Saturday, January 9, 2021

Weekly Commentary: Issues 2021

Fragility. Last year exposed myriad fragilities. The U.S. stock market went from all-time highs to an emergency FOMC meeting in ten sessions. The S&P500 lost more than a third of its value in just 21 trading days. Q2 GDP collapsed at a 31% annualized rate. Financial conditions tightened dramatically, with illiquidity and dislocation erupting throughout the markets – equities and fixed income. The year demonstrated the fragility of social stability. Frail confidence in our institutions was similarly revealed.

A historic rally saw stock prices end 2020 at record highs. Financial conditions loosened spectacularly, with the year seeing record investment-grade and high-yield bond issuance. Record IPOs and SPACs. It was a year of surging trading volumes for both equities and options. The Fed’s balance sheet expanded almost $3.2 TN in 43 weeks.

Financial fragilities were exposed – and then seemingly resolved at the generous hand of the Federal Reserve (and global central bank community).

For years now, my beginning of the year “Issues” pieces have featured a key Credit Bubble maxim: “The Bubble either further inflates or bursts.” While easier to dismiss than ever, this dynamic has never been as germane. The Fed-induced Bubble is raging out of control. Monetary Disorder is acute and highly destabilizing. Sustainability must be questioned.

The system to begin 2021 in the throes of historic late-cycle “Terminal Phase Excess.” One cannot overstate the damage this ongoing epic Monetary Disorder will inflict upon financial, economic, social and political stability.

The brazen assault on our U.S. Capitol this week was both terribly distressing and ominous. Covid infections continue to run out of control, with single-day deaths this week surpassing 4,000 for the first time. Meanwhile, Tesla surged 25% this week (794% y-o-y) - increasing market capitalization to $834 billion. Bitcoin surpassed $40,000 Friday, with one-week and one-month gains of 38% and 100%. The small cap Russell 2000 jumped 5.9% this week, with the S&P400 Midcaps up 4.8%. The “average stock” Value Line Arithmetic Index rose 4.6%. The KWB Bank Index surged 8.5% during the first five trading sessions of the year. The Philadelphia Oil Services Index jumped 13.6%. Beginning where it left off in 2020, the Goldman Sachs Most Short Index surged 10.1% in a week.

There is at least some discussion of “Bubbles,” a sign of how flagrant excess has become. To be sure, years of Bubble excess have inflated into a full-fledged stock market and financial mania. This is an extremely dangerous situation: speculative blow-off dynamics coupled with acute latent fragilities.

Nonetheless, confidence in the Federal Reserve’s capacity to sustain the boom is more deeply ingrained than ever. Last year’s unprecedented crisis measures emboldened financial speculation. Underlying fragilities are disregarded. The general view is that risk can be readily ignored – it must be to capture such easy trading profits. The Fed has everything under better control than ever. Our central bank will ensure that financial conditions remain exceptionally loose.

Key Issue 2021: Can the Fed sustain ultra-loose financial conditions?

There’s a fallacy that became only more toxic during 2020: That the Fed readily manages and controls financial conditions. Markets, financial systems and finance, more generally, evolve over time, with this evolution significantly influenced by policy measures. The appearance of Fed control persists only so long as the Bubble inflates.

For about three decades, the Fed has accommodated, nurtured and backstopped leveraged speculation – arguably to the point where speculative leveraging is the prevailing force dictating underlying financial conditions. In a “risk on” backdrop, expanding speculative Credit (leverage), loose financial conditions, and speculation all feed a self-reinforcing Bubble Dynamic. But the wildness awaits…

We witnessed this past March how quickly de-risking and deleveraging can erupt into illiquidity, dislocation and panic. Unprecedented speculative leverage had accumulated across global markets. Associated latent fragilities were exposed – and unprecedented policy measures were required to hold collapse at bay. In the end, in excess of $3 TN of Fed liquidity ($8.5TN from “G4” central banks) reversed the powerful forces of de-risking/deleveraging. A potent new speculative cycle was unleashed.

