7%, y-o-y.

M2 (narrow) "money" supply sank $102.0bn last week to $19.197 TN, yet with an unprecedented 43-week gain of $3.763 TN. "Narrow money" surged $3.871 TN, or 25.3%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits dropped $76.3bn, and Savings Deposits fell $15.1bn. Small Time deposits declined $4.5bn. Retail Money Funds fell $7.3bn.

Total money market fund assets dropped $23.1bn to $4.297 TN. Total money funds surged $688bn y-o-y, or 19.0%.

Total Commercial Paper fell $9.0bn to $1.021 TN. CP was down $106bn, or 9.4%, year-over-year.

Freddie Mac 30-year fixed mortgage rates increased a basis point to 2.67% (down 105bps in 2020). Fifteen-year rates declined two bps to an all-time low 2.17% (down 99bps). Five-year hybrid ARM rates sank eight bps to 2.71% (down 75bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 2.90% (down 114bps).

Currency Watch:

December 29 – Bloomberg (Cormac Mullen and Ruth Carson): “Speculative traders are ending the year doubling down on their bets against the dollar. Net short non-commercial positions in futures linked to the ICE U.S. Dollar Index have surged to the most since March 2011, according to the latest Commodity Futures Trading Commission data. The gauge of the U.S. currency has fallen over 6% this year as investors turned against the greenback amid unprecedented monetary easing from the Federal Reserve and a move away from haven assets.”

For the week, the U.S. dollar index declined 0.3% to 89.92 (2020 decline 6.8%). For the week on the upside, the South Korean won increased 1.5%, the Australian dollar 1.2%, the Canadian dollar 1.1%, the New Zealand dollar 1.0%, the British pound 0.8%, the Swedish krona 0.8%, the Norwegian krone 0.6%, the Singapore dollar 0.6%, the Swiss franc 0.4%, the Japanese yen 0.2%, and the euro 0.2%. For the week on the downside, the South African rand declined 0.6%, the Brazilian real 0.5% and the Mexican peso 0.2%. The Chinese renminbi increased 0.22% versus the dollar this week (up 6.68% y-t-d).

For 2020, the Swedish krona increased 13.8%, the Australian dollar 9.6%, the Swiss franc 9.2%, the euro 8.9%, the New Zealand dollar 6.6%, the South Korean won 6.4%, the Japanese yen 5.2%, the British pound 3.1%, the Norwegian krone 2.4%, the Canadian dollar 2.1% and the Singapore dollar 1.8%. Declining versus the dollar, the Brazilian real was down 22.5%, the Mexican peso 5.0% and the South African rand 4.7%.

Notable 2020 EM currency declines included the Argentine peso (28.9%), the Turkish lira (20.0%), and the Russian ruble (16.7%).

Commodities Watch:

The Bloomberg Commodities Index rose 1.3% (down 3.5% in 2020). Spot Gold added 0.8% to $1,899 (up 25.1%). Silver jumped 1.9% to $26.412 (up 47.4%). WTI crude increased 29 cents to $48.52 (down 21%). Gasoline rose 2.3% (down 17%), and Natural Gas gained 0.8% (up 16%). Copper fell 1.2% (up 26%). Wheat jumped 2.2% (up 15%). Corn surged 7.3% (up 25%).

Coronavirus Watch:

December 30 – Bloomberg (Drew Armstrong, Gabrielle Coppola, and John Tozzi): “The U.S. is vaccinating an average of only 200,000 people a day against Covid-19, and many states have used just a small percentage of the shipments sent to them this month. Data gathered from states and the U.S. Department of Health and Human Services show that while Operation Warp Speed has distributed millions of doses, some states have been slow to get them into people’s arms. The nation almost certainly won’t hit the Trump administration’s goal of 20 million vaccinations by year-end…”

December 31 – Reuters (Rebecca Spalding and Carl O’Donnell): “Seattle public health officials have so little COVID-19 funding on hand they worry they will have to shut down some virus testing sites as they mount a campaign to dose their 2.3 million residents with Pfizer Inc’s and Moderna Inc’s vaccines… In counties across the United States, the funding crisis has limited the hiring of needed vaccine staff, delayed the creation of vaccination centers, and undermined efforts to raise public awareness, officials told Reuters.”

December 30 – Reuters (Steve Gorman): “The leading U.S. infectious disease specialist, Dr. Anthony Fauci, said… he foresees America achieving enough collective COVID-19 immunity through vaccinations to regain ‘some semblance of normality’ by autumn 2021, despite early setbacks in the vaccine rollout.”

