Fundamentally, Bubbles at their core are mechanisms of wealth redistribution and destruction, though for some time pernicious effects tend to be masked by the Bubble Illusion of fantastic development, innovation and expanding prosperity. Bubble-related inequality intensifies over the life of the cycle, turning highly destabilizing late in the Bubble period. Wealth and (financial and market) power become increasingly concentrated. Governments face mounting pressure – from an increasingly disaffected populace, as well as from the inordinately powerful financial and corporate sectors. Panicky governmental measures to hold collapse at bay invariably become instrumental in climactic “Terminal Phase” blow-off excess.
I’ll add that Bubble consequences are anathema to communist governments. That said, the overpowering seduction of “fantastic development, innovation and broad-based prosperity” can prove irresistible. This has especially been the case for a nation tenaciously determined to attain what it views as its rightful standing as a global superpower.
It’s a challenge to place the historic Chinese Bubble into proper context. Chinese Bank Assets have inflated more than 10-fold from 2004’s $4.5 TN to June 2021’s $52 TN. China ended Q1 with a debt-to-GDP ratio of 329% (IIF data), having doubled since the 2008 crisis. And while the latest iteration of Aggregate Financing (China’s measure of broad Credit growth) dates back only to 2017, it captures the parabolic nature of late-cycle excess. Aggregate Financing has inflated $7.9 TN, or 18%, over the past 17 months to $46.7 TN, with growth since 2017 at $18.3 TN, or 64%.
China has never experienced such spectacular wealth. Their over 1,000 billionaires exceed even the U.S. A booming equities market has lavishly rewarded entrepreneurs and corporate executives, along with the mass of speculators - including the thousands of Chinese hedge funds that have sprung up, along with millions of online retail speculators. But when it comes to bountiful growth in perceived wealth, a large segment of the population has enjoyed previously unimaginable gains from apartment price inflation.
Beijing has accumulated a $3.34 TN international reserves war chest, bolstered by years of U.S. trade deficits and global “hot money” flows. These reserves have been instrumental in China’s capacity to continue years of profligacy without typical emerging market boom and bust dynamics. Links from Fed QE to China’s boom are rather direct.
China’s ascendancy on the world stage mirrors the trajectory of its Credit expansion. The “Nine Dash Line” and militarization of the South China Sea. The Belt and Road initiative. Their uncompromising approach to U.S. trade negotiations. The Hong Kong crackdown. Playing hardball with Australia and others. Military drills off the coast of Taiwan. Negotiations with the Taliban. Partnered with Russia, China is building a global faction to rival the U.S.-led western alliance.
Beijing adopted markets and capitalistic development as necessary expedients to meet its developmental and geopolitical objectives. Bubbles inflated - and ran unchecked. Beijing repeatedly moved to rein in excess – and repeatedly lost its nerve and backed off. To be sure, Bubbles feed off timid policymaking. The communist party recognized in 2017 that Bubbles and associated inequality had become serious risks. A more determined effort to get the Bubble under control was scuttled, however, first because of acrimonious Trump trade negotiations, and then in response to Covid. The pandemic response saw parabolic Credit excess like never before.
President Xi and Chinese leadership have grown Weary of Their Experiment in Capitalism. It served its purpose, but has turned increasingly problematic. They clearly appreciate the risks associated with Bubbles and inequality – perhaps even recognizing the existential threat.
“Xi Jinping Takes Aim at the Gross Inequalities of China’s ‘Gilded Age’,” was the title of Friday’s (August 20th) insightful Financial Times opinion piece authored by James Kynge:
“Having spent four decades creating one of the most unequal societies on Earth, Beijing is now seized by a mantra of ‘common prosperity’ — or redistributing spoils to hundreds of millions of have-nots… ‘There is a sea-change in the way the Chinese Communist party sees its legitimacy,’ said Yu Jie, a researcher at Chatham House, a London-based think-tank. ‘Xi is addressing ordinary peoples’ agonies over unequal distribution of income and the lack of equal access to basic social welfare and some services.’ A commission led by Xi issued a call to arms this week. It said China would ‘regulate excessively high incomes and encourage high-income groups and enterprises to return more to society’. While the party had long allowed some people and regions to ‘get rich first’, it was now prioritising ‘common prosperity for all’. At stake is the CCP’s social contract with China’s people, Yu said. ‘If the party defends the current status quo that is manifestly unfair in its distribution of wealth and opportunity, trust from ordinary people will collapse.’”
Of course, Beijing today seeks to redistribute wealth. Mr. Kynge’s article notes that “some 600m Chinese live off a monthly income of about Rmb1,000 ($154).” Beijing finds the momentous power achieved by China’s big Internet companies as unacceptable. They are determined to crack down on various industries they see as promoting inequality or offering socially undesirable goods and services. They will now insist on the communist party having a hand in everything of significant importance. And in no way are they willing to now tolerate market forces dictating the nature of the cycle’s downside. Beijing is seizing the reins.
This week offered important confirmation of the faltering China Bubble thesis. It has become increasingly clear Beijing is determined to impose a radical shift in the flow of finance, investment, and the allocation of resources and wealth throughout the entire Chinese economy. And while government measures can certainly dictate lending and real investment, I don’t see how a destabilizing interruption in the flow of finance and speculative deleveraging can be avoided at this point.
The risk versus reward calculus for speculative endeavors has been momentously altered, albeit for stocks, corporate Credit and real estate. China’s Bubbles are in serious jeopardy – and I would now expect de-risking/deleveraging to gain momentum. Unfolding dynamics are putting China’s historic apartment Bubble at grave risk, especially for the highly inflated upper end. The week was notable for faltering Chinese Bubble contagion destabilizing global markets.
The Shanghai Composite dropped 2.5% this week, with the growth-oriented ChiNext Index sinking 4.6%. Hong Kong’s Hang Seng Index was slammed 5.8%. South Korea’s KOSPI fell 3.5%, and Taiwan’s TAIEX Index dropped 3.8%. Japan’s Nikkei lost 3.4%. Stocks were hit 2.6% in Brazil.
The Bloomberg Commodities Index slumped 4.2% this week. WTI Crude sank $6.30, or 10.6%. Industrial metals were under heavy liquidation. Copper fell 5.9%, Lead 3.6%, Nickel 6.1%, Tin 8.7%, and Zinc 3.5%. Palladium was crushed 14.3%. Iron Ore fell 6.3% (down 38% from May high to a 2021 low) and Steel Rebar 4.5%. Curiously, the soft commodities were also under pressure. Wheat dropped 5.9%, Corn 6.3%, Soybeans 9.2%, Rubber 4.7%, Coffee 2.5% and Sugar 1.9%.
Contagion erupted also in global currency markets, with the commodity currencies under notable pressure. Leading on the downside, the South African rand declined 3.7%, the Australian dollar 3.2%, the New Zealand dollar 2.9%, the Norwegian krone 2.5%, the Brazilian real 2.5%, the Canadian dollar 2.4%, and the Mexican peso 2.4%. China's renminbi declined 0.37% versus the dollar.
It evolved over years into a distinctive global Bubble Dynamic, with highly synchronized risk markets across the globe. China emerged as the marginal source of global Credit, speculative leverage, demand for commodities, and much more. U.S. market immunity to China’s faltering Bubble began to fade this week. So far, “risk off” has been relegated to the “fringe” – with small cap weakness and hints of risk aversion in junk debt. But I would expect de-risking/deleveraging to begin gravitating from the “Periphery” toward the “Core.”
Ten-year Treasury yields dipped two bps this week to 1.26%, a rather uninspiring gain considering China and global market developments. This raises the question of how much support the Treasury market has left to offer in the event of an intensifying “risk off” dynamic. I believe a major global de-risking/deleveraging dynamic has commenced in China and Asia. U.S. “investors” seem oblivious to the risk posed to our highly speculative markets in equities, corporate Credit and derivatives.
For the Week:
The S&P500 declined 0.6% (up 18.3% y-t-d), and the Dow fell 1.1% (up 14.7%). The Utilities jumped 2.0% (up 11.2%). The Banks sank 3.6% (up 27.8%), and the Broker/Dealers lost 3.3% (up 24.6%). The Transports dropped 2.5% (up 16.4%). The S&P 400 Midcaps fell 2.0% (up 16.0%), and the small cap Russell 2000 dropped 2.5% (up 9.8%). The Nasdaq100 slipped 0.3% (up 17.1%). The Semiconductors slumped 2.4% (up 16.5%). The Biotechs declined 0.6% (up 0.6%). While bullion gained $1, the HUI gold index sank 5.9% (down 19.9%).
Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields added two bps to 0.23% (up 10bps y-t-d). Five-year T-note yields increased a basis point to 0.78% (up 42bps). Ten-year Treasury yields declined two bps to 1.23% (up 34bps). Long bond yields dropped six bps to 1.87% (up 23bps). Benchmark Fannie Mae MBS yields added one basis point to 1.79% (up 44bps).
Greek 10-year yields added a basis point to 0.56% (down 7bps y-t-d). Ten-year Portuguese yields were unchanged at 0.11% (up 8bps). Italian 10-year yields were unchanged at 0.55% (unchanged). Spain's 10-year yields slipped a basis point to 0.21% (up 16bps). German bund yields fell three bps to negative 0.50% (up 7bps). French yields declined two bps to negative 0.15% (up 19bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields fell five bps to 0.52% (up 33bps). U.K.'s FTSE equities index slumped 1.8% (up 9.7% y-t-d).
Japan's Nikkei Equities Index dropped 3.4% (down 1.6% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.01% (down 1 bp y-t-d). France's CAC40 sank 3.9% (up 19.4%). The German DAX equities index lost 1.1% (up 15.2%). Spain's IBEX 35 equities index declined 0.9% (up 10.4%). Italy's FTSE MIB index dropped 2.8% (up 16.6%). EM equities were mostly lower. Brazil's Bovespa index fell 2.6% (down 0.8%), while Mexico's Bolsa was little changed (up 16.7%). South Korea's Kospi index sank 3.5% (up 6.5%). India's Sensex equities index slipped 0.2% (up 15.9%). China's Shanghai Exchange fell 2.5% (down 1.3%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 2.2%). Russia's MICEX equities index declined 1.0% (up 16.5%).
Investment-grade bond funds saw inflows of $4.278 billion, while junk bond funds posted outflows of $4.0 million (from Lipper).
Federal Reserve Credit last week expanded $93.2bn to a record $8.298 TN. Over the past 101 weeks, Fed Credit expanded $4.572 TN, or 123%. Fed Credit inflated $5.487 Trillion, or 195%, over the past 458 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $5.9bn to $3.502 TN. "Custody holdings" were up $85bn, or 2.5%, y-o-y.
Total money market fund assets rose $12.5bn to $4.522 TN. Total money funds declined $22bn y-o-y, or 0.5%.
Total Commercial Paper declined $3.3bn to $1.138 TN. CP was up $132bn, or 13.1%, year-over-year.
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 2.86% (down 13bps y-o-y). Fifteen-year rates added one basis point to 2.15% (down 38bps). Five-year hybrid ARM rates declined a basis point to 2.43% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.03% (down 2bps).
Currency Watch:
For the week, the U.S. Dollar Index gained 1.1% to 93.50 (up 4.0% y-t-d). For the week on the downside, the South African rand declined 3.7%, the Australian dollar 3.2%, the New Zealand dollar 2.9%, the Norwegian krone 2.5%, the Brazilian real 2.5%, the Canadian dollar 2.4%, the Mexican peso 2.4%, the Swedish krona 1.8%, the British pound 1.8%, the South Korean won 0.9%, the euro 0.8%, the Singapore dollar 0.5%, the Japanese yen 0.2% and the Swiss franc 0.2%. The Chinese renminbi declined 0.37% versus the dollar (up 0.40% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index dropped 4.2% (up 16.8% y-t-d). Spot Gold was little changed at $1,781 (down 6.2%). Silver fell 3.0% to $23.03 (down 12.8%). WTI crude sank $6.30 to $62.14 (up 28%). Gasoline lost 10.6% (up 44%), and Natural Gas slipped 0.3% (up 52%). Copper dropped 5.9% (up 17%). Wheat fell 5.9% (up 14%). Corn sank 6.3% (up 11%). Bitcoin gained $1,645 this week to $49,248 (up 69%).