Key Issue 2021: Will the latest speculative cycle, arguably the most egregious and destabilizing yet, be sustained through the year?

Ebullient markets celebrate the Fed’s unprecedented 2020 measures, with more faith in “whatever it takes” than ever. More sober analysis would recognize the relationship between systemic speculative leverage, underlying fragility, and the scope of the Fed’s response necessary to thwart Bubble collapse. Importantly, the need for such monumental Fed measures confirmed the unprecedented scope of leveraged speculation and speculative excess more generally.

The Fed and global central bank 2020 crisis response pushed unparalleled leveraged speculation and financial excess to even more precarious extremes. While presumed otherwise in the markets, last year’s market bailout and resulting mania have significantly exacerbated what was already acute Bubble fragility.

Typically, a speculative cycle’s manic phase has a limited duration. As in life, it becomes difficult to sustain the intensity of extreme euphoria. But this is the most extraordinary of cycles. Myriad signs of rank excess that in the past would have aroused concerns from the more sophisticated market operators are today paid no heed at all. Not with markets over-liquefied and the Fed determined to inject $120 billion monthly for the foreseeable future. This promotes an extended cycle – an elongated “Terminal Phase” – with only more egregious speculation and speculative leverage.

The 2008 crisis was labeled “a hundred-year flood.” Crises inflict enormous pain. Normally, lessons are learned, and behaviors are altered. Speculators are chastened, while policymakers assume a more assertive role in safeguarding against lending, debt accumulation and speculative excesses. But contemporary central bank doctrine has transformed age-old dynamics. QE, zero rates and using asset inflation as the key mechanism for system reflation ensure anomalous dynamics. The Bubble was reflated and then some, ensuring only greater future Bubble collapses.

The global Bubble was again at the precipice in 2020, with reflationary policy measures employed more quickly and in incredible dimensions. Bubbles were rapidly resuscitated. Pain was ameliorated before it altered risk tolerance and speculative impulses.

It would be highly unusual to have back-to-back years of financial crisis. But the speed by which intense speculative excess reemerged post-crisis has been extraordinary. There are some similarities to the post-LTCM bailout rally that briskly ripened into the 1999 technology stock mania – with less than 18-months from bailout to a major market top in March 2000.

Yet the scope of the current global Bubble across asset classes so dwarfs 1999. Between September 1998 and the end of March 1999, Federal Reserve Assets expanded $55 billion to $580 billion. For this cycle, the expansion of Fed Credit is now up to $3.580 TN in 69 weeks. Central bank largess has spurred history’s greatest Credit expansion – in the U.S., China and globally. Many governments over the past year ran deficits surpassing 10% of GDP. The U.S. fiscal deficit exceeded $3.0 TN, or approaching 15% of GDP. In the face of an unprecedented supply of new bonds and debt, market yields nonetheless collapsed. Central bankers completely disabled the market pricing mechanism.

January 8 – Bloomberg (Jordan Fabian): “President-elect Joe Biden on Friday called for trillions of dollars in immediate further fiscal support, including increased direct payments, after a surge in coronavirus cases caused U.S. payrolls to drop for the first time since April. ‘The price tag will be high,’ Biden said of his planned package… He promised to lay out his proposals next Thursday… ‘It will be in the trillions of dollars.’ Biden invoked images of the unemployed waiting in long food lines and added a dire warning: ‘If we don’t act now, things are going to get much worse and harder to get out of a hole later.’ Biden made the call for new assistance – including boosting stimulus checks to $2,000 -- after an unexpectedly poor December jobs report…”

Ten-year Treasury yields surged 20 bps to start the new year to 1.12% - the high since March 19th. Long-bond yields jumped 23 bps to 1.88%. After winning both Georgia Senate runoff elections, at 50 seats the Democrats have effectively accomplished “clean sweep” control of Washington. Presumably, next week we’ll have a better idea of the size of the new administration’s stimulus plan.