December 27 – The Hill (Zack Budryk): “Anthony Fauci… on Sunday said people should take the more contagious strain of the coronavirus that has emerged in southeastern England ‘very seriously.’ Fauci, who has discouraged outright barring flights from the United Kingdom, said… U.S. officials were right to require proof of negative coronavirus tests for anyone entering the country from Britain. Public health officials are examining the new strain ‘very intensively now,’ including questions such as, ‘Does it make someone more ill? Is it more serious virus in the sense of virulence? And the answer is, it doesn’t appear to be that way.’”

December 29 – CNBC (Noah Higgins-Dunn): “California will extend its stay-at-home order for two regions of the state — Southern California and San Joaquin Valley — where intensive-care unit capacity is strained from an onslaught of Covid-19 patients, the state’s Health and Human Services Secretary Dr. Mark Ghaly said… The regional order, which Gov. Gavin Newsom first announced on Dec. 3 and was set to expire Monday, splits the state into five regions… If the remaining ICU capacity in a region falls below 15%, it will trigger a three-week stay-at-home order, Newsom said.”

December 29 – Reuters (Steve Gorman): “Strict stay-at-home orders were renewed indefinitely on Tuesday for much of California, a leading U.S. hot spot of the COVID-19 pandemic, as the state’s top health official said that many hospitals were teetering on the brink of crisis… At least 90% of the county’s hospitals, he said, have been stretched so thin by the influx of COVID-19 patients that they were forced to divert incoming emergency patients to other facilities for much of the day over the past weekend.”

December 28 – Los Angeles Times (Luke Money, Rong-Gong Lin II, Hayley Smith): “Health officials in hard-hit Los Angeles County issued their most dire warning yet about the coronavirus, saying Monday that hospitals are at risk of running out of space, especially with the looming threat of a Christmas-fueled surge. The county could top 10,000 total COVID-19 deaths in a matter of days. Hospitals are so inundated that they've resorted to placing patients in conference rooms or gift shops. Some are contending with aging and insufficient infrastructure that threatens to interrupt the flow of life-saving oxygen.”

December 30 – Bloomberg (Ana Monteiro): “California Governor Gavin Newsom said he’ll ask lawmakers for an immediate $2 billion to help schools open safely for in-person instruction by early spring, even as a surge in Covid-19 cases overwhelms health-care facilities in the most populous U.S. state. The money would be spent on testing, ventilation and personal protective equipment, Newsom said... He said he’ll seek weekly testing for communities with high rates of transmission; masks for all students and staff; improved contact tracing; and the prioritization of school workers for vaccinations.”

Market Instability Watch:

December 29 – Bloomberg (Elizabeth Stanton): “For the first time in two years, bond investors are betting that U.S. inflation will average close to 2% per year over the coming decade. The market’s key measure of price expectations reached 1.981% on Tuesday after touching 1.992% Monday, the highest since December 2018… The gauge, known as the breakeven rate, is gaining momentum as traders prepare for an economic recovery in 2021… The roll-out of vaccinations against the coronavirus is also fueling the move higher. It’s all happening against the backdrop of the Federal Reserve’s push to revive inflation… In August, policy makers unveiled an extensively previewed new approach, under which they will seek inflation that averages 2% over time by allowing price pressures to overshoot after periods of weakness. One key to that effort, officials have said, is the need to buoy expectations for inflation.”

December 31 – Bloomberg (Bailey Lipschultz): “In a historic year that marked a rapid plunge into bear market territory and a swift recovery into the bull zone, high-flying technology stocks and electric-vehicle pioneer Tesla Inc. were standout trades. The S&P 500 Index went from peak to trough to peak again within 175 days as investors initially shunned most stocks in response to Covid-19 lockdowns and fears of prolonged recession, but later piled into stay-at-home beneficiaries. Since its pandemic-driven low, the benchmark has rallied 67%, smashing old records and adding $14 trillion in value.”

December 30 – Wall Street Journal (Maureen Farrell): “Defying expectations, investors piled into initial public offerings at a record rate in 2020, and few expect the euphoria to wear off soon… Companies raised $167.2 billion through 454 offerings on U.S. exchanges this year through Dec. 24, compared with the previous full-year record of $107.9 billion at the height of the dot-com boom in 1999, according to Dealogic. The coronavirus pandemic turned the typical rhythm of the IPO market on its head, with $67.3 billion raised in the fourth quarter. That is roughly six times the total for the first three months of the year. As a result of the scramble, stalwarts of the 21st-century economy including Airbnb Inc., DoorDash Inc. and Palantir Technologies Inc. are now publicly traded…”