Coronavirus Watch:
August 16 – CNBC (Rich Mendez, Robert Towey and Nate Rattner): “Five states broke records for the average number of daily new Covid cases over the weekend as the delta variant strains hospital systems across the U.S. and forces many states to reinstate public health restrictions. Florida, Louisiana, Hawaii, Oregon and Mississippi all reached new peaks in their seven-day average of new cases per day as of Sunday… On a per capita basis, Louisiana, Mississippi and Florida are suffering from the three worst outbreaks in the country.”
Market Mania Watch:
August 19 – Bloomberg (Suzanne Woolley): “The ranks of 401(k) and IRA millionaires are exploding. The number of 401(k) accounts with balances of at least $1 million at Fidelity Investments grew 84% year over year to 412,000, while the number of seven-figure IRAs jumped more than 64% to 341,600, Fidelity said. Together, the number of accounts with $1 million or more grew 74.5% — though it isn’t clear how many individuals that represents, because people can have multiple accounts.”
August 18 – Bloomberg (Olivia Raimonde and Heather Perlberg): “The higher risk, higher reward world of private credit is targeting the wealthy. Blackstone Group Inc., Carlyle Group Inc., Apollo Global Management Inc. and other large firms have started offering products for individuals to invest in loans to midsized companies that banks won’t touch. The lure is a potential annual return at times surpassing 8%, when corporate bond return indexes are negative, plus a relatively low initial investment. Their push coincides with a broader democratization in financial markets, with apps such as Robinhood Markets Inc. helping people find their way into everything from SPACs to Dogecoin.”
August 16 – Financial Times (Robin Wigglesworth and Kaye Wiggins): “The biggest listed US private capital companies have more than tripled in value since the depths of last year’s market sell-off, as investors seek to benefit from the hefty fees they rake in from the boom in unlisted assets. The combined market value of Blackstone, KKR, Carlyle, Apollo and Ares has ballooned from a March 2020 low of $80bn to about $252bn this year, and private equity chiefs sounded an ebullient tone on earnings calls with analysts this summer. ‘We are fortunate to be in a growth business,’ said Marc Rowan, chief executive of Apollo Global Management. ‘Almost every day, the business gets better. The trends in the business are overwhelmingly favourable.’”
August 17 – Bloomberg (Charles Williams): “The biggest buyers of U.S. leveraged loans have raised money this year at the fastest pace on record, as investors clamor for higher yields and floating-rate debt. Money managers that bundle loans into bonds known as collateralized loan obligations have sold more than $100 billion of those securities in the U.S. in 2021… It’s the earliest in the year that CLO sales have reached that level, putting annual issuance on track to surpass 2018’s record of $130.4 billion. With CLO sales reaching new records, demand for the loans that get packaged into the securities is surging as well. In the leveraged loan market, new money financings, those backing acquisitions and dividends, swelled to more than $40 billion in June and July, the first back-to-back months at that level since Bloomberg began tracking syndicated leveraged loan data in 2013.”
August 14 – CNBC (Robert Frank): “A McLaren F1 was auctioned at Pebble Beach on Friday night for $20.5 million, showing the continued strength of the classic car market. Gooding & Co. auctioned off the rare McLaren F1 to a packed and excited crowd, blowing past its estimate of at least $15 million. The F1, one of the most prized collector cars for its rarity and place in auto history, became the most expensive car auctioned this year and the most expensive McLaren F1 ever sold.”
Market Instability Watch:
August 14 – Bloomberg (Jan-Patrick Barnert and Michael Msika): “It’s been two decades since Wall Street analysts were this upbeat. About 56% of all recommendations on S&P 500 firms are listed as buys, the most since 2002. It’s one more data point that shows the extent of the euphoria sweeping markets… While analysts are historically a bullish bunch, they’re turning even more optimistic in the face of relentless stock-market gains and corporate earnings that topped even the highest expectations. For all the concerns about the delta variant, China’s regulatory crackdown or waning Federal Reserve stimulus, it hasn’t made much of a dent yet on stock prices. ‘It’s not just financial conditions and low rates fueling the appetite for risk assets -- tremendous fundamental improvement is forecast into 2022,’ Todd Jablonski, chief investment officer at Principal Global Asset Allocation, said…”
August 14 – Bloomberg (Simon Kennedy and Benjamin Purvis): “Former U.S. Treasury Secretary Lawrence Summers said the Federal Reserve’s massive bond-buying program is resulting in a ‘bizarre’ situation in which the government’s funding structure is overly focused on the short-term… ‘In effect, the government now has a floating rate short-term liability outstanding rather than a long-term fixed interest rate liability,’ Summers told Bloomberg… ‘At a moment of super uncertainty, at a moment when many people think rates are remarkably low, a decision to fund more short seems bizarre.’”
Inflation Watch:
August 17 – Bloomberg (Tope Alake, Fabiana Batista, Pratik Parija, and Leslie Patton): “Whether at supermarkets, corner stores, or open-air markets, prices for food have been surging in much of the world, forcing families to make tough decisions about their diets. Meat is often the first to go, ceding space to less expensive proteins such as dairy, eggs, or beans. In some households, a glass of milk has become a luxury reserved only for children; fresh fruit, once deemed a necessity, is now a treat. Food prices in July were up 31% from the same month last year, according to… the United Nations’ Food and Agriculture Organization.”
August 19 – CNBC (Diana Olick): “The onset of the coronavirus pandemic caused unprecedented, worldwide supply-chain disruptions, but experts say that’s a drop in the bucket compared with the disruptions that climate change will cause. Wildfires in the American West, flooding in China and Europe and drought in South America are already disrupting supplies of everything from lumber to chocolate to sushi rice. ‘Whether you’re in the agricultural sector or the forestry sector, or in the tech sector, there is really no particular sector that is immune from climate change,’ said Christy Slay, senior director… at The Sustainability Consortium… About a quarter of the lumber consumed in the U.S. comes from Canada, which is seeing severe drought and wildfire conditions. ‘The wildfires burning in Western Canada are significantly impacting the supply chain and our ability to transport product to market,’ Canadian lumber producer Canfor Corp. said... ‘As a result, we are implementing short-term production curtailments at our Canadian sawmills.’ The homebuilding industry is already suffering severe supply-chain issues due to Covid, and fires are only exacerbating that.”
August 12 – Bloomberg (Maria Heeter): “U.S. home prices rose the most on record in the second quarter as buyers battled for a scarcity of listings. The median price of an existing single-family home jumped 23% from a year earlier to an all-time high of $357,900, the National Association of Realtors said… About 94% of 183 metropolitan areas measured had double-digit gains, up from 89% in the first quarter… Buyers are having a hard time finding properties they can afford: Sales of previously owned homes in the U.S. fell for a fourth straight month in May.”
August 17 – Bloomberg (Augusta Victoria Saraiva and Alexandre Tanzi): “U.S. single-family home rental prices jumped 7.5% in June, showing no sign of abating amid a hot housing market and construction lags. The year-over-year pace accelerated from 6.6% in May, which was the biggest percentage gain since at least 2005, according to CoreLogic… The most expensive homes saw the biggest jump in rents, at 9.6%.”
August 18 – CNBC (Alicia Adamczyk): “Sorry to be the bearer of bad news. But if you’re currently renting your place, you might see the price tick up when it’s time to renew your lease. In fact, rent is forecast to be even higher this year than it would have been if the pandemic had not occurred. Throughout 2020, many renters were able to benefit from price reductions or even months of free rent as landlords struggled to fill empty units. But those concessions are more or less gone, and landlords are hiking up prices as Covid-19 restrictions end and housing demand spikes. Housing costs were rising before Covid, but the coronavirus exacerbated the problem: The national median rent has increased by 11.4% so far in 2021, compared with just 3.3% for the first six months of 2017, 2018 and 2019, according to… Apartment List…”
August 18 – Financial Times (Emiko Terazono and Michael Pooler): “After enduring the worst drought in nearly a century followed by a bout of cold temperatures, areas within Brazil’s farming belt are braced for further adversity as the La Niña weather phenomenon threatens to bring more dry conditions later this year. In the small mountain town of Caconde in São Paulo state, third-generation coffee grower Ademar Pereira, 44, estimates that half of this year’s crop will be lost because many of the shrubs on his family’s modest plantation have succumbed to the chill. ‘It was already going to be a very small harvest. And with the frost, it got worse,’ he said. ‘There are lots of people who’ve lost everything.’”
Biden Administration Watch:
August 14 – Financial Times (Colby Smith and Lauren Fedor): “The $3.5tn price tag on the Biden administration’s budget plan has ignited fresh debate in Washington about the potential inflationary effects of increased public spending at a time when US consumer prices are rising rapidly… Rising inflation fears could imperil Joe Biden’s spending ambitions as the two bills head to the House of Representatives later this month. The House, which Democrats control by a slim margin, will return from summer recess early to first consider the budget resolution, and then weigh up the infrastructure package. Both pieces of legislation must pass both chambers of Congress. ‘Inflation has become part of the congressional debate for the first time in the at least 25 years I’ve been following this,’ said Jason Furman, a senior fellow at the Peterson Institute for International Economics…”
August 16 – Bloomberg (Steven T. Dennis): “Democrats are betting Republicans will blink and agree to raise the debt ceiling before it expires, a risky wager after a weeks-long standoff that threatens the health of the financial markets and continued U.S. government operations. Should market turmoil and a federal shutdown ensue this fall, it could overshadow Democrats’ efforts to push through President Joe Biden’s $4.1 trillion economic agenda and serve a blow to the party heading into next year’s midterm elections.”
August 16 – Associated Press (Ashraf Khalil and Josh Boak): “President Joe Biden’s administration has approved a significant and permanent increase in the levels of food aid available to needy families — the largest single increase in the program’s history. Starting in October, average benefits for food stamps… will rise more than 25% above pre-pandemic levels. The increased assistance will be available indefinitely to all 42 million SNAP beneficiaries. The increase coincides with the end of a 15% boost in SNAP benefits that was ordered as a pandemic protection measure.”
Federal Reserve Watch:
August 18 – Financial Times (John Plender): “William McChesney Martin, head of the Federal Reserve from 1951 to 1970, argued that the task of the central bank was to take away the punch bowl when the party was getting going. With investors worrying in recent weeks about ‘peak everything’ as froth accumulates in equities, bonds, housing, cryptocurrencies and heaven knows what else, the party has long since been under way and is now in full swing and more. Indeed, the central banks have been busy topping up the punch bowl through their continued bond purchases to keep interest rates low while conducting an interminable debate on when and how to remove support. Their protestations that the risk of inflation is ‘transitory’ look increasingly questionable. The curious thing about this approach to monetary policy is that central bankers seem hard pressed to explain why continuing the asset buying programme, known as quantitative easing, is necessary.”
August 16 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are nearing agreement to begin scaling back their easy money policies in about three months if the economic recovery continues, with some pushing to end their asset-purchase program by the middle of next year. In recent interviews and public statements, several have advocated for this timetable, which would enable them to raise interest rates sooner than currently anticipated if the economy makes rapid progress toward their goals. Officials at their July 27-28 meeting deliberated on two important questions: when to start paring their monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage securities, and how quickly to reduce, or taper, them… The answers are important to financial markets because Fed officials have said they would prefer to conclude the bond-buying program before considering when to raise interest rates from near-zero.”