For sure, the Treasury market now faces massive supply – with a fiscal deficit likely to rival last year’s $3.1 TN. After buying the majority of 2020’s net Treasury issuance, the Fed is poised to purchase a Trillion or so in 2021. That leaves a significant hole. In addition, inflationary pressures are germinating. The 10-year Treasury inflation “breakeven” rate jumped nine bps this week to 2.07%, the high since October 2018. Crude (WTI) prices surged $3.72 this week, with gasoline up 9.4% and natural gas gaining 6.3%. Copper rose 4.4%. Corn jumped 2.5% this week, with soybeans up 4.6%. Strong price gains were posted by cotton, palm oil, rubber and live cattle.

Fed vice chair Richard Clarida spoke Friday afternoon before the Council on Foreign Relations. Bloomberg headlines captured the gist of his message: “Time to slow pace of bond buying ‘Well down the road.’” “Can be quite some time before we think about tapering.” Chicago Fed president Charles Evans this week commented, “Frankly, if we got 3% inflation that would not be so bad.”

Issue 2021: The Fed is Playing with Fire.

I understand the deep complacency. The Fed has not felt pressured from the markets to raise rates since 1994. In a more normal environment, the bond market would look at the confluence of mounting inflationary pressures and Fed indifference with trepidation. Throw in unprecedented supply and booming risk markets and you’ve got all necessary ingredients for a brutal Treasury bear market. Yet fear remains difficult to come by. There is already talk of how much higher market yields would need to move before the Fed steps in with larger purchases of long-dated Treasuries. “Whatever it takes.”

I see these breakdowns in monetary management, market function and fiscal discipline likely coming to a head in 2021. Would the Fed significantly boost QE in the face of manic risk markets and a recovering economy? I see the Republican party emerging from disarray to return to its fiscal conservative roots. The Federal Reserve now faces major political risk when it's viewed as financing the Democrats liberal agenda. Issue 2021: Fed credibility.

Another massive stimulus program risks turning both Republicans and an increasingly inflation-focused bond market against massive Fed monetization. There is, as well, the not inconsequential risk of a disorderly decline in the dollar. The confluence of huge trade deficits, previously unimaginable fiscal deficits, massive Fed monetization, over-indebtedness, and a vulnerable financial Bubble places dollar stability in jeopardy.

It’s not unusual for a nation’s bond market and currency to turn disorderly concurrently. Such a scenario for Treasuries and the dollar would place the Fed under the most pressure to tighten policy in decades. The iShares long-dated Treasury ETF (TLT) sank 4.1% this week, a painful reminder of how quickly losses can mount for a perceived low-risk Treasury bond. Treasuries, corporate bonds and fixed-income securities more generally are extraordinarily vulnerable to a painful bear market.

Meanwhile, high-yield bond risk premiums (spreads and CDS) remain near multi-year lows. This is in spite of looming Credit distress throughout the economy. Risk markets remain white-hot and financial conditions extraordinarily loose. Companies enjoy the easiest access to cheap finance, ensuring Credit stress, defaults and risk premiums remain well contained. Still, corporate Credit is acutely vulnerable to a bout of risk aversion and a resulting tightening of financial conditions. We witnessed in March how quickly ETF outflows can manifest into marketplace illiquidity, dislocation and fears of widespread corporate defaults.

The iShares Emerging Market equities ETF (EEM) surged 5.8% this week to an all-time high, with a 22% gain since November 1st. Brazil’s Bovespa Index jumped 5.1% this week, with Mexico’s Bolsa up 6.0%. Major equities indices jumped 9.7% in South Korea, 9.2% in Chile, 6.0% in South African, 5.0% in Russia and 4.3% in Turkey. The global liquidity tsunami impacted virtually all markets, though some of the greatest effects were experienced in many of the marginal markets most vulnerable to shifts in financial conditions. The global Bubble is today raging, but there is acute vulnerability to any unexpected risk aversion and tightening of financial conditions.