December 28 – Zacks (Sanghamitra Saha): “The year 2020 has witnessed several trend reversals due to the pandemic. Along with the change in the field of work culture and lifestyle, a notable shift is palpable in the investment world. For example, a major change noted in the IPO and M&A field is the rise of Black Check or Special Purchase Acquisition Company (SPAC)… In 2020, SPACs make up most of the growth in the U.S. IPO market compared with the year-ago level. So far this year, SPACs have raised $79.87 billion in gross proceeds from 237 counts, surpassing the record $13.6 billion raised in 2019 (raised from 59 IPOs). The average IPO size was $337 million. The 462% year-over-year jump in proceeds raised by SPACs this year outperformed the traditional IPOs, which have been raised $67 billion year-to-date, as quoted on Business Insider. In 2007, the last peak of SPAC IPO volumes, SPACs made up about 14% of the IPO market versus about 50% of the market share in 2020.”

December 29 – NPR (Camila Domonoske): “This year, the hottest trend on Wall Street could be summed up in one strange and unfamiliar word: SPAC. Shaquille O'Neal's got a SPAC. Former House Speaker Paul Ryan’s got a SPAC. Famed investor Bill Ackman launched a $4 billion SPAC. And a 25-year-old became the youngest self-made billionaire thanks to… a SPAC. So what is a SPAC? A ‘special purpose acquisition company’ is a way for a company to go public without all the paperwork of a traditional IPO, or initial public offering. In an IPO, a company announces it wants to go public, then discloses a lot of details about its business operations. After that, investors put money into the company in exchange for shares. A SPAC flips that process around. Investors pool their money together first, with no idea what company they're investing in. The SPAC goes public as a shell company.”

December 29 – Financial Times (Andrew Edgecliffe-Johnson): “‘These are times when the strong can get stronger,’ Nike chief executive John Donahoe said in September, as he celebrated the digital investments and robust brand that helped the sportswear group to increase its earnings even as Covid-19 closed its stores. Nike was far from the only household name boasting of resilient profits and a growing share of a market it already leads. From Amazon to Starbucks, McDonald’s to Mondelez, many of America’s biggest businesses got bigger this year, even as the turmoils of Covid-19 plunged smaller rivals into crisis. Just as Blackstone had been ‘a huge winner coming out of the global financial crisis’, chief executive Steve Schwarzman told analysts… recently, ‘I think it’s going to turn out to be another one of those acceleration moments.’ The unequal, ‘K-shaped’ recovery that economists fear is dividing the wider US economy is also playing out across corporate America, as the pandemic deepens the gulf between the largest, best-financed companies and those lacking scale, leading brands or robust balance sheets.”

December 30 – Bloomberg (Eric Lam): “Bitcoin is homing in on $29,000 as the world’s largest cryptocurrency pushes its mindnumbing rally in 2020 past 300%. The digital asset surged above $28,840 as of 3:44 p.m. Wednesday to a record. In December alone, Bitcoin has surged almost 50%, putting it on track for its biggest monthly gain since 2019.”

Global Bubble Watch:

December 29 – Wall Street Journal (Mike Bird): “The Federal Reserve, European Central Bank and Bank of Japan have collectively expanded their balance sheets by around $8 trillion in 2020. It took them almost eight years to achieve the same growth following the seizure of global financial markets in September 2008. That burst of bond-buying has revived a debate about quantitative easing, and how it might impose a fiscal cost on the countries pursuing it. But the circumstances in which to worry look fairly limited. The logic goes like this: When the central bank buys bonds from commercial banks, the proceeds are credited to those banks in the form of additional reserves parked at the monetary authority. The central bank then pays interest on those reserves. In periods like the past decade when the market value of bond portfolios has swelled, that has been profitable for central banks.”

December 31 – Bloomberg (Devon Pendleton and Jack Witzig): “Billionaires have always traveled in a different orbit than the rest of us. Nicer things, more power, rocket-launching stations. But 2020 threw that gulf into stark relief. While much of the world grappled with soaring unemployment and plunging growth, the 0.001% benefited from unprecedented wealth creation. The world’s 500 richest people added $1.8 trillion to their combined net worth this year and are now worth $7.6 trillion, according to the Bloomberg Billionaires Index. Equivalent to a 31% increase, it’s the biggest annual gain in the eight-year history of the index…”

December 28 – Financial Times (David Carnevali, Eric Platt, Camilla Hodgson and Hudson Lockett): “Companies raised more money through stock market listings in 2020 than in any year besides 2007, as a rebound in equities valuations lured in businesses and blank-cheque acquisition vehicles rushed to list in the US. Businesses raised almost $300bn through flotations globally in 2020, including a record $159bn in the US… Stripping out the roughly $76bn raised through blank-cheque companies, deal activity in the US and Asia jumped more than 70% from the previous year. Listings in Europe, by contrast were lethargic. At $20.3bn, they were down by a tenth from 2019 to reach almost half of 2018 levels. Proceeds in Asia, at $73.4bn, would have been far higher if payment company Ant Group had not halted its blockbuster $37bn IPO after it ran afoul of Chinese regulators.”