August 18 – Bloomberg (Craig Torres): “Most Federal Reserve officials agreed last month they could start slowing the pace of bond purchases later this year, judging that enough progress had been made toward their inflation goal, while gains had been made toward their employment objective. ‘Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,’ minutes of the Federal Open Market Committee’s July 27-28 gathering [said]… ‘Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.’”
August 18 – Reuters (Howard Schneider and Lindsay Dunsmuir): “Federal Reserve officials felt their employment benchmark for decreasing support for the economy ‘could be reached this year,’ but appeared to disagree on other key aspects of where monetary policy should turn next in the transition from the pandemic crisis, according to minutes from last month's policy meeting. The account… showed Fed officials largely expect that later this year they will reduce the central bank's emergency monthly purchases of $120 billion of Treasury bonds and mortgage-backed securities. But consensus on other key issues appeared elusive, including the start date and pace of the bond-buying ‘taper,’ and whether the bigger risk to the recovery is posed by inflation, ongoing joblessness, or the lurking chance that a resurgent coronavirus may throw things into reverse.”
August 17 – Financial Times (Colby Smith): “A top Federal Reserve official has warned that the US central bank’s emergency bond-buying programme is ill-suited for an economy held back by supply constraints, urging instead a speedy end to the stimulus to avoid burdensome debts and inflationary pressures. Eric Rosengren, president of the Boston Fed, told the Financial Times that he would support the central bank announcing next month that it would begin to wind down or ‘taper’ its $120bn in monthly asset purchases this autumn and get on track to halt them by the middle of 2022. The purchases of Treasuries and agency mortgage-backed securities were no longer the right remedy in an environment of severe shortages of essential materials and workers, Rosengren said. The current situation was different from the aftermath of the 2008 global financial crisis, when the Fed faced a shortfall of demand and addressed it by reducing borrowing costs, he said…”
August 18 – Reuters (Howard Schneider): “If the Federal Reserve misreads the strength of future inflation in order to delay tightening monetary policy now it could require ‘very disruptive’ and swift changes in policy down the road, St. Louis Federal Reserve president James Bullard said… Arguments in favor of a ‘go slow’ approach to changing monetary policy are ‘a playbook from the aftermath of the global financial crisis,’ less relevant to an economy with higher than expected inflation and likely fast job growth, Bullard said. ‘We could really get into trouble if we commit,’ to a delayed exit from low interest rates and the current $120 billion in monthly bond purchases, he said.”
August 18 – Associated Press (Martin Crutsinger): “Federal Reserve Chairman Jerome Powell said… the U.S. economy has been permanently changed by the COVID pandemic and it is important that the central bank adapt to those changes. ‘We’re not simply going back to the economy that we had before the pandemic,’ Powell said… ‘We need to watch carefully as the economy continues to get through the pandemic and try to understand the ways that the economy has changed and what the implications are for our policy.’”
U.S. Bubble Watch:
August 17 – CNBC (Jeff Cox): “Shoppers in the U.S. cut back their purchases in July even more than expected as worries over the delta variant of Covid-19 dampened activity and government stimulus dried up. Retail sales for the month fell 1.1%, worse than the Dow Jones estimate of a 0.3% decline and below the upwardly revised 0.7% increase in June… Though July saw a month-over-month decline, the $617.7 billion in sales still represented a 15.8% acceleration from the same time a year ago. Most of the monthly decline came from motor vehicles and parts dealers, which fell 3.9%... Clothing stores saw a 2.6% decline, and sporting goods, musical instrument and book stores fell 1.9%. Online sales also posted a 3.1% drop.”
August 13 – Bloomberg (Christopher Maloney): “The surge in home prices is forcing buyers to take on larger-sized mortgages, increasing prepayment risk for investors. The National Association of Realtors… reported that the median price of an existing single-family home rose 23% from a year ago to a record $357,900 during the second quarter. Historically low mortgage rates, sparse housing inventory and a flight from urban areas during the pandemic have all been factors in this rise.”
August 18 – Associated Press (Martin Crutsinger): “Home construction fell a sharp 7% in July as homebuilders struggled to cope with a variety of headwinds. The July decline put home construction at a seasonally adjusted annual rate of 1.53 million units… It was the slowest pace since April but was 2.5% higher than a year ago. Applications for building permits… rose 2.6% in July from the June level to an annual rate of 1.64 million units… Construction starts for single-family homes fell 4.9% in July to an annual rate of 1.11 million while construction of apartments of five units or more dropped 13.6% to a rate of 412,000 units.”
August 19 – Associated Press (Paul Wiseman): “The number of people seeking unemployment benefits fell last week for a fourth straight time to a pandemic low, the latest sign that America’s job market is rebounding from the pandemic recession… Jobless claims fell by 29,000 to 348,000. The four-week average of claims, which smooths out week-to-week volatility, also fell — by 19,000, to just below 378,000, also a pandemic low. The weekly pace of applications for unemployment aid has fallen more or less steadily since topping 900,000 in early January.”
August 17 – CNBC (Diana Olick): “Sentiment among single-family homebuilders dropped 5 points to 75 in August on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)… Of the index’s three components, current sales conditions fell 5 points to 81 and traffic of prospective buyers also fell 5 points to 60. Sales expectations in the next six months were unchanged at 81. Builders are contending with continued rising costs for materials as well as for skilled labor. That is pushing the price of newly built homes ever higher and clearly affecting demand.”
August 16 – Reuters (Evan Sully): “The New York Federal Reserve said… its barometer of manufacturing business activity in New York State declined more than expected in August after growing at a record-setting pace in the month before. The regional Fed’s ‘Empire State’ index on current business conditions fell around 25 points to 18.3, lower than a reading of 29.0 forecast…”
August 18 – CNBC (Robert Frank): “More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report. The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government. According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million — or 44% of all taxpayers — in 2019.”
Fixed-Income Bubble Watch:
August 17 – Financial Times (Joe Rennison): “A boom in US corporate borrowing has laid the foundation for a wave of defaults at financially risky companies, according to leading debt rating agencies… Sales of low-rated, ‘speculative-grade’ debt have already reached $650bn this year, according to S&P Global Ratings, putting them on track to surpass all-time borrowing records with more than four months left to go in 2021. Companies of all types had already borrowed record amounts of cash in 2020 in an effort to ride out the coronavirus downturn. Senior analysts at both Moody’s and S&P said furious demand from investors on the hunt for higher-yielding assets at a time of low interest rates had given less creditworthy companies access to financing with loose lending terms.”
August 17 – Bloomberg (Lisa Lee): “U.S. leveraged loan investors are starting to push back against companies that are trying to borrow outsized amounts of money at some of the most aggressive terms ever seen. Midcoast East Texas, a natural gas pipeline and transport business, has postponed a $400 million leveraged loan sale. Teaching Strategies, a provider of curriculums and software for educators, had to offer higher interest on Tuesday for a $320 million leveraged-buyout loan it is selling.”
China Watch:
August 18 – Wall Street Journal (Keith Zhai and Stella Yifan Xie): “China gave priority to economic growth for most of the past 40 years. Now, Xi Jinping is signaling plans to more assertively promote social equality, as he tries to solidify popular support for continued Communist Party rule. The push is captured by a catchphrase, ‘common prosperity,’ now appearing everywhere in China, including in public speeches, state-owned media and schools—and in comments from newly chastened business tycoons like Jack Ma. Like many Communist party slogans, details remain vague. But officials and analysts who have tracked the phrase’s use say it is meant to convey the idea that leaders are returning to the party’s original ambitions to empower workers and the disadvantaged, and will limit gains of the capitalist class when necessary to address social inequities.”
August 18 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping emphasized at a finance and economic meeting Tuesday the need to support moderate wealth for all — or the idea of ‘common prosperity,’ which analysts have said is behind the latest regulatory crackdown on tech companies. Significantly, the meeting was the first Xi led publicly since a two-week quiet period. Chinese leaders typically spend early August in secret political discussions at a resort… The meeting called for the ‘reasonable adjustment of excessive incomes and encouraging high income groups and businesses to return more to society,’ state media said…”
August 17 – Financial Times (Tom Mitchell and Sun Yu): “President Xi Jinping has called for stronger ‘regulation of high incomes’ in the latest sign that a 10-month campaign targeting China’s largest technology companies is rapidly expanding to encompass broader social goals. State media reported that a meeting of the Chinese Communist party’s Central Financial and Economic Affairs Commission…, chaired by Xi, had emphasised the need to ‘regulate excessively high incomes and encourage high-income groups and enterprises to return more to society’. The committee added that while the party had allowed some people and regions to ‘get rich first’ in the early decades of China’s reform and opening period, it was now prioritising ‘common prosperity for all’.”
August 19 – Bloomberg: “Chinese academics in a province that’s piloting measures to reduce income inequality said the government should impose wealth taxes, including on property and inheritance. In a front-page article published Thursday by the official Economic Daily newspaper, two researchers at Zhejiang University argued that the taxes would help adjust the earnings of high-income groups and narrow the income gap. Li Shi, a professor, and Yang Yixin, a researcher, said the taxes should be imposed at an appropriate time to promote ‘common prosperity.’”
August 17 – Reuters (Josh Horwitz): “China moved… to tighten control of its technology sector, publishing detailed rules aimed at tackling unfair competition and companies' handling of critical data. Beijing has been firming its grip on internet platforms in recent months, citing the risk of abusing market power to stifle competition, misuse of consumers' information and violation of consumer rights, in a reversal after years of a more laissez-faire approach.”
August 19 – Reuters (Samuel Shen, Clare Jim and Cheng Leng): “China’s central bank said it summoned executives of the country’s most indebted property developer, China Evergrande Group, to talks… and issued a rare warning that the company needs to reduce its debt risks and prioritise stability. The unusual summons comes amid fragile confidence in China’s credit markets and concern that any financial crisis at Evergrande could pose a systemic risk as the company struggles to find the cash it needs to pay its lenders. It also comes days after President Xi Jinping highlighted efforts to forestall major financial risks and as a flurry of regulatory crackdowns roil China’s equity markets.”
August 18 – Bloomberg: “China Evergrande Group’s shares and bonds slid for a second day after billionaire Hui Ka Yan stepped down as chairman of the company’s onshore real estate unit. The move spooked investors already concerned about the company’s funding troubles… Its 5.9% local bond due 2023 tumbled 26% to 42.4 yuan and was halted for a few minutes before resuming trading…”
August 18 – Financial Times (Thomas Hale): “State-backed Chinese investors will bail out Huarong Asset Management, as the under-pressure bad debt manager unveiled losses of Rmb103bn ($15.9bn) after months of uncertainty over its finances. The state-owned company said… that Citic, the Chinese bank, fellow bad debt manager Cinda Asset Management, China Insurance Investment, China Life Asset Management and Sino-Ocean Capital Holding, the asset manager, intended to make strategic investments of an undisclosed amount. The proposed capital injection for Huarong prompted a rally in the company’s bonds on international markets, where it has borrowed more than $20bn. On Thursday, its perpetual bonds rose 11% to trade at 95 cents on the dollar, compared to as low as 49 cents in April following a sell-off.”
August 19 – Wall Street Journal (Xie Yu and Serena Ng): “China’s top manager of distressed assets said it would post a massive loss and expects to receive a capital infusion from state-owned financial institutions, avoiding a messy default that would have had wide repercussions for Asia’s credit markets. China Huarong Asset Management Co., which is majority owned by China’s Ministry of Finance and the largest of the country’s managers of nonperforming loans and other bad debt, also said it has no plans to restructure its debt, cementing beliefs among investors that many Chinese institutions are too big to fail. Late Wednesday, the company said it expects to post a net loss equivalent to about $16 billion for 2020.”