No country faces a greater challenge than China in balancing the need to reduce stimulus against the risk of unleashing underlying acute fragility. After expanding Credit $500 billion monthly for most of 2020, Chinese officials will attempt to restore some degree of financial restraint. The risk of a financial accident in China in 2021 is reasonably high.

Beijing postponed plans to get its Credit system in order as it confronted aggressive trade war tactics from the Trump administration. Officials then resorted to massive fiscal and monetary stimulus to counteract contractionary pandemic dynamics. Today, there’s excessive optimism regarding China’s economic recovery – and the soundness of its system more generally. Beijing is not oblivious to the perilous scope of China’s Bubble.

Authorities will now cautiously attempt to impose restraint, a risky proposition for one of history’s great financial and economic Bubbles. I expect cracks in the corporate debt market and “small” banking sector to expand into more systemic issues in the event of heightened risk aversion and deleveraging. China’s apartment markets remain an accident in the making. The stability of China’s bloated banking system is an Issue 2021.

It is now a dangerously synchronized global Bubble. Global developments – market, financial, economic and geopolitical – pose significant risk to the vulnerable U.S. Bubble. The general impression is that geopolitical tensions will ease with the new Biden administration taking control – especially with China. I’m skeptical that much will slow the evolving cold war between rival superpowers. Taiwan and the South China Sea much remain potential flashpoints for 2021.

But for now – and especially after this week’s developments - I remain more worried about domestic conflict than international. What an absolutely abhorrent start to the new year for our country. Wednesday’s spectacle was an appalling national nightmare. Was it a freak anomaly? The end of something – or more likely the beginning?

As disturbing as Wednesday’s U.S. Capitol insurrection was, by evening I found myself trying to find reasons for hope. Would the debacle force some serious rethink? Would there be recognition that things had been pushed much too far? As a nation, through this disgusting episode of mayhem might we begin the challenge of national reconciliation. Could we come to a consensus that as a nation we need to tone down partisan rhetoric? Would Wednesday force the reassessment of efforts hell-bent on inciting anger – anger that burst into violence, desecration and even murder in our beloved Capitol Building.

Our nation is today dangerously divided – and how this social crisis evolves is a key Issue 2021. Here, on Friday evening, I find myself less hopeful. The end of something or the beginning? Will the chaotic conclusion of the Trump presidency set in motion the healing process, or has something menacing been unleashed that will prove difficult to contain? Is the far-right fringe energized and emboldened? Can we keep the extremists from the right and left from clashing? Do we now face elevated risk of domestic terrorism?

How citizen Donald Trump handles quite difficult circumstances is, unfortunately, a major Issue 2021. Does he resolve to play a constructive role in national reconciliation, or does the famed “counterpuncher” coming out swinging madly at his adversaries? How gory does the unfolding civil war within the Republican party become?

I am left to hope for a much-needed easing of social tensions – a pulling back from the precipice. There were over 300,000 new Covid cases today, with another 4,000 American deaths. We can be hopeful that with vaccinations we will be through the worst of this terrible pandemic within a few months. But how much worse will things become in the meantime? There are these more contagious virus variants, along with the possibility that virus mutations may at some point weaken vaccine efficacy.

I worry about deepening scars – from the pandemic, from divisiveness, from all the hostility, and from waning faith in our institutions. I’m not happy to write another dark piece – in back-to-back weeks – 2020 then 2021 prospects. But I worry. We’re witnessing an increasingly combustible social tinderbox. I rather clearly see a fire starter.

We’re a bursting Bubble away from severe societal crisis. And this could be the major Issue 2021. It’s tempting to focus on booming markets and the constructive role they will play in economic recovery and social healing. But it’s no coincidence that securities prices are going nuts as social stability increasingly fractures. Society today suffers the myriad deleterious effects from decades of dysfunctional finance and resulting Monetary Disorder. Meanwhile, the Fed responds feverishly to late-cycle market, economic and social fragility with Trillions.