December 28 – Bloomberg (Leslie Kaufman): “Covid continues to cause severe economic distress, but natural disasters fueled by a warming planet also took their toll this year, causing record damage and displacing millions according to two new assessments of insurance claims in 2020… With its relatively high property values, the U.S. topped the list of countries financially impacted by climate change, incurring $60 billion in damages. Much of that was caused by an unusually heavy Atlantic hurricane season. Altogether, the 30 named storms caused at least $41 billion in damages and displaced an estimated 200,000 people across the U.S., as well as Central America and the Caribbean.”

December 29 – Financial Times (Eric Platt): “Investment banks across the world generated a record $124.5bn in fees this year as companies raced to raise cash in order to survive the pandemic. The windfall came as lenders earned high fees underwriting debt and equity offerings for clients such as aerospace group Boeing, property rental site Airbnb and telecoms group SoftBank, according to… Refinitiv. It was a ‘very robust year for underwriting both debt and equity’, said Jason Goldberg, an analyst at Barclays.”

Trump Administration Watch:

December 27 – Reuters (Steve Holland and Susan Cornwell): “U.S. President Donald Trump on Sunday signed into law a $2.3 trillion pandemic aid and spending package, restoring unemployment benefits to millions of Americans and averting a federal government shutdown in a crisis of his own making. Trump… backed down from his earlier threat to block the bill, which was approved by Congress last week, after he came under intense pressure from lawmakers on both sides.”

December 30 – Reuters (Susan Cornwell and David Morgan): “U.S. Senate leader Mitch McConnell dealt a likely death blow… to President Donald Trump’s bid to boost coronavirus aid to Americans, declining to schedule a swift Senate vote on a bill to raise relief checks to $2,000 from $600. McConnell said… a bill passed by the Democratic-controlled House of Representatives, which sought to meet fellow Republican Trump’s demands for bigger checks, ‘has no realistic path to quickly pass the Senate.’”

December 30 – Bloomberg (Erik Wasson and Roxana Tiron): “The prospects for boosting stimulus payments for most Americans to $2,000 are fading fast in the Republican-controlled U.S. Senate even with GOP leaders under pressure by both President Donald Trump and congressional Democrats. The partisan clash over the payments also is entangling another piece of year-end business in the Senate -- a vote to override Trump’s veto of a crucial $740.5 billion defense policy bill. Senator Bernie Sanders is attempting to force a delay on the defense legislation unless Senate Majority Leader Mitch McConnell relents and allows a vote on a standalone bill on the bigger stimulus checks. McConnell on Tuesday blocked an attempt by Democratic leader Chuck Schumer to set up a vote on a House-passed bill…”

December 30 – CNBC (Will Feuer and Kevin Stankiewicz): “President Donald Trump tried… to deflect criticism for a slower-than-expected rollout of the Covid-19 vaccine, saying the U.S. has distributed the lifesaving shots but states have to administer them. More than 11.4 million doses of Pfizer and Moderna’s two-dose vaccines have been distributed across the country as of Monday morning, but just about 2.1 million shots have been given to people… That’s a far cry from U.S. health officials’ original goal of injecting at least 20 million Americans with their first shots before the end of the year. ‘The Federal Government has distributed the vaccines to the states,’ the president said in a tweet. ‘Now it is up to the states to administer. Get moving!’”

December 31 – Reuters: “Iranian Foreign Minister Mohammad Javad Zarif on Thursday accused U.S. President Donald Trump of attempting to fabricate a pretext to attack Iran, and said Tehran would defend itself forcefully… The U.S. military flew two nuclear-capable B-52 bombers to the Middle East in a message of deterrence to Iran on Wednesday, but the bombers have since left the region.”

December 31 – Bloomberg (Max Zimmerman and Gregor Stuart Hunter): “The New York Stock Exchange said it will delist three Chinese corporations to comply with a U.S. executive order that imposed restrictions on companies identified as affiliated with the Chinese military. China Mobile Ltd., China Telecom Corp Ltd., China Unicom Hong Kong Ltd. will be suspended from trading between Jan. 7 and Jan. 11, and proceedings to delist them have started…”

Biden Administration Watch:

December 31 – Wall Street Journal (Natalie Andrews and Nick Timiraos): “Janet Yellen, President-elect Joe Biden’s pick for Treasury secretary, collected more than $7 million in speaking fees during more than 50 in-person and virtual engagements over the past two years, according to financial disclosures… A separate ethics agreement outlined Ms. Yellen’s plans to resign as a consultant to the Magellan Financial Group Ltd., an investment-fund manager based in Australia, upon her confirmation. Ms. Yellen began consulting for the firm one year after leaving her post as Federal Reserve chairwoman in early 2018.”