August 18 – Bloomberg (Sofia Horta e Costa and Ye Xie): “China Huarong Asset Management Co. ultimately proved too big to fail, but its protracted bailout process shows Beijing’s determination to punish creditors who ignore risks in heavily indebted companies. The almost five-month saga triggered some of the most extreme swings ever for an investment-grade Chinese bond issuer, changing the way even seasoned money managers evaluate the nation’s $12 trillion credit market. While some Huarong bonds rallied to 97 cents on the dollar after the company unveiled a recapitalization by state-backed investors late Wednesday, the rescue came too late for many bondholders who sold at heavy losses earlier this year.”
August 16 – Wall Street Journal (Serena Ng): “The latest Chinese market to buckle under pressure from Beijing's wide-ranging corporate crackdown: junk bonds. Companies from China make up the bulk of Asia's roughly $300 billion high-yield dollar bond market, thanks to a surge in borrowing by the country’s heavily indebted property developers. But the investor optimism that drove that borrowing has collapsed. Stress has been building following a string of debt defaults and growing concern about a few large issuers, including property giant China Evergrande…”
August 15 – Bloomberg: “China is widening curbs on the nation’s soaring home prices by temporarily halting land auctions in some major cities, potentially hurting a key source of cash for local governments. Several large Chinese cities recently suspended centralized land sales…, after attempts to limit the number of auctions per year backfired. China has also stipulated that the price premium for land should be capped at 15%, Citigroup Inc. analysts… wrote… after market rumors about the policy change. Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry. Their most recent moves have included halting private equity funds from raising money to invest in residential property developments. Still, land sales generated more than $1 trillion in income for local governments last year, creating a sensitive balancing act for Beijing.”
August 15 – Reuters (Liangping Gao and Ryan Woo): “China’s new home prices rose at the slowest clip in six months in July, as authorities further tightened rules in the red-hot property sector, including limits on some categories of purchases. Average new home prices in China’s 70 major cities rose 0.3% in July from a month earlier, slowing from a 0.5% gain in June… China’s property market rebounded quickly from the COVID-19 crisis last year, triggering concerns about financial risks in an overheated market. That has prompted authorities to step up curbs this year, including restrictions on borrowing by developers, caps on banks’ lending to the sector, guiding banks to raise mortgage rates and a crackdown on illegal funding… ‘In most cities, both newly built and resale homes have seen a clear slowdown in price growth,’ said Zhang Dawei, chief analyst with property agency Centaline. ‘The housing price growth is expected to continue to soften, as the credit policy returns to normal (from easy to tight),’ Zhang said.”
August 16 – Bloomberg: “Home-price growth in China moderated for a second month in July after authorities took further steps to rein in the market. New home prices in 70 cities, excluding state-subsidized housing, rose 0.3% last month from June, when then gained 0.41%... It was the slowest growth in six months. The residential market has begun to cool after the government increased efforts to curb surging prices. Vice Premier Han Zheng last month vowed that the property sector shouldn’t be used as a short-term boost for the economy, becoming the highest-ranking official to address the real estate issue in recent months.”
August 20 – Bloomberg: “The slow pace of borrowing by local governments in China and curbs on the property market mean the economy will receive less of a boost this year from infrastructure investment than initially thought. Cities and provinces will sell about 1.8 trillion yuan ($277 billion) in local government special bonds by the end of August, data compiled by Bloomberg show, amounting to 48% of their quota for the year. At the same time last year, about 75% of the quota had been sold as local authorities ramped up spending…”
August 20 – Bloomberg: “China’s rolling regulatory crackdown on unfair markets found more targets Friday among liquor makers, cosmetics firms and online pharmacies. A slew of commentaries and reports in state media called for tougher oversight to protect consumers as President Xi Jinping’s campaign to address inequality broadens. That’s piled more misery on investors with global institutions dumping $1 billion worth of mainland shares via trading links on Friday while U.S.-traded Chinese stocks endure weeks of pain.”
August 16 – Reuters (Kevin Yao and Gabriel Crossley): “China's factory output and retail sales growth slowed sharply and missed expectations in July, as new COVID-19 outbreaks and floods disrupted business operations, adding to signs the economic recovery is losing momentum. Industrial production in the world's second largest economy increased 6.4% year-on-year in July… Analysts had expected output to rise 7.8% after growing 8.3% in June. Retail sales increased 8.5% in July from a year ago, far lower than the forecast 11.5% rise and June's 12.1% uptick.”
August 16 – Bloomberg: “The management of troubled private oil refiner Liaoning Bora Enterprise Group has been taken over by government officials from China’s Panjin city amid a tax probe that could lead to heavy fines and possible insolvency… Bora is seeking to restructure and avoid collapse due to mounting financial woes brought on by large amounts of unpaid taxes.”
Global Bubble Watch:
August 16 – Reuters (Gertrude Chavez-dreyfuss): “Foreign holdings of U.S. Treasuries in June climbed to their highest since February 2020…, in what analysts described as broad-based demand that helped drive yields lower for the month. Major foreign holders held $7.202 trillion in Treasuries, up from $7.135 trillion in May… The month also saw about $67 billion in Treasury purchases, the largest monthly increase in a year. ‘Some of the biggest additions to foreign Treasury holdings were in custodian countries such as Ireland, Cayman Islands, and Luxembourg, which tells me that buying was pretty broad-based,’ said Gennadiy Goldberg, senior U.S. rates strategist, at TD Securities…”
August 19 – Bloomberg (Craig Trudell and River Davis): “Toyota Motor Corp.’s efforts to stockpile enough chips and other key components to ride out supply disruptions only protected the company so long before it too succumbed to the shortages eviscerating automakers. The manufacturer will suspend output at 14 plants across Japan for various lengths of time through next month. The impact of these cuts will be harshest in September, with Toyota slashing its production plan by 40%, though risks will carry forward beyond next month. It’s the latest sign even the best supply-chain planning is proving no match for a pandemic that virtually ground the auto industry to a halt a year ago and has since plagued efforts to restore production.”
EM Watch:
August 13 – Reuters (Abraham Gonzalez): “Mexico is on track to mark a second year of record foreign capital outflows from the country's sovereign debt market, with more than $10 billion having left so far. Persistent high inflation, a fresh wave of COVID-19 and uncertainty created by government policy decisions have dampened appetite for Mexican debt. Some 202 billion pesos ($10bn) in capital left the market during January-July, compared to 257 billion pesos for all of 2020… In July alone, the exodus hit 67.5 billion pesos.”
Europe Watch:
August 14 – Bloomberg (James Hirai): “One of Europe’s riskiest bond bets is turning into a telltale sign of how much faith investors have in the central bank’s ability to engineer a smooth recovery out of the pandemic. Italian benchmark yields are near a six-month low and the government is so flush with cash that it canceled last week’s debt auction. The market is beginning to look like a crowded trade, with the number of outstanding positions in bond futures at the highest since March. It’s the latest evidence of the bullishness that’s swept across European markets. Italy is among the region’s most indebted nations yet has seen borrowing costs crater thanks to unprecedented stimulus from the European Central Bank that is quashing volatility and driving investors into the highest-yielding corners of the market.”
Japan Watch:
August 15 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s economy rebounded more than expected in the second quarter after slumping in the first three months of this year… But many analysts expect growth to remain modest in the current quarter as state of emergency curbs reimposed to combat a spike in infections weigh on household spending. The world's third-largest economy grew an annualised 1.3% in April-June after a revised 3.7% slump in the first quarter…”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 16 – CNBC (Pippa Stevens): “The U.S. government… declared the first-ever water shortage at Lake Mead, the nation’s largest reservoir by volume, after water levels fell to record lows amid a decades-long drought. Water cuts will go into effect in January for Arizona, Nevada and Mexico, the Bureau of Reclamation said... Arizona will take the biggest hit, with about 18% of the state’s annual apportionment cut.”
August 14 – Wall Street Journal (Lindsay Huth and Taylor Umlauf): “As drought persists across more than 95% of the American West, water elevation at the Hoover Dam has sunk to record-low levels, endangering a source of hydroelectric power for an estimated 1.3 million people across California, Nevada and Arizona. The water level at Lake Mead, the Colorado River reservoir serving the Hoover Dam, fell to 1,068 ft. above sea level in July, the lowest level since the lake was first filled… in the 1930s… For dams to produce power, they rely on the immense pressure created by the body of water they are blocking. As water levels go down, less pressure is exerted and the dams in turn produce less hydroelectric energy, which means the dam can produce less power.”
August 16 – Bloomberg (Mark Chediak): “More than a million acres of California landscape have been torched and Golden State firefighters are bracing for more conflagrations this week. Crews are battling 10 large blazes including the Dixie Fire, the second-biggest in state history, that has already scorched about 570,000 acres and destroyed more than 1,000 structures, according to the California Department of Forestry and Fire Protection.”
August 18 – Reuters (Fred Greaves): “An incendiary mix of strong, shifting winds and drought-parched vegetation stoked two of California's largest wildfires…, with thousands of people chased from their foothill and forest homes in the Sierra Nevada range. Some narrowly escaped the latest surge in flames and wind-whipped embers with only the clothes on their backs and the few belongings they managed to pack into their vehicles during chaotic evacuations. ‘Everything is gone. It's tearing me up,’ Fred Bratten, 57, said… ‘The only thing I can do now is clean my mess up and move on. It's like burying your dead.’”
August 19 – Reuters (Karl Plume): “There was barely a buzz in the air as John Miller pried the lid off of a crate, one of several ‘bee boxes’ stacked in eight neat piles beside a cattle grazing pasture outside Gackle, North Dakota. ‘Nothing,’ Miller said as he lifted a plastic hive frame from the box, squirming with only a few dozen bees. ‘Normally this would be dripping, full of honey. But not this year.’ A scorching drought is slashing honey production in North Dakota, the top producing state of the sweet syrup, and a shortage of bees needed to pollinate fruits and flowers puts West Coast cash crops like almonds, plums and apples at risk, according to more than a dozen interviews with farmers, bee experts, economists and farm industry groups.”
Leveraged Speculation Watch:
August 16 – CNBC (Stephen Spratt): “Hedge funds dominated Treasury buying flows in June as the global reflation trade ran out of steam. Investors domiciled in the Cayman Islands, a territory used as a base for leveraged investors and hedge funds, snapped up $27 billion of U.S. debt that month… That was the largest net purchase of any region. The buying came after Cayman-Island funds sold almost $150 billion of U.S. sovereign bonds in the first five months of the year…”
August 18 – Bloomberg (Katherine Burton and Brian Chappatta): “Ray Dalio insists that the swings in Chinese markets are little more than ‘wiggles.’ But for a certain subset of hedge-fund managers, the consequences of Beijing’s crackdown might seem more like an earthquake… All told, 13F filings from recent days demonstrate that even some of the biggest and brightest money managers didn’t anticipate China’s sweeping crackdown on everything from large technology firms to for-profit tutoring companies. On Monday, U.S. Securities and Exchange Commission Chair Gary Gensler issued his most direct warning yet about the risks of investing in Chinese companies.”
August 14 – Financial Times (Robin Wigglesworth and Laurence Fletcher): “Every January for the past two decades, a clutch of hedge fund titans and their top investors have cloistered themselves at Palm Beach’s plush Breakers Hotel to wine, dine and gossip in the balmy Floridian weather. Although the exclusive Morgan Stanley-arranged event is one of the social occasions of the year for some of the lucky invitees, the mood has been downbeat for much of the post-financial crisis era — deflated by disappointing returns and dwindling investor faith… This year, however, the fact that it was a virtual conference couldn’t quell an unmistakable sense of optimism. ‘This was the first time in many years Breakers felt like a celebration — as much as anything can feel like a celebration online. It had an upbeat feel to it,’ says Sandy Rattray, chief investment officer of Man Group.”