The inflationism I’ve been chronicling weekly for over two decades has turned desperate. This is a deeply troubling dynamic – a disaster in the making. The culmination of a crazy financial mania right in the face of deepening late-cycle economic and social distress. The worst-case Bubble scenario is, most regrettably, a momentous Issue 2021. I saw nothing but ominous confirmation of this troubling thesis during a chaotic first week of 2021: The Year of Acute Monetary Disorder and Fragility.

For the Week:

The S&P500 gained 1.8% (up 17.1% y-o-y), and the Dow rose 1.6% (up 7.9%). The Utilities were little changed (down 0.3%). The Banks surged 8.6% (down 4.3%), and the Broker/Dealers jumped 5.5% (up 35.2%). The Transports advanced 2.9% (up 17.3%). The S&P 400 Midcaps jumped 4.8% (up 17.8%), and the small cap Russell 2000 surged 5.9% (up 26.2%). The Nasdaq100 advanced 1.7% (up 46.2%). The Semiconductors rose 5.0% (up 57.3%). The Biotechs jumped 3.8% (up 14.6%). While bullion was down $50, the HUI gold index increased 0.9% (up 30.9%).

Three-month Treasury bill rates ended the week at 0.07%. Two-year government yields added a basis point to 0.14% (down 144bps y-t-d). Five-year T-note yields jumped 12 bps to 0.48% (down 115bps). Ten-year Treasury yields surged 20 bps to 1.12% (down 70bps). Long bond yields spiked 23 bps to 1.875% (down 41bps). Benchmark Fannie Mae MBS yields rose 13 bps to 1.47% (down 115bps).

Greek 10-year yields fell four bps to 0.58% (down 76bps y-o-y). Ten-year Portuguese yields dropped five bps to negative 0.02% (down 42bps). Italian 10-year yields slipped a basis point to 0.53% (down 79bps). Spain's 10-year yields declined one basis point to 0.04% (down 40bps). German bund yields rose five bps to negative 0.52% (down 32bps). French yields gained two bps to negative 0.32% (down 36bps). The French to German 10-year bond spread narrowed three to 20 bps. U.K. 10-year gilt yields jumped nine bps to 0.29% (down 48bps). U.K.'s FTSE equities index surged 6.4% (down 9.4% y-o-y).

Japan's Nikkei Equities Index jumped 2.5% (up 18.0% y-o-y). Japanese 10-year "JGB" yields added one basis point to 0.03% (up 4bps y-o-y). France's CAC40 rose 2.8% (down 5.5%). The German DAX equities index advanced 2.4% (up 4.2%). Spain's IBEX 35 equities index surged 4.1% (down 12.2%). Italy's FTSE MIB index rose 2.5% (down 5.1%). EM equities shot higher. Brazil's Bovespa index rose 5.1% (up 8.3%), and Mexico's Bolsa surged 6.0% (up 4.6%). South Korea's Kospi index surged 9.7% (up 42.9%). India's Sensex equities index gained 2.2% (up 17.3%). China's Shanghai Exchange jumped 2.8% (up 15.5%). Turkey's Borsa Istanbul National 100 index inflated 4.3% (up 36.4%). Russia's MICEX equities index jumped 5.0% (up 10.6%).

Investment-grade bond funds saw inflows of $5.356 billion, while junk bond funds posted outflows of $196 million (from Lipper).

Federal Reserve Credit last week contracted $43.5bn to $7.307 TN. Over the past year, Fed Credit expanded $3.179 TN, or 77%. Fed Credit inflated $4.496 Trillion, or 160%, over the past 426 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dipped $1.5bn to $3.489 TN. "Custody holdings" were up $81.2bn, or 2.4%, y-o-y.

M2 (narrow) "money" supply dropped $125.1bn last week to $19.072 TN, yet with an unprecedented 44-week gain of $3.638 TN. "Narrow money" surged $3.738 TN, or 24.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits sank $145.2bn, while Savings Deposits fell $26.8bn. Small Time deposits declined $4.3bn. Retail Money Funds dropped $4.0bn.