Election Watch:

December 27 – Bloomberg (Billy House and Eric Martin): “The two Georgia runoffs that will decide control of the U.S. Senate begin their final stretch, with President Donald Trump again putting himself in the middle of the campaign. Trump ignited controversy last week by holding up pandemic relief and government funding. Although he signed the legislation…, a week after it cleared Congress, his late action will end up delaying the stimulus payments he criticized as too low and cutting a week’s worth of expanded benefits for the jobless. The outgoing president is also headed back to Georgia, where he has lashed out at the governor and other Republicans officials.”

Federal Reserve Watch:

December 29 – Reuters (Dan Burns): “The Federal Reserve… said it had extended the end date for its Main Street Lending Program by eight days to process a rush of applications submitted since the Trump administration said it was terminating the emergency credit facility and several others set up by the U.S. central bank. The program, targeted at small- and mid-sized businesses in need of credit to get through the recession triggered by the coronavirus pandemic, will remain open until Jan. 8 rather than closing on Dec. 31, as originally announced by U.S. Treasury Secretary Steven Mnuchin in November, the Fed said…”

December 30 – Bloomberg (Christopher Condon): “Changes to the Federal Reserve’s interest-rate setting panel will make the U.S. central bank even less likely to tighten monetary policy in the new year… In the annual rotation of voters on the Federal Open Market Committee, the four regional Fed presidents who receive that privilege in 2021 will be marginally more dovish… than the four they replace. The most notable shift comes as Chicago’s Charles Evans, one of the most predictably dovish officials, takes the vote held this year by Cleveland’s Loretta Mester… In addition, a new permanent vote now belongs to Christopher Waller, the former research director of the St. Louis Fed who was sworn in as a member of the Fed’s Board of Governors on Dec. 18.”

U.S. Bubble Watch:

December 27 – Associated Press (Tamara Lush, Josh Boak, Nicholas Riccardi and Claire Galofaro): “Elections are meant to resolve arguments. This one inflamed them. Weeks after the votes have been counted and the winners declared, many Americans remain angry, defiant and despairing. Millions now harbor new grievances borne of President Donald Trump’s baseless claims of election fraud. Many Democrats are saddened by results that revealed the opposition to be far more powerful than they imagined. And in both groups there are those grappling with larger, more disquieting realizations: The foundations of the American experiment have been shaken — by partisan rancor, disinformation, a president’s assault on democracy and a deadly coronavirus pandemic.”

December 30 – Bloomberg (Ana Monteiro): “The U.S. merchandise-trade deficit widened to an all-time high in November as American companies imported a record value of consumer goods. The shortfall grew to $84.8 billion last month from $80.4 billion in October, according to Commerce Department data… The median estimate… was for a $81.5 billion deficit. Imports rose 2.6% to $212 billion, the highest since May 2019 and led by a jump in shipments of consumer goods. Exports increased 0.8% to $127.2 billion.”

December 29 – Associated Press: “U.S. home prices jumped in October by the most in more than six years as a pandemic-fueled buying rush drives the number of available properties for sale to record lows. That combination of strong demand and limited supply pushed home prices up 7.9% in October compared with 12 months ago, according to Tuesday’s S&P CoreLogic Case-Shiller 20-city home price index. That’s the largest annual increase since June 2014. The coronavirus outbreak has forced millions of Americans to work from home and it’s curtailed other activities like eating out, going to movies or visiting gyms. That’s leading more people to seek out homes with more room for a home office, a bigger kitchen, or space to work out.”

December 30 – Reuters (Noel Randewich): “Wall Street investors with access to newly listed stocks at their exclusive IPO prices reaped huge returns in 2020, while retail investors who generally miss out on the best prices still made tidy gains. Shares of companies that went public via IPOs or direct listings this year on average have surged 75%, with corporations that have yet to report a profit jumping more than twice as much as those with positive bottom lines... The analysis includes about 200 companies that held IPOs in the United States this year, and a handful of direct listings from companies such as Asana and Palantir Technologies. About 70% of the companies listing their shares this year are not run profitably…”

Fixed Income Watch:

December 30 – Bloomberg (Danielle Moran): “The $3.9 trillion U.S. municipal bond market is on track to finish 2020 with returns of about 5.2%, marking the seventh straight year of gains and showcasing the rebound from a record selloff in March… State and local governments issued about $457 billion of long-term bonds in 2020 -- 12.5% more than what was sold in 2019 -- with the increase driven by a sharp jump in the sale of taxable bonds… This year’s supply exceeds the previous record reached in 2016. Governments sold about $140 billion of taxable long-term municipals this year, more than double the amount sold in 2019, and tax-exempt bond sales reached about $317 billion…”

China Watch:

December 30 – Bloomberg: “China’s central bank has pumped enough cash into the banking system to convince government bond investors that the worst is finally over. Over the past month, the People’s Bank of China has had to work especially hard to rein in borrowing costs after a surge in credit defaults damped commercial lenders’ enthusiasm to make loans. The central bank injected a net $84 billion in one-year funding and $20 billion of short-term cash into the financial system in the final five weeks of 2020 alone.”

December 29 – Bloomberg: “China’s central bank reiterated its pledge to avoid a sudden shift in monetary policy while it maintains necessary support for the economy’s recovery. The main priority is stability, the People’s Bank of China said… after its quarterly policy meeting, vowing to ‘make no sharp turn’ on policy. Monetary policy should be flexible, targeted, reasonable and appropriate, it said, reiterating comments from the Communist Party’s recent Central Economic Work Conference. The PBOC has been signaling a gradual withdrawal of monetary stimulus as business activity returns to normal and debt levels soar. The recent statements from authorities suggest a ‘more moderate’ stance compared with previous calls on stimulus exit, according to Huachuang Securities analysts…”

December 31 – Bloomberg: “China’s regulators will impose caps on banks’ lending to the real estate sector for the first time, in their latest efforts to prevent systematic risks after a series of property curbs in recent years did little to damp buyer enthusiasm. Under the new mechanism taking effect on Jan 1, 2021, loans to developers will be capped at 40% for the nation’s largest state-owned lenders while banks’ mortgage lending should be no more than 32.5% of their outstanding credit, the People’s Bank of China and the China Banking and Insurance Regulatory Commission said… The move underscores authorities’ determination to keep a tight rein on the bubble-prone sector and curb leverage at some of the nation’s largest developers.”

December 31 – Reuters (Lusha Zhang and Ryan Woo): “Prices of new homes in China rose at a slower pace in December, with tightening policies continuing to cool the market, a private survey showed on Friday, but price growth in 2020 still topped the previous year’s pace despite the coronavirus pandemic. New home prices in 100 cities rose 0.25% in December from a month earlier versus a 0.32% gain in November, moderating for the second straight month… For the whole year of 2020, new home prices rose 3.46%, slightly more than 3.34% seen in 2019…”

December 30 – Bloomberg: “China has stepped up scrutiny of the nation’s credit rating industry, imposing a short-term ban on new business for two risk assessors within two weeks following a surge in bond defaults. China’s interbank bond market watchdog said… it will halt China Chengxin International Credit Rating Co.’s new debt grading business for three months, citing violations of relevant rules in its rating service for Yongcheng Coal & Electricity Holding Group Co. and Henan Energy & Chemical Industry Group Co. The National Association of Financial Market Institutional Investors said China Chengxin… didn’t investigate the borrowers’ debt-related problems and failed to reveal their credit risk effectively.”

December 28 – Bloomberg (Tom Hancock): “Smaller Chinese companies and those in the retail industry are struggling to access credit amid a weak recovery in consumer spending, according to China Beige Book International… Loan rejection rates for retail businesses increased to 38% in the final quarter of 2020 from 14% in the previous quarter, according to the latest quarterly report from CBBI. Rejection rates for small and medium-sized businesses rose to 24% in the final quarter, double the rate posted by large companies… ‘Large firms continue to gobble up whatever credit was available, enjoying much lower capital costs than their smaller counterparts, alongside higher loan applications and still falling rejections,’ CBBI said. ‘This is the opposite of the quagmire small-and-medium enterprises find themselves in.’”

December 28 – Wall Street Journal (Mike Bird): “A Chinese asset market that barely existed three decades ago is now one of the world’s largest and most important centers of leverage and economic activity. The country’s property sector has developed at a breakneck pace, construction and asset prices have surged, and the country’s top real-estate developers have become some of the largest firms in the world. Real-estate investment has outstripped GDP growth for the most of the last two decades…”

December 30 – Bloomberg: “China’s economic recovery could be past its peak and beginning to stabilize as the year draws to a close, with a key manufacturing gauge moderating in December after an export-fueled boost to production. The official manufacturing purchasing managers’ index fell to 51.9 from a three-year high of 52.1 in November… The non-manufacturing gauge, reflecting activity in the construction and services sectors, dropped to 55.7 from 56.4.”