Geopolitical Watch:
August 17 – Wall Street Journal (Michael R. Gordon and James Marson): “The ascent of the Taliban has redrawn the diplomatic map for the U.S. and its rivals as they compete to shape the future of Afghanistan. China and Russia already are moving to build ties with the Taliban and have hosted Taliban officials even before the U.S. military completed its troop withdrawal. In recognition of Beijing and Moscow’s expanding influence in Kabul, Secretary of State Antony Blinken called the Chinese and Russian foreign ministers… A statement from the Russian foreign ministry said that the diplomats agreed to continue consultations, which would include China and Pakistan, on how to encourage ‘an inclusive inter-Afghan dialogue in the new conditions.’”
August 17 – Bloomberg: “When the Taliban took over Afghanistan the first time in 1996, China refused to recognize their rule and left its embassy shut for years. This time around, Beijing has been among the first to embrace the Islamist militants next door. China’s remarkable shift was on display little more than two weeks ago, when Foreign Minister Wang Yi welcomed a Taliban delegation to the northern port of Tianjin as the group made gains against the administration of President Ashraf Ghani, who fled the country on Sunday. Wang’s endorsement of the Taliban’s ‘important role’ in governing Afghanistan provided a crucial boost of legitimacy for an organization that has long been a global pariah due to its support of terrorism and the repression of women.”
August 17 – Bloomberg (Kari Soo Lindberg): “The U.S. has said it remains committed to Taiwan and other allies, pushing back at concerns about its resolve after its departure from Afghanistan led to the Taliban taking over Kabul. ‘We believe that our commitments to our allies and partners are sacrosanct and always have been,’ National Security Advisor Jake Sullivan said… ‘We believe our commitment to Taiwan and to Israel remains as strong as it’s ever been.’”
August 17 – Reuters (Yew Lun Tian and Yimou Lee): “China carried out assault drills near Taiwan on Tuesday, with warships and fighter jets exercising off the southwest and southeast of the island in what the country's armed forces said was a response to ‘external interference’ and ‘provocations’. Taiwan… has complained of repeated People's Liberation Army (PLA) drills in its vicinity in the past two years or so, part of a pressure campaign to force the island to accept China's sovereignty. In a brief statement, the PLA's Eastern Theatre Command said warships, anti-submarine aircraft and fighter jets had been dispatched close to Taiwan to carry out ‘joint fire assault and other drills using actual troops’.”
August 19 – Wall Street Journal (Alastair Gale, Joyu Wang and Laurence Norman): “As the Taliban overran Afghanistan last week, 25,000 Marines and other U.S. Navy personnel held exercises in part to simulate the capture and control of islands in the Western Pacific. One of the largest military drills since the Cold War—involving dozens of ships and submarines, and held with Japanese, British and Australian forces—shows how far the American military’s focus has shifted since the invasion of Afghanistan two decades ago. The exercises, intended to counter China’s territorial ambitions, also highlight how the U.S. is seeking to reassure allies of its global presence as questions are raised about the reliability of American military commitments after the fall of Kabul.”
August 18 – New York Times (Eshe Nelson and Alan Rappeport): “Despite the chaotic end to its presence in Afghanistan, the United States still has control over billions of dollars belonging to the Afghan central bank, money that Washington is making sure remains out of the reach of the Taliban. About $7 billion of the central bank’s $9 billion in foreign reserves are held by the Federal Reserve Bank of New York…, and the Biden administration has already moved to block access to that money. The Taliban’s access to the other money could also be restricted by the long reach of American sanctions and influence. The central bank has $1.3 billion in international accounts, some of it euros and British pounds in European banks, the former official, Ajmal Ahmady, said…”
August 18 – Reuters (David Shepardson): “The U.S. Transportation Department… said it will limit some flights from Chinese carriers to 40% passenger capacity for four weeks after the Chinese government imposed similar limits on four United Airlines flights. China told United on Aug. 6 it was imposing sanctions after it alleged five passengers who traveled from San Francisco to Shanghai tested positive for COVID-19 on July 21.”
The S&P500 declined 0.6% (up 18.3% y-t-d), and the Dow fell 1.1% (up 14.7%). The Utilities jumped 2.0% (up 11.2%). The Banks sank 3.6% (up 27.8%), and the Broker/Dealers lost 3.3% (up 24.6%). The Transports dropped 2.5% (up 16.4%). The S&P 400 Midcaps fell 2.0% (up 16.0%), and the small cap Russell 2000 dropped 2.5% (up 9.8%). The Nasdaq100 slipped 0.3% (up 17.1%). The Semiconductors slumped 2.4% (up 16.5%). The Biotechs declined 0.6% (up 0.6%). While bullion gained $1, the HUI gold index sank 5.9% (down 19.9%).
Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields added two bps to 0.23% (up 10bps y-t-d). Five-year T-note yields increased a basis point to 0.78% (up 42bps). Ten-year Treasury yields declined two bps to 1.23% (up 34bps). Long bond yields dropped six bps to 1.87% (up 23bps). Benchmark Fannie Mae MBS yields added one basis point to 1.79% (up 44bps).
Greek 10-year yields added a basis point to 0.56% (down 7bps y-t-d). Ten-year Portuguese yields were unchanged at 0.11% (up 8bps). Italian 10-year yields were unchanged at 0.55% (unchanged). Spain's 10-year yields slipped a basis point to 0.21% (up 16bps). German bund yields fell three bps to negative 0.50% (up 7bps). French yields declined two bps to negative 0.15% (up 19bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields fell five bps to 0.52% (up 33bps). U.K.'s FTSE equities index slumped 1.8% (up 9.7% y-t-d).
Japan's Nikkei Equities Index dropped 3.4% (down 1.6% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.01% (down 1 bp y-t-d). France's CAC40 sank 3.9% (up 19.4%). The German DAX equities index lost 1.1% (up 15.2%). Spain's IBEX 35 equities index declined 0.9% (up 10.4%). Italy's FTSE MIB index dropped 2.8% (up 16.6%). EM equities were mostly lower. Brazil's Bovespa index fell 2.6% (down 0.8%), while Mexico's Bolsa was little changed (up 16.7%). South Korea's Kospi index sank 3.5% (up 6.5%). India's Sensex equities index slipped 0.2% (up 15.9%). China's Shanghai Exchange fell 2.5% (down 1.3%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 2.2%). Russia's MICEX equities index declined 1.0% (up 16.5%).
Investment-grade bond funds saw inflows of $4.278 billion, while junk bond funds posted outflows of $4.0 million (from Lipper).
Federal Reserve Credit last week expanded $93.2bn to a record $8.298 TN. Over the past 101 weeks, Fed Credit expanded $4.572 TN, or 123%. Fed Credit inflated $5.487 Trillion, or 195%, over the past 458 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $5.9bn to $3.502 TN. "Custody holdings" were up $85bn, or 2.5%, y-o-y.
Total money market fund assets rose $12.5bn to $4.522 TN. Total money funds declined $22bn y-o-y, or 0.5%.
Total Commercial Paper declined $3.3bn to $1.138 TN. CP was up $132bn, or 13.1%, year-over-year.
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 2.86% (down 13bps y-o-y). Fifteen-year rates added one basis point to 2.15% (down 38bps). Five-year hybrid ARM rates declined a basis point to 2.43% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.03% (down 2bps).
Currency Watch:
For the week, the U.S. Dollar Index gained 1.1% to 93.50 (up 4.0% y-t-d). For the week on the downside, the South African rand declined 3.7%, the Australian dollar 3.2%, the New Zealand dollar 2.9%, the Norwegian krone 2.5%, the Brazilian real 2.5%, the Canadian dollar 2.4%, the Mexican peso 2.4%, the Swedish krona 1.8%, the British pound 1.8%, the South Korean won 0.9%, the euro 0.8%, the Singapore dollar 0.5%, the Japanese yen 0.2% and the Swiss franc 0.2%. The Chinese renminbi declined 0.37% versus the dollar (up 0.40% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index dropped 4.2% (up 16.8% y-t-d). Spot Gold was little changed at $1,781 (down 6.2%). Silver fell 3.0% to $23.03 (down 12.8%). WTI crude sank $6.30 to $62.14 (up 28%). Gasoline lost 10.6% (up 44%), and Natural Gas slipped 0.3% (up 52%). Copper dropped 5.9% (up 17%). Wheat fell 5.9% (up 14%). Corn sank 6.3% (up 11%). Bitcoin gained $1,645 this week to $49,248 (up 69%).
Coronavirus Watch:
August 16 – CNBC (Rich Mendez, Robert Towey and Nate Rattner): “Five states broke records for the average number of daily new Covid cases over the weekend as the delta variant strains hospital systems across the U.S. and forces many states to reinstate public health restrictions. Florida, Louisiana, Hawaii, Oregon and Mississippi all reached new peaks in their seven-day average of new cases per day as of Sunday… On a per capita basis, Louisiana, Mississippi and Florida are suffering from the three worst outbreaks in the country.”
Market Mania Watch:
August 19 – Bloomberg (Suzanne Woolley): “The ranks of 401(k) and IRA millionaires are exploding. The number of 401(k) accounts with balances of at least $1 million at Fidelity Investments grew 84% year over year to 412,000, while the number of seven-figure IRAs jumped more than 64% to 341,600, Fidelity said. Together, the number of accounts with $1 million or more grew 74.5% — though it isn’t clear how many individuals that represents, because people can have multiple accounts.”
August 18 – Bloomberg (Olivia Raimonde and Heather Perlberg): “The higher risk, higher reward world of private credit is targeting the wealthy. Blackstone Group Inc., Carlyle Group Inc., Apollo Global Management Inc. and other large firms have started offering products for individuals to invest in loans to midsized companies that banks won’t touch. The lure is a potential annual return at times surpassing 8%, when corporate bond return indexes are negative, plus a relatively low initial investment. Their push coincides with a broader democratization in financial markets, with apps such as Robinhood Markets Inc. helping people find their way into everything from SPACs to Dogecoin.”
August 16 – Financial Times (Robin Wigglesworth and Kaye Wiggins): “The biggest listed US private capital companies have more than tripled in value since the depths of last year’s market sell-off, as investors seek to benefit from the hefty fees they rake in from the boom in unlisted assets. The combined market value of Blackstone, KKR, Carlyle, Apollo and Ares has ballooned from a March 2020 low of $80bn to about $252bn this year, and private equity chiefs sounded an ebullient tone on earnings calls with analysts this summer. ‘We are fortunate to be in a growth business,’ said Marc Rowan, chief executive of Apollo Global Management. ‘Almost every day, the business gets better. The trends in the business are overwhelmingly favourable.’”
August 17 – Bloomberg (Charles Williams): “The biggest buyers of U.S. leveraged loans have raised money this year at the fastest pace on record, as investors clamor for higher yields and floating-rate debt. Money managers that bundle loans into bonds known as collateralized loan obligations have sold more than $100 billion of those securities in the U.S. in 2021… It’s the earliest in the year that CLO sales have reached that level, putting annual issuance on track to surpass 2018’s record of $130.4 billion. With CLO sales reaching new records, demand for the loans that get packaged into the securities is surging as well. In the leveraged loan market, new money financings, those backing acquisitions and dividends, swelled to more than $40 billion in June and July, the first back-to-back months at that level since Bloomberg began tracking syndicated leveraged loan data in 2013.”
August 14 – CNBC (Robert Frank): “A McLaren F1 was auctioned at Pebble Beach on Friday night for $20.5 million, showing the continued strength of the classic car market. Gooding & Co. auctioned off the rare McLaren F1 to a packed and excited crowd, blowing past its estimate of at least $15 million. The F1, one of the most prized collector cars for its rarity and place in auto history, became the most expensive car auctioned this year and the most expensive McLaren F1 ever sold.”