Total money market fund assets gained $12.1bn to $4.309 TN. Total money funds surged $660bn y-o-y, or 18.1%.

Total Commercial Paper surged $84.6bn to $1.105 TN. CP was down $21bn, or 1.8%, year-over-year.

Freddie Mac 30-year fixed mortgage rates declined two bps to a record low 2.65% (down 99bps y-o-y). Fifteen-year rates slipped a basis point to an all-time low 2.16% (down 91bps). Five-year hybrid ARM rates rose four bps to 2.75% (down 55bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 2.94% (down 101bps).

Currency Watch:

January 6 – Bloomberg: “There are growing signs that Beijing is keen to slow the ascent in China’s currency after it surged to the highest level since mid-2018 against the dollar. The People’s Bank of China set its fixing at 6.4604 per dollar on Wednesday…The onshore yuan fell 0.11% to 6.4620… The move came after policy makers sent a string of signals suggesting they are growing uncomfortable with the yuan’s strength.”

For the week, the U.S. dollar index increased 0.2% to 90.066 (down 7.5% y-o-y). For the week on the upside, the Norwegian krone increased 1.9%, the Australian dollar 0.8%, the New Zealand dollar 0.8%, the Canadian dollar 0.2%, and the Swiss franc 0.1%. On the downside, the Brazilian real declined 4.1%, the South African rand 3.9%, the British pound 0.8%, the Japanese yen 0.7%, the Mexican peso 0.6%, the South Korean won 0.3%, the Swedish krona 0.3%, and the Singapore dollar 0.3%. The Chinese renminbi increased 0.81% versus the dollar this week (up 7.28% y-o-y).

Commodities Watch:

January 5 – Reuters (Alex Lawler, Shadia Nasralla and Ahmad Ghaddar): “Saudi Arabia pledged additional, voluntary oil output cuts of one million barrels per day (bpd) in February and March as part of a deal under which most OPEC+ producers will hold production steady in the face of new coronavirus lockdowns. Saudi is going beyond its promised cuts as part of the OPEC+ group of producers to support both its own economy and the oil market, Energy Minister Prince Abdulaziz bin Salman said…”

The Bloomberg Commodities Index gained 2.1% (down 1.3% y-o-y). Spot Gold dropped 2.6% to $1,849 (up 18.3%). Silver sank 6.7% to $24.637 (up 36.1%). WTI crude surged $3.72 to $52.24 (down 12%). Gasoline rose 9.4% (down 7%), and Natural Gas jumped 6.3% (up 23%). Copper surged 4.4% (up 31%). Wheat slipped 0.3% (up 13%). Corn rose 2.5% (up 29%). Bitcoin surged about $11,000 this week, or 38%, to surpass $40,000.

Coronavirus Watch:

January 6 – CNBC (Will Feuer): “A record number of people died in the U.S. from Covid on Tuesday and Wednesday, when a mob of angry Trump supporters stormed the U.S. Capitol during a riot. A record 3,733 people died from the virus on Tuesday, followed by 3,865 deaths Wednesday…”

January 7 – Bloomberg: “Connecticut, Texas and Pennsylvania reported their first cases of the virus variant that helped trigger a U.K. lockdown amid concern that Covid-19 deaths in the U.S. are likely to maintain a near-record pace at least through January. Mounting hospitalizations are offsetting any positive effect from the halting start to inoculations. New York, New Jersey, Florida and North Carolina are among states that reported daily records as Illinois became the fifth state to surpass 1 million infections.”