December 30 – Financial Times (Ryan McMorrow and Tom Mitchell): “Beijing is accelerating plans to bring Jack Ma’s Ant Group more closely under its control as part of a ‘rectification’ drive that would make it difficult for one of China’s richest men to fully rebuild his online empire. Ant’s consumer lending unit and other fast-growing parts of the financial technology group will be carved out into a new financial holding company to be regulated by the People’s Bank of China… The reorganisation would bring Ant directly under the thumb of the regulators Mr Ma has long brushed up against, with public critiques that irked authorities and officials at China’s state-owned banks.”

December 30 – Wall Street Journal (Xie Yu): “China’s top credit-rating firm was banned from rating new bonds for three months, after an investigation found it ignored red flags at a state-owned coal miner whose default last month rattled the country’s bond market. China Chengxin International Credit Rating Co. had an AAA rating on the miner when it failed to repay the equivalent of $153 million in short-term debt on Nov. 10. The default occurred just weeks after the company, Yongcheng Coal & Electricity Holding Group Co., raised the same amount from a sale of three-year-debt.”

December 31 – NPR (Reese Oxner): “She was a lawyer. But when the coronavirus began raging in Wuhan, China, Zhang Zhan started reporting as a citizen journalist — offering a candid look at the situation on the ground. Then, after months of sharing videos and text updates on WeChat, Twitter and YouTube — the 37-year-old's social media feeds went dark in May. Authorities detained her, claiming she was spreading lies… And on Monday, she was sentenced to four years in prison. One of Zhang's attorneys said she was convicted of ‘picking quarrels and provoking trouble’… While detained, Zhang refused to eat as a-form of protest… According to her lawyer, she was brought into court in a wheelchair, having lost a significant amount of weight. Her mother sobbed after the sentencing.”

Central Bank Watch:

December 30 – Financial Times: “The year 2020 will stand as the time when the coronavirus crisis almost broke the financial markets. Investors watched with growing horror in March as a stock sell-off turned into a liquidity crisis where even the ultra-safe US government bond market was straining to match buyers and sellers — challenging the most basic assumptions of risk and threatening the underpinnings of the financial system. Central banks and governments initially struggled to stop the rot, before providing unprecedented programmes of bond-buying and rate cuts that laid the ground for a record-breaking ‘everything rally’.”

EM Watch:

December 29 – Reuters (Karin Strohecker): “Many emerging markets emulated their developed peers this year with bond-buying programmes that successfully tamped down borrowing costs, yet unease is also stirring about the possible hit to hard-won monetary policy independence. While some central banks including South Africa and India limited themselves to buying government debt in secondary trading, others such as Indonesia and Ghana launched themselves straight into primary markets… Emerging market watchers such as David Hauner at BofA are broadly positive on the results. ‘So far it has been a success in a sense that it has actually reduced borrowing costs in local currency for many emerging markets, reduced illiquidity in bad times and helped cap yields as well,’ Hauner said.”

Europe Watch:

January 1 – Bloomberg (Joe Mayes): “The U.K. completed its divorce from the European Union, leaving the bloc’s single market and customs regime more than four years after voting for Brexit and with the country gripped by a deepening crisis. The end of the transition period at 11 p.m. in London on New Year’s Eve launched the U.K. on a new path on its own, free from EU laws, able to strike trade agreements around the world and to reshape its economy. ‘This is an amazing moment for this country,’ Prime Minister Boris Johnson said in his New Year’s message. ‘We have our freedom in our hands and it is up to us to make the most of it.’”

December 28 – Bloomberg (Joe Mayes, Siddharth Philip and Deirdre Hipwell): “The U.K. and European Union may have signed a trade deal, but British businesses still face a raft of difficult changes. More than four years in the making, the Brexit agreement avoids the worst-case scenario of new tariffs and quotas after Dec. 31… The divorce will still create significant disruption for a range of industries. Mutual recognition of standards, which would have allowed firms to make products in the U.K. and market them in the EU without any extra certification process, isn’t part of the deal. Likewise, workers in Britain’s services industry… face new costs and bureaucracy as their professional qualifications will no longer be automatically recognized in the EU.”

December 30 – Wall Street Journal (Patricia Kowsmann): “European banks are doing something that got them into trouble years ago: loading up on government debt, a trade investors call the ‘doom loop.’ Banks in the eurozone, stuffed with excess cash thanks to Covid-19 central bank relief efforts, bought close to €200 billion, the equivalent of $245 billion, in government debt of their home countries in the year to September. That has raised their holdings by 19% to €1.2 trillion… This comes against the backdrop of massive government and central bank support packages that have buoyed assets.”