Market Instability Watch:
August 14 – Bloomberg (Jan-Patrick Barnert and Michael Msika): “It’s been two decades since Wall Street analysts were this upbeat. About 56% of all recommendations on S&P 500 firms are listed as buys, the most since 2002. It’s one more data point that shows the extent of the euphoria sweeping markets… While analysts are historically a bullish bunch, they’re turning even more optimistic in the face of relentless stock-market gains and corporate earnings that topped even the highest expectations. For all the concerns about the delta variant, China’s regulatory crackdown or waning Federal Reserve stimulus, it hasn’t made much of a dent yet on stock prices. ‘It’s not just financial conditions and low rates fueling the appetite for risk assets -- tremendous fundamental improvement is forecast into 2022,’ Todd Jablonski, chief investment officer at Principal Global Asset Allocation, said…”
August 14 – Bloomberg (Simon Kennedy and Benjamin Purvis): “Former U.S. Treasury Secretary Lawrence Summers said the Federal Reserve’s massive bond-buying program is resulting in a ‘bizarre’ situation in which the government’s funding structure is overly focused on the short-term… ‘In effect, the government now has a floating rate short-term liability outstanding rather than a long-term fixed interest rate liability,’ Summers told Bloomberg… ‘At a moment of super uncertainty, at a moment when many people think rates are remarkably low, a decision to fund more short seems bizarre.’”
Inflation Watch:
August 17 – Bloomberg (Tope Alake, Fabiana Batista, Pratik Parija, and Leslie Patton): “Whether at supermarkets, corner stores, or open-air markets, prices for food have been surging in much of the world, forcing families to make tough decisions about their diets. Meat is often the first to go, ceding space to less expensive proteins such as dairy, eggs, or beans. In some households, a glass of milk has become a luxury reserved only for children; fresh fruit, once deemed a necessity, is now a treat. Food prices in July were up 31% from the same month last year, according to… the United Nations’ Food and Agriculture Organization.”
August 19 – CNBC (Diana Olick): “The onset of the coronavirus pandemic caused unprecedented, worldwide supply-chain disruptions, but experts say that’s a drop in the bucket compared with the disruptions that climate change will cause. Wildfires in the American West, flooding in China and Europe and drought in South America are already disrupting supplies of everything from lumber to chocolate to sushi rice. ‘Whether you’re in the agricultural sector or the forestry sector, or in the tech sector, there is really no particular sector that is immune from climate change,’ said Christy Slay, senior director… at The Sustainability Consortium… About a quarter of the lumber consumed in the U.S. comes from Canada, which is seeing severe drought and wildfire conditions. ‘The wildfires burning in Western Canada are significantly impacting the supply chain and our ability to transport product to market,’ Canadian lumber producer Canfor Corp. said... ‘As a result, we are implementing short-term production curtailments at our Canadian sawmills.’ The homebuilding industry is already suffering severe supply-chain issues due to Covid, and fires are only exacerbating that.”
August 12 – Bloomberg (Maria Heeter): “U.S. home prices rose the most on record in the second quarter as buyers battled for a scarcity of listings. The median price of an existing single-family home jumped 23% from a year earlier to an all-time high of $357,900, the National Association of Realtors said… About 94% of 183 metropolitan areas measured had double-digit gains, up from 89% in the first quarter… Buyers are having a hard time finding properties they can afford: Sales of previously owned homes in the U.S. fell for a fourth straight month in May.”
August 17 – Bloomberg (Augusta Victoria Saraiva and Alexandre Tanzi): “U.S. single-family home rental prices jumped 7.5% in June, showing no sign of abating amid a hot housing market and construction lags. The year-over-year pace accelerated from 6.6% in May, which was the biggest percentage gain since at least 2005, according to CoreLogic… The most expensive homes saw the biggest jump in rents, at 9.6%.”
August 18 – CNBC (Alicia Adamczyk): “Sorry to be the bearer of bad news. But if you’re currently renting your place, you might see the price tick up when it’s time to renew your lease. In fact, rent is forecast to be even higher this year than it would have been if the pandemic had not occurred. Throughout 2020, many renters were able to benefit from price reductions or even months of free rent as landlords struggled to fill empty units. But those concessions are more or less gone, and landlords are hiking up prices as Covid-19 restrictions end and housing demand spikes. Housing costs were rising before Covid, but the coronavirus exacerbated the problem: The national median rent has increased by 11.4% so far in 2021, compared with just 3.3% for the first six months of 2017, 2018 and 2019, according to… Apartment List…”
August 18 – Financial Times (Emiko Terazono and Michael Pooler): “After enduring the worst drought in nearly a century followed by a bout of cold temperatures, areas within Brazil’s farming belt are braced for further adversity as the La Niña weather phenomenon threatens to bring more dry conditions later this year. In the small mountain town of Caconde in São Paulo state, third-generation coffee grower Ademar Pereira, 44, estimates that half of this year’s crop will be lost because many of the shrubs on his family’s modest plantation have succumbed to the chill. ‘It was already going to be a very small harvest. And with the frost, it got worse,’ he said. ‘There are lots of people who’ve lost everything.’”
Biden Administration Watch:
August 14 – Financial Times (Colby Smith and Lauren Fedor): “The $3.5tn price tag on the Biden administration’s budget plan has ignited fresh debate in Washington about the potential inflationary effects of increased public spending at a time when US consumer prices are rising rapidly… Rising inflation fears could imperil Joe Biden’s spending ambitions as the two bills head to the House of Representatives later this month. The House, which Democrats control by a slim margin, will return from summer recess early to first consider the budget resolution, and then weigh up the infrastructure package. Both pieces of legislation must pass both chambers of Congress. ‘Inflation has become part of the congressional debate for the first time in the at least 25 years I’ve been following this,’ said Jason Furman, a senior fellow at the Peterson Institute for International Economics…”
August 16 – Bloomberg (Steven T. Dennis): “Democrats are betting Republicans will blink and agree to raise the debt ceiling before it expires, a risky wager after a weeks-long standoff that threatens the health of the financial markets and continued U.S. government operations. Should market turmoil and a federal shutdown ensue this fall, it could overshadow Democrats’ efforts to push through President Joe Biden’s $4.1 trillion economic agenda and serve a blow to the party heading into next year’s midterm elections.”
August 16 – Associated Press (Ashraf Khalil and Josh Boak): “President Joe Biden’s administration has approved a significant and permanent increase in the levels of food aid available to needy families — the largest single increase in the program’s history. Starting in October, average benefits for food stamps… will rise more than 25% above pre-pandemic levels. The increased assistance will be available indefinitely to all 42 million SNAP beneficiaries. The increase coincides with the end of a 15% boost in SNAP benefits that was ordered as a pandemic protection measure.”
Federal Reserve Watch:
August 18 – Financial Times (John Plender): “William McChesney Martin, head of the Federal Reserve from 1951 to 1970, argued that the task of the central bank was to take away the punch bowl when the party was getting going. With investors worrying in recent weeks about ‘peak everything’ as froth accumulates in equities, bonds, housing, cryptocurrencies and heaven knows what else, the party has long since been under way and is now in full swing and more. Indeed, the central banks have been busy topping up the punch bowl through their continued bond purchases to keep interest rates low while conducting an interminable debate on when and how to remove support. Their protestations that the risk of inflation is ‘transitory’ look increasingly questionable. The curious thing about this approach to monetary policy is that central bankers seem hard pressed to explain why continuing the asset buying programme, known as quantitative easing, is necessary.”
August 16 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are nearing agreement to begin scaling back their easy money policies in about three months if the economic recovery continues, with some pushing to end their asset-purchase program by the middle of next year. In recent interviews and public statements, several have advocated for this timetable, which would enable them to raise interest rates sooner than currently anticipated if the economy makes rapid progress toward their goals. Officials at their July 27-28 meeting deliberated on two important questions: when to start paring their monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage securities, and how quickly to reduce, or taper, them… The answers are important to financial markets because Fed officials have said they would prefer to conclude the bond-buying program before considering when to raise interest rates from near-zero.”
August 18 – Bloomberg (Craig Torres): “Most Federal Reserve officials agreed last month they could start slowing the pace of bond purchases later this year, judging that enough progress had been made toward their inflation goal, while gains had been made toward their employment objective. ‘Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,’ minutes of the Federal Open Market Committee’s July 27-28 gathering [said]… ‘Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.’”
August 18 – Reuters (Howard Schneider and Lindsay Dunsmuir): “Federal Reserve officials felt their employment benchmark for decreasing support for the economy ‘could be reached this year,’ but appeared to disagree on other key aspects of where monetary policy should turn next in the transition from the pandemic crisis, according to minutes from last month's policy meeting. The account… showed Fed officials largely expect that later this year they will reduce the central bank's emergency monthly purchases of $120 billion of Treasury bonds and mortgage-backed securities. But consensus on other key issues appeared elusive, including the start date and pace of the bond-buying ‘taper,’ and whether the bigger risk to the recovery is posed by inflation, ongoing joblessness, or the lurking chance that a resurgent coronavirus may throw things into reverse.”
August 17 – Financial Times (Colby Smith): “A top Federal Reserve official has warned that the US central bank’s emergency bond-buying programme is ill-suited for an economy held back by supply constraints, urging instead a speedy end to the stimulus to avoid burdensome debts and inflationary pressures. Eric Rosengren, president of the Boston Fed, told the Financial Times that he would support the central bank announcing next month that it would begin to wind down or ‘taper’ its $120bn in monthly asset purchases this autumn and get on track to halt them by the middle of 2022. The purchases of Treasuries and agency mortgage-backed securities were no longer the right remedy in an environment of severe shortages of essential materials and workers, Rosengren said. The current situation was different from the aftermath of the 2008 global financial crisis, when the Fed faced a shortfall of demand and addressed it by reducing borrowing costs, he said…”
August 18 – Reuters (Howard Schneider): “If the Federal Reserve misreads the strength of future inflation in order to delay tightening monetary policy now it could require ‘very disruptive’ and swift changes in policy down the road, St. Louis Federal Reserve president James Bullard said… Arguments in favor of a ‘go slow’ approach to changing monetary policy are ‘a playbook from the aftermath of the global financial crisis,’ less relevant to an economy with higher than expected inflation and likely fast job growth, Bullard said. ‘We could really get into trouble if we commit,’ to a delayed exit from low interest rates and the current $120 billion in monthly bond purchases, he said.”
August 18 – Associated Press (Martin Crutsinger): “Federal Reserve Chairman Jerome Powell said… the U.S. economy has been permanently changed by the COVID pandemic and it is important that the central bank adapt to those changes. ‘We’re not simply going back to the economy that we had before the pandemic,’ Powell said… ‘We need to watch carefully as the economy continues to get through the pandemic and try to understand the ways that the economy has changed and what the implications are for our policy.’”
U.S. Bubble Watch:
August 17 – CNBC (Jeff Cox): “Shoppers in the U.S. cut back their purchases in July even more than expected as worries over the delta variant of Covid-19 dampened activity and government stimulus dried up. Retail sales for the month fell 1.1%, worse than the Dow Jones estimate of a 0.3% decline and below the upwardly revised 0.7% increase in June… Though July saw a month-over-month decline, the $617.7 billion in sales still represented a 15.8% acceleration from the same time a year ago. Most of the monthly decline came from motor vehicles and parts dealers, which fell 3.9%... Clothing stores saw a 2.6% decline, and sporting goods, musical instrument and book stores fell 1.9%. Online sales also posted a 3.1% drop.”
August 13 – Bloomberg (Christopher Maloney): “The surge in home prices is forcing buyers to take on larger-sized mortgages, increasing prepayment risk for investors. The National Association of Realtors… reported that the median price of an existing single-family home rose 23% from a year ago to a record $357,900 during the second quarter. Historically low mortgage rates, sparse housing inventory and a flight from urban areas during the pandemic have all been factors in this rise.”