January 4 – Reuters (Kate Holton, Kate Kelland, Guy Faulconbridge and Alistair Smout): “UK scientists expressed concern… that COVID-19 vaccines being rolled out in Britain may not be able to protect against a new variant of the coronavirus that emerged in South Africa and has spread internationally. Both Britain and South Africa have detected new, more transmissible variants of the COVID-19-causing virus in recent weeks that have driven a surge in cases. British Health Secretary Matt Hancock said… he was now very worried about the variant identified in South Africa. Simon Clarke, an associate professor in cellular microbiology at the University of Reading, said that while both variants had some new features in common, the one found in South Africa ‘has a number additional mutations ... which are concerning’.”

January 5 – CBS: “New York Governor Andrew Cuomo said… a new COVID-19 strain that was detected in the state after it was first identified in the United Kingdom last month ‘could be a game changer.’ He called it ‘highly problematic.’ ‘This is a virus we have to be extra careful with,’ the governor said…”

January 4 – Bloomberg (Julia Fanzeres): “The U.S. could see an elevated death rate for more than a decade as the economic fallout from the coronavirus persists, underscoring the long-term health impact of the deep recession. The nation’s mortality rate is forecast to increase 3% while life expectancy will drop 0.5% over the next 15 years, representing 890,000 more American deaths, according to a working paper from researchers at Duke, Harvard and Johns Hopkins universities. Over a 20-year period, that amounts to 1.37 million additional deaths.”

January 8 – CNBC (Sam Meredith): “London Mayor Sadiq Khan… declared a major incident over the rapid spread of the coronavirus in the U.K.’s capital city. He had previously warned the virus was ‘out of control’ and the National Health Service was ‘on the cusp of being overwhelmed.’ ‘I have declared a major incident in London because the threat this virus poses to our city is at crisis point,’ Khan said… ‘One in 30 Londoners now has COVID-19. If we do not take immediate action now, our NHS could be overwhelmed and more people will die,’ he added.”

January 3 – Reuters (Estelle Shirbon, Alistair Smout and Guy Faulconbridge): “British Prime Minister Boris Johnson… ordered England into a new national lockdown to contain a surge in COVID-19 cases that threatens to overwhelm parts of the health system before a vaccine programme reaches a critical mass… Johnson said a new, more contagious variant of the coronavirus first identified in the United Kingdom and now present in many other countries was spreading at great speed and immediate action was needed to slow it down.”

January 5 – Financial Times (Mohamed El-Erian): “As the new Covid-19 strain triggers tighter restrictions on economic activity and limits even more the movement of people, it has become increasingly clear that the road to vaccine-induced immunity will now have more potholes. Already it was a journey that was likely to add further stress to the great disconnect between a buoyant and profitable Wall Street and a struggling Main Street. The change should force policymakers and markets to pay more attention to three other features of this Covid era that are also consequential for the longer-term: the unusually large dispersion in performance in big economies, a significant worsening in inequality and deeper economic scarring. Because it spreads much faster, the new Covid-19 variant has altered the health risk assessments of both individuals and governments. This inevitably imposes even bigger pressures on economic and social interactions…”

Market Instability Watch:

January 6 – Bloomberg (Emily Barrett, John Ainger and Ruth Carson): “U.S. Treasury yields broke above 1% for the first time since the pandemic-driven turmoil in March, and the selloff may only have just begun should the Democrats secure control of the U.S. Senate. The 10-year yield… at one point surged close to 10 bps to more than 1.05% as Democratic victories appeared likely in both Senate runoff elections in Georgia, paving the way for more spending… Long-bond rates, meanwhile, were on track for their biggest one-day jump since March’s pandemic-related turmoil and investors have already started to dust off reflation trades in anticipation of a so-called Blue Sweep.”

January 6 – Bloomberg (Stephen Spratt): “Quantitative hedge funds are busy liquidating loss-making long Treasuries positions and could begin to establish new short ones if the 10-year yield breaches 1.10%... Momentum funds known as Commodity Trading Advisors likely drove the initial move upward in yields on Wednesday, based on activity in futures markets, Citigroup Inc.’s Edward Acton wrote… The funds have been cutting losses since 10-year yields reached around 1.02%, said Nomura Holdings Inc.’s Masanari Takada.”