Japan Watch:

December 29 – Reuters (Elaine Lies): “Tokyo’s coronavirus outbreak is severe and could explode in the coming days just as Japan begins its New Year’s holiday period, in which millions of people usually move around the country, the city’s governor said… The capital recorded 944 new coronavirus cases on Wednesday, just under the record 949 recorded on Saturday, and medical experts warned that unless the outbreak is checked the city could soon see over 1,000 new patients a day. ‘Please emphasise life over fun,’ Governor Yuriko Koike told a news conference…”

December 28 – Reuters (Irene Wang and Kiyoshi Takenaka): “Japan… detected a coronavirus variant found in South Africa, the government said, the first such discovery in a nation that has already identified more than a dozen cases of another variant that is spreading rapidly in Britain.”

Leveraged Speculation Watch:

December 30 – Bloomberg (Benjamin Robertson): “Private equity firms on the hunt for capital are increasingly turning to specialty lenders for financing and providing a valuable asset as collateral: stakes in their funds. The buyout industry has about $3 trillion of unrealized value on its books, according to Preqin. And it’s tapping that to land loans for bolt-on deals, to refinance debt or bail out struggling companies in their portfolios. Investors are racing to make loans. Lender 17Capital saw record demand and provided $1.5 billion of portfolio financing this year. U.K.-based Silicon Valley Bank… did a year’s worth of deals in March alone. Investec Plc’s fund finance division has seen $4.5 billion of inquiries related to this financing through to September, more than double the value for 2019… ‘Volumes have gone through the roof,’ said Pierre-Antoine de Selancy, co-founder of 17Capital… ‘Private equity portfolio companies will continue to need more cash as the economy struggles.’”

December 31 – Bloomberg (Dana Hull and Esha Dey): “Tesla Inc. short sellers lost billions more on the electric-vehicle maker than any other company in 2020, as bears got severely burned by the stock’s surge to new highs. With shares up over 730%, Tesla bears have seen more than $38 billion in mark-to-market losses this year, according to… S3 Partners. By comparison, the next-biggest loss for short sellers was on Apple Inc., at just under $7 billion… This ‘is not only the largest mark-to-market loss for any stock this year, it is the largest yearly mark-to-market loss I have ever seen,’ said Ihor Dusaniwsky, a managing director at S3 Partners.”

December 30 – Bloomberg (Hema Parmar, Katherine Burton and Nishant Kumar): “Turns out, the hedge fund industry’s swashbucklers haven’t been made obsolete by the machines just yet. After years of being outgunned and outclassed by computer-driven quantitative strategies, human stock-pickers climbed back on top in 2020, helped by aggressive bets in technology and the flood of central bank money that buoyed markets. The dizzying gyrations of the pandemic-stricken year humbled even the most sophisticated of quants -- notably behemoths Renaissance Technologies and Two Sigma -- whose trading models were thrown off by swings their computers had never seen before. Overall, human-run funds put up some their best numbers in a decade… Whether by luck or by skill, they showed that in this most unusual of years, stock-pickers could still stand up to the seemingly inexorable rise of the machines.”

Geopolitical Watch:

December 30 – Bloomberg: “In Xi Jinping’s China, nearly everything is becoming a national security issue. This month Xi called on Communist Party officials in the 25-member Politburo to build a ‘holistic national security architecture’ that would extend to ‘all aspects of the work of the party and the country.’ He listed 10 components, including ‘safeguarding’ China’s one-party political system and focusing more on ‘forestalling and defusing national security risks.’ Also speaking at the Dec. 12 meeting was Yuan Peng, who heads a think tank affiliated with the Ministry of State Security -- China’s main intelligence agency. In a June article, he outlined a new post-pandemic global order with the U.S. and EU on the decline and the world facing an imminent economic depression, in which he also touted the benefits of China’s tech-driven mass surveillance model over that of Western democracies.”

December 30 – Reuters (Ben Blanchard): “Two U.S. warships sailed through the sensitive Taiwan Strait… drawing protest from Beijing, the second such mission this month and coming almost two weeks after a Chinese aircraft carrier group used the same waterway. China, which claims democratically run Taiwan as its own territory, has been angered by stepped-up U.S. support for the island, including arms sales and sailing warships through the Taiwan Strait, further souring Beijing-Washington relations.”

December 28 – Reuters (Gabriel Crossley): “China expressed anger… after U.S. President Donald Trump signed into law measures to further bolster support for Taiwan and Tibet, which had been included in a $2.3 trillion pandemic aid and spending package. China has watched with growing alarm as the United States has stepped up its backing for Chinese-claimed Taiwan and its criticism of Beijing’s rule in remote Tibet, further straining a relationship under intense pressure over trade, human rights and other issues.”