August 18 – Associated Press (Martin Crutsinger): “Home construction fell a sharp 7% in July as homebuilders struggled to cope with a variety of headwinds. The July decline put home construction at a seasonally adjusted annual rate of 1.53 million units… It was the slowest pace since April but was 2.5% higher than a year ago. Applications for building permits… rose 2.6% in July from the June level to an annual rate of 1.64 million units… Construction starts for single-family homes fell 4.9% in July to an annual rate of 1.11 million while construction of apartments of five units or more dropped 13.6% to a rate of 412,000 units.”
August 19 – Associated Press (Paul Wiseman): “The number of people seeking unemployment benefits fell last week for a fourth straight time to a pandemic low, the latest sign that America’s job market is rebounding from the pandemic recession… Jobless claims fell by 29,000 to 348,000. The four-week average of claims, which smooths out week-to-week volatility, also fell — by 19,000, to just below 378,000, also a pandemic low. The weekly pace of applications for unemployment aid has fallen more or less steadily since topping 900,000 in early January.”
August 17 – CNBC (Diana Olick): “Sentiment among single-family homebuilders dropped 5 points to 75 in August on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)… Of the index’s three components, current sales conditions fell 5 points to 81 and traffic of prospective buyers also fell 5 points to 60. Sales expectations in the next six months were unchanged at 81. Builders are contending with continued rising costs for materials as well as for skilled labor. That is pushing the price of newly built homes ever higher and clearly affecting demand.”
August 16 – Reuters (Evan Sully): “The New York Federal Reserve said… its barometer of manufacturing business activity in New York State declined more than expected in August after growing at a record-setting pace in the month before. The regional Fed’s ‘Empire State’ index on current business conditions fell around 25 points to 18.3, lower than a reading of 29.0 forecast…”
August 18 – CNBC (Robert Frank): “More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report. The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government. According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million — or 44% of all taxpayers — in 2019.”
Fixed-Income Bubble Watch:
August 17 – Financial Times (Joe Rennison): “A boom in US corporate borrowing has laid the foundation for a wave of defaults at financially risky companies, according to leading debt rating agencies… Sales of low-rated, ‘speculative-grade’ debt have already reached $650bn this year, according to S&P Global Ratings, putting them on track to surpass all-time borrowing records with more than four months left to go in 2021. Companies of all types had already borrowed record amounts of cash in 2020 in an effort to ride out the coronavirus downturn. Senior analysts at both Moody’s and S&P said furious demand from investors on the hunt for higher-yielding assets at a time of low interest rates had given less creditworthy companies access to financing with loose lending terms.”
August 17 – Bloomberg (Lisa Lee): “U.S. leveraged loan investors are starting to push back against companies that are trying to borrow outsized amounts of money at some of the most aggressive terms ever seen. Midcoast East Texas, a natural gas pipeline and transport business, has postponed a $400 million leveraged loan sale. Teaching Strategies, a provider of curriculums and software for educators, had to offer higher interest on Tuesday for a $320 million leveraged-buyout loan it is selling.”
China Watch:
August 18 – Wall Street Journal (Keith Zhai and Stella Yifan Xie): “China gave priority to economic growth for most of the past 40 years. Now, Xi Jinping is signaling plans to more assertively promote social equality, as he tries to solidify popular support for continued Communist Party rule. The push is captured by a catchphrase, ‘common prosperity,’ now appearing everywhere in China, including in public speeches, state-owned media and schools—and in comments from newly chastened business tycoons like Jack Ma. Like many Communist party slogans, details remain vague. But officials and analysts who have tracked the phrase’s use say it is meant to convey the idea that leaders are returning to the party’s original ambitions to empower workers and the disadvantaged, and will limit gains of the capitalist class when necessary to address social inequities.”
August 18 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping emphasized at a finance and economic meeting Tuesday the need to support moderate wealth for all — or the idea of ‘common prosperity,’ which analysts have said is behind the latest regulatory crackdown on tech companies. Significantly, the meeting was the first Xi led publicly since a two-week quiet period. Chinese leaders typically spend early August in secret political discussions at a resort… The meeting called for the ‘reasonable adjustment of excessive incomes and encouraging high income groups and businesses to return more to society,’ state media said…”
August 17 – Financial Times (Tom Mitchell and Sun Yu): “President Xi Jinping has called for stronger ‘regulation of high incomes’ in the latest sign that a 10-month campaign targeting China’s largest technology companies is rapidly expanding to encompass broader social goals. State media reported that a meeting of the Chinese Communist party’s Central Financial and Economic Affairs Commission…, chaired by Xi, had emphasised the need to ‘regulate excessively high incomes and encourage high-income groups and enterprises to return more to society’. The committee added that while the party had allowed some people and regions to ‘get rich first’ in the early decades of China’s reform and opening period, it was now prioritising ‘common prosperity for all’.”
August 19 – Bloomberg: “Chinese academics in a province that’s piloting measures to reduce income inequality said the government should impose wealth taxes, including on property and inheritance. In a front-page article published Thursday by the official Economic Daily newspaper, two researchers at Zhejiang University argued that the taxes would help adjust the earnings of high-income groups and narrow the income gap. Li Shi, a professor, and Yang Yixin, a researcher, said the taxes should be imposed at an appropriate time to promote ‘common prosperity.’”
August 17 – Reuters (Josh Horwitz): “China moved… to tighten control of its technology sector, publishing detailed rules aimed at tackling unfair competition and companies' handling of critical data. Beijing has been firming its grip on internet platforms in recent months, citing the risk of abusing market power to stifle competition, misuse of consumers' information and violation of consumer rights, in a reversal after years of a more laissez-faire approach.”
August 19 – Reuters (Samuel Shen, Clare Jim and Cheng Leng): “China’s central bank said it summoned executives of the country’s most indebted property developer, China Evergrande Group, to talks… and issued a rare warning that the company needs to reduce its debt risks and prioritise stability. The unusual summons comes amid fragile confidence in China’s credit markets and concern that any financial crisis at Evergrande could pose a systemic risk as the company struggles to find the cash it needs to pay its lenders. It also comes days after President Xi Jinping highlighted efforts to forestall major financial risks and as a flurry of regulatory crackdowns roil China’s equity markets.”
August 18 – Bloomberg: “China Evergrande Group’s shares and bonds slid for a second day after billionaire Hui Ka Yan stepped down as chairman of the company’s onshore real estate unit. The move spooked investors already concerned about the company’s funding troubles… Its 5.9% local bond due 2023 tumbled 26% to 42.4 yuan and was halted for a few minutes before resuming trading…”
August 18 – Financial Times (Thomas Hale): “State-backed Chinese investors will bail out Huarong Asset Management, as the under-pressure bad debt manager unveiled losses of Rmb103bn ($15.9bn) after months of uncertainty over its finances. The state-owned company said… that Citic, the Chinese bank, fellow bad debt manager Cinda Asset Management, China Insurance Investment, China Life Asset Management and Sino-Ocean Capital Holding, the asset manager, intended to make strategic investments of an undisclosed amount. The proposed capital injection for Huarong prompted a rally in the company’s bonds on international markets, where it has borrowed more than $20bn. On Thursday, its perpetual bonds rose 11% to trade at 95 cents on the dollar, compared to as low as 49 cents in April following a sell-off.”
August 19 – Wall Street Journal (Xie Yu and Serena Ng): “China’s top manager of distressed assets said it would post a massive loss and expects to receive a capital infusion from state-owned financial institutions, avoiding a messy default that would have had wide repercussions for Asia’s credit markets. China Huarong Asset Management Co., which is majority owned by China’s Ministry of Finance and the largest of the country’s managers of nonperforming loans and other bad debt, also said it has no plans to restructure its debt, cementing beliefs among investors that many Chinese institutions are too big to fail. Late Wednesday, the company said it expects to post a net loss equivalent to about $16 billion for 2020.”
August 18 – Bloomberg (Sofia Horta e Costa and Ye Xie): “China Huarong Asset Management Co. ultimately proved too big to fail, but its protracted bailout process shows Beijing’s determination to punish creditors who ignore risks in heavily indebted companies. The almost five-month saga triggered some of the most extreme swings ever for an investment-grade Chinese bond issuer, changing the way even seasoned money managers evaluate the nation’s $12 trillion credit market. While some Huarong bonds rallied to 97 cents on the dollar after the company unveiled a recapitalization by state-backed investors late Wednesday, the rescue came too late for many bondholders who sold at heavy losses earlier this year.”
August 16 – Wall Street Journal (Serena Ng): “The latest Chinese market to buckle under pressure from Beijing's wide-ranging corporate crackdown: junk bonds. Companies from China make up the bulk of Asia's roughly $300 billion high-yield dollar bond market, thanks to a surge in borrowing by the country’s heavily indebted property developers. But the investor optimism that drove that borrowing has collapsed. Stress has been building following a string of debt defaults and growing concern about a few large issuers, including property giant China Evergrande…”
August 15 – Bloomberg: “China is widening curbs on the nation’s soaring home prices by temporarily halting land auctions in some major cities, potentially hurting a key source of cash for local governments. Several large Chinese cities recently suspended centralized land sales…, after attempts to limit the number of auctions per year backfired. China has also stipulated that the price premium for land should be capped at 15%, Citigroup Inc. analysts… wrote… after market rumors about the policy change. Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry. Their most recent moves have included halting private equity funds from raising money to invest in residential property developments. Still, land sales generated more than $1 trillion in income for local governments last year, creating a sensitive balancing act for Beijing.”
August 15 – Reuters (Liangping Gao and Ryan Woo): “China’s new home prices rose at the slowest clip in six months in July, as authorities further tightened rules in the red-hot property sector, including limits on some categories of purchases. Average new home prices in China’s 70 major cities rose 0.3% in July from a month earlier, slowing from a 0.5% gain in June… China’s property market rebounded quickly from the COVID-19 crisis last year, triggering concerns about financial risks in an overheated market. That has prompted authorities to step up curbs this year, including restrictions on borrowing by developers, caps on banks’ lending to the sector, guiding banks to raise mortgage rates and a crackdown on illegal funding… ‘In most cities, both newly built and resale homes have seen a clear slowdown in price growth,’ said Zhang Dawei, chief analyst with property agency Centaline. ‘The housing price growth is expected to continue to soften, as the credit policy returns to normal (from easy to tight),’ Zhang said.”
August 16 – Bloomberg: “Home-price growth in China moderated for a second month in July after authorities took further steps to rein in the market. New home prices in 70 cities, excluding state-subsidized housing, rose 0.3% last month from June, when then gained 0.41%... It was the slowest growth in six months. The residential market has begun to cool after the government increased efforts to curb surging prices. Vice Premier Han Zheng last month vowed that the property sector shouldn’t be used as a short-term boost for the economy, becoming the highest-ranking official to address the real estate issue in recent months.”
August 20 – Bloomberg: “The slow pace of borrowing by local governments in China and curbs on the property market mean the economy will receive less of a boost this year from infrastructure investment than initially thought. Cities and provinces will sell about 1.8 trillion yuan ($277 billion) in local government special bonds by the end of August, data compiled by Bloomberg show, amounting to 48% of their quota for the year. At the same time last year, about 75% of the quota had been sold as local authorities ramped up spending…”
August 20 – Bloomberg: “China’s rolling regulatory crackdown on unfair markets found more targets Friday among liquor makers, cosmetics firms and online pharmacies. A slew of commentaries and reports in state media called for tougher oversight to protect consumers as President Xi Jinping’s campaign to address inequality broadens. That’s piled more misery on investors with global institutions dumping $1 billion worth of mainland shares via trading links on Friday while U.S.-traded Chinese stocks endure weeks of pain.”
August 16 – Reuters (Kevin Yao and Gabriel Crossley): “China's factory output and retail sales growth slowed sharply and missed expectations in July, as new COVID-19 outbreaks and floods disrupted business operations, adding to signs the economic recovery is losing momentum. Industrial production in the world's second largest economy increased 6.4% year-on-year in July… Analysts had expected output to rise 7.8% after growing 8.3% in June. Retail sales increased 8.5% in July from a year ago, far lower than the forecast 11.5% rise and June's 12.1% uptick.”
August 16 – Bloomberg: “The management of troubled private oil refiner Liaoning Bora Enterprise Group has been taken over by government officials from China’s Panjin city amid a tax probe that could lead to heavy fines and possible insolvency… Bora is seeking to restructure and avoid collapse due to mounting financial woes brought on by large amounts of unpaid taxes.”
Global Bubble Watch:
August 16 – Reuters (Gertrude Chavez-dreyfuss): “Foreign holdings of U.S. Treasuries in June climbed to their highest since February 2020…, in what analysts described as broad-based demand that helped drive yields lower for the month. Major foreign holders held $7.202 trillion in Treasuries, up from $7.135 trillion in May… The month also saw about $67 billion in Treasury purchases, the largest monthly increase in a year. ‘Some of the biggest additions to foreign Treasury holdings were in custodian countries such as Ireland, Cayman Islands, and Luxembourg, which tells me that buying was pretty broad-based,’ said Gennadiy Goldberg, senior U.S. rates strategist, at TD Securities…”
August 19 – Bloomberg (Craig Trudell and River Davis): “Toyota Motor Corp.’s efforts to stockpile enough chips and other key components to ride out supply disruptions only protected the company so long before it too succumbed to the shortages eviscerating automakers. The manufacturer will suspend output at 14 plants across Japan for various lengths of time through next month. The impact of these cuts will be harshest in September, with Toyota slashing its production plan by 40%, though risks will carry forward beyond next month. It’s the latest sign even the best supply-chain planning is proving no match for a pandemic that virtually ground the auto industry to a halt a year ago and has since plagued efforts to restore production.”
EM Watch:
August 13 – Reuters (Abraham Gonzalez): “Mexico is on track to mark a second year of record foreign capital outflows from the country's sovereign debt market, with more than $10 billion having left so far. Persistent high inflation, a fresh wave of COVID-19 and uncertainty created by government policy decisions have dampened appetite for Mexican debt. Some 202 billion pesos ($10bn) in capital left the market during January-July, compared to 257 billion pesos for all of 2020… In July alone, the exodus hit 67.5 billion pesos.”
Europe Watch:
August 14 – Bloomberg (James Hirai): “One of Europe’s riskiest bond bets is turning into a telltale sign of how much faith investors have in the central bank’s ability to engineer a smooth recovery out of the pandemic. Italian benchmark yields are near a six-month low and the government is so flush with cash that it canceled last week’s debt auction. The market is beginning to look like a crowded trade, with the number of outstanding positions in bond futures at the highest since March. It’s the latest evidence of the bullishness that’s swept across European markets. Italy is among the region’s most indebted nations yet has seen borrowing costs crater thanks to unprecedented stimulus from the European Central Bank that is quashing volatility and driving investors into the highest-yielding corners of the market.”
Japan Watch:
August 15 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s economy rebounded more than expected in the second quarter after slumping in the first three months of this year… But many analysts expect growth to remain modest in the current quarter as state of emergency curbs reimposed to combat a spike in infections weigh on household spending. The world's third-largest economy grew an annualised 1.3% in April-June after a revised 3.7% slump in the first quarter…”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 16 – CNBC (Pippa Stevens): “The U.S. government… declared the first-ever water shortage at Lake Mead, the nation’s largest reservoir by volume, after water levels fell to record lows amid a decades-long drought. Water cuts will go into effect in January for Arizona, Nevada and Mexico, the Bureau of Reclamation said... Arizona will take the biggest hit, with about 18% of the state’s annual apportionment cut.”
August 14 – Wall Street Journal (Lindsay Huth and Taylor Umlauf): “As drought persists across more than 95% of the American West, water elevation at the Hoover Dam has sunk to record-low levels, endangering a source of hydroelectric power for an estimated 1.3 million people across California, Nevada and Arizona. The water level at Lake Mead, the Colorado River reservoir serving the Hoover Dam, fell to 1,068 ft. above sea level in July, the lowest level since the lake was first filled… in the 1930s… For dams to produce power, they rely on the immense pressure created by the body of water they are blocking. As water levels go down, less pressure is exerted and the dams in turn produce less hydroelectric energy, which means the dam can produce less power.”
August 16 – Bloomberg (Mark Chediak): “More than a million acres of California landscape have been torched and Golden State firefighters are bracing for more conflagrations this week. Crews are battling 10 large blazes including the Dixie Fire, the second-biggest in state history, that has already scorched about 570,000 acres and destroyed more than 1,000 structures, according to the California Department of Forestry and Fire Protection.”
August 18 – Reuters (Fred Greaves): “An incendiary mix of strong, shifting winds and drought-parched vegetation stoked two of California's largest wildfires…, with thousands of people chased from their foothill and forest homes in the Sierra Nevada range. Some narrowly escaped the latest surge in flames and wind-whipped embers with only the clothes on their backs and the few belongings they managed to pack into their vehicles during chaotic evacuations. ‘Everything is gone. It's tearing me up,’ Fred Bratten, 57, said… ‘The only thing I can do now is clean my mess up and move on. It's like burying your dead.’”
August 19 – Reuters (Karl Plume): “There was barely a buzz in the air as John Miller pried the lid off of a crate, one of several ‘bee boxes’ stacked in eight neat piles beside a cattle grazing pasture outside Gackle, North Dakota. ‘Nothing,’ Miller said as he lifted a plastic hive frame from the box, squirming with only a few dozen bees. ‘Normally this would be dripping, full of honey. But not this year.’ A scorching drought is slashing honey production in North Dakota, the top producing state of the sweet syrup, and a shortage of bees needed to pollinate fruits and flowers puts West Coast cash crops like almonds, plums and apples at risk, according to more than a dozen interviews with farmers, bee experts, economists and farm industry groups.”
Leveraged Speculation Watch:
August 16 – CNBC (Stephen Spratt): “Hedge funds dominated Treasury buying flows in June as the global reflation trade ran out of steam. Investors domiciled in the Cayman Islands, a territory used as a base for leveraged investors and hedge funds, snapped up $27 billion of U.S. debt that month… That was the largest net purchase of any region. The buying came after Cayman-Island funds sold almost $150 billion of U.S. sovereign bonds in the first five months of the year…”
August 18 – Bloomberg (Katherine Burton and Brian Chappatta): “Ray Dalio insists that the swings in Chinese markets are little more than ‘wiggles.’ But for a certain subset of hedge-fund managers, the consequences of Beijing’s crackdown might seem more like an earthquake… All told, 13F filings from recent days demonstrate that even some of the biggest and brightest money managers didn’t anticipate China’s sweeping crackdown on everything from large technology firms to for-profit tutoring companies. On Monday, U.S. Securities and Exchange Commission Chair Gary Gensler issued his most direct warning yet about the risks of investing in Chinese companies.”
August 14 – Financial Times (Robin Wigglesworth and Laurence Fletcher): “Every January for the past two decades, a clutch of hedge fund titans and their top investors have cloistered themselves at Palm Beach’s plush Breakers Hotel to wine, dine and gossip in the balmy Floridian weather. Although the exclusive Morgan Stanley-arranged event is one of the social occasions of the year for some of the lucky invitees, the mood has been downbeat for much of the post-financial crisis era — deflated by disappointing returns and dwindling investor faith… This year, however, the fact that it was a virtual conference couldn’t quell an unmistakable sense of optimism. ‘This was the first time in many years Breakers felt like a celebration — as much as anything can feel like a celebration online. It had an upbeat feel to it,’ says Sandy Rattray, chief investment officer of Man Group.”
Geopolitical Watch:
August 17 – Wall Street Journal (Michael R. Gordon and James Marson): “The ascent of the Taliban has redrawn the diplomatic map for the U.S. and its rivals as they compete to shape the future of Afghanistan. China and Russia already are moving to build ties with the Taliban and have hosted Taliban officials even before the U.S. military completed its troop withdrawal. In recognition of Beijing and Moscow’s expanding influence in Kabul, Secretary of State Antony Blinken called the Chinese and Russian foreign ministers… A statement from the Russian foreign ministry said that the diplomats agreed to continue consultations, which would include China and Pakistan, on how to encourage ‘an inclusive inter-Afghan dialogue in the new conditions.’”
August 17 – Bloomberg: “When the Taliban took over Afghanistan the first time in 1996, China refused to recognize their rule and left its embassy shut for years. This time around, Beijing has been among the first to embrace the Islamist militants next door. China’s remarkable shift was on display little more than two weeks ago, when Foreign Minister Wang Yi welcomed a Taliban delegation to the northern port of Tianjin as the group made gains against the administration of President Ashraf Ghani, who fled the country on Sunday. Wang’s endorsement of the Taliban’s ‘important role’ in governing Afghanistan provided a crucial boost of legitimacy for an organization that has long been a global pariah due to its support of terrorism and the repression of women.”
August 17 – Bloomberg (Kari Soo Lindberg): “The U.S. has said it remains committed to Taiwan and other allies, pushing back at concerns about its resolve after its departure from Afghanistan led to the Taliban taking over Kabul. ‘We believe that our commitments to our allies and partners are sacrosanct and always have been,’ National Security Advisor Jake Sullivan said… ‘We believe our commitment to Taiwan and to Israel remains as strong as it’s ever been.’”
August 17 – Reuters (Yew Lun Tian and Yimou Lee): “China carried out assault drills near Taiwan on Tuesday, with warships and fighter jets exercising off the southwest and southeast of the island in what the country's armed forces said was a response to ‘external interference’ and ‘provocations’. Taiwan… has complained of repeated People's Liberation Army (PLA) drills in its vicinity in the past two years or so, part of a pressure campaign to force the island to accept China's sovereignty. In a brief statement, the PLA's Eastern Theatre Command said warships, anti-submarine aircraft and fighter jets had been dispatched close to Taiwan to carry out ‘joint fire assault and other drills using actual troops’.”
August 19 – Wall Street Journal (Alastair Gale, Joyu Wang and Laurence Norman): “As the Taliban overran Afghanistan last week, 25,000 Marines and other U.S. Navy personnel held exercises in part to simulate the capture and control of islands in the Western Pacific. One of the largest military drills since the Cold War—involving dozens of ships and submarines, and held with Japanese, British and Australian forces—shows how far the American military’s focus has shifted since the invasion of Afghanistan two decades ago. The exercises, intended to counter China’s territorial ambitions, also highlight how the U.S. is seeking to reassure allies of its global presence as questions are raised about the reliability of American military commitments after the fall of Kabul.”
August 18 – New York Times (Eshe Nelson and Alan Rappeport): “Despite the chaotic end to its presence in Afghanistan, the United States still has control over billions of dollars belonging to the Afghan central bank, money that Washington is making sure remains out of the reach of the Taliban. About $7 billion of the central bank’s $9 billion in foreign reserves are held by the Federal Reserve Bank of New York…, and the Biden administration has already moved to block access to that money. The Taliban’s access to the other money could also be restricted by the long reach of American sanctions and influence. The central bank has $1.3 billion in international accounts, some of it euros and British pounds in European banks, the former official, Ajmal Ahmady, said…”
August 18 – Reuters (David Shepardson): “The U.S. Transportation Department… said it will limit some flights from Chinese carriers to 40% passenger capacity for four weeks after the Chinese government imposed similar limits on four United Airlines flights. China told United on Aug. 6 it was imposing sanctions after it alleged five passengers who traveled from San Francisco to Shanghai tested positive for COVID-19 on July 21.”