January 7 – Reuters (Noel Randewich): “Shares of Tesla surged to a record high in heavy trading on Thursday, with the electric car maker’s stock market value exceeding Facebook’s for the first time. Shares in the company led by Elon Musk jumped nearly 8% to end the session at $816, putting its market capitalization at $774 billion and making it Wall Street’s fifth-most-valuable company…”

January 5 – Bloomberg (Annie Massa): “GMO co-founder Jeremy Grantham renewed his grim outlook for U.S. stocks, warning of a ‘fully-fledged epic bubble,’ just days after equity indexes finished off a euphoric year. Stocks are careening away from fair prices amid ‘hysterically speculative’ investor behavior -- and even the Federal Reserve won’t be able to stop a looming crash, Grantham wrote in a letter, titled ‘Waiting for the Last Dance’… ‘I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble,’ Grantham wrote. ‘A bubble that is beginning to look like a real humdinger.’”

January 7 – Bloomberg (Olga Kharif): “The total market value of cryptocurrencies surpassed $1 trillion for the first time… amid a frenzied and volatile rally in Bitcoin to yet another record. Cryptocurrencies hit the milestone after a fivefold climb in market value in the past year, data from tracker CoinGecko shows. Strategists have cited demand from speculative retail traders, trend-following quant funds, the rich and even institutional investors as among the reasons for the surge.”

Global Bubble Watch:

January 5 – Bloomberg (Anchalee Worrachate): “The world’s biggest economies shouldering record debt burdens are about to confront an unwelcome legacy of the financial crisis: a $13 trillion debt bill. The Group of Seven nations plus key emerging markets face the heaviest bond maturities in at least a decade… According to… Bloomberg, these governments may need to roll over 51% more debt than in 2020. The good news is that both central banks and investors are on their side. Policy makers facing lingering economic challenges from the pandemic are likely to stay accommodative… Bonds remain a sought-after haven amid the virus’s rising toll on health and economies. ‘Government debt ratios have exploded, but I believe that the short-term worrying over a rising debt is fruitless,’ said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. ‘Debt is leverage and assuming it’s not abused, it’s one of the most successful tools for growing wealth.’”

January 5 – Wall Street Journal (Jon Sindreu): “The pandemic will leave Western nations carrying the biggest public-debt pile as a percentage of gross domestic product since World War II. To deal with it, they will need a better grasp of inflation. So far, fears about high debt-to-GDP ratios have been proven repeatedly wrong. Even so, officials are already trying to set limits. In the eurozone, deficit caps will likely return. In the U.K., Treasury chief Rishi Sunak has dubbed the path of public finances ‘unsustainable.’ If activist fiscal policy is to survive, new rules are required. Should they aim to stave off ‘bond vigilantes,’ or simply not stoke inflation? The latter focus has been popularized by the contentious school of thought known as Modern Monetary Theory, but the divide isn’t what it seems. Even vociferous opponents of MMT share the assumption that inflation is the true constraint on fiscal policy.”

January 7 – Bloomberg (Agnieszka de Sousa and Megan Durisin): “Global food prices reached a six-year high in December and are likely to keep rising into 2021, adding to pressure on household budgets while hunger surges around the world. A United Nations gauge of food prices has jumped 18% since May, as adverse weather, government measures to safeguard supplies and robust demand helped fuel rallies across agricultural commodities from grains to palm oil. Prices will likely climb further, the UN’s Food & Agriculture Organization said.”

January 7 – Reuters (Tom Sims): “Natural catastrophes around the world resulted in $210 billion in damage in 2020, with the United States especially hard hit by hurricanes and wildfires… The damage, tallied by the German reinsurer Munich Re, increased from $166 billion in the previous year, and comes as a warming planet heightens risks. Losses that were insured rose to $82 billion from $57 billion in 2019…”

Trump Administration Watch:

January 6 – Wall Street Journal (Gerald F. Seib): “Never in recent memory have the events of a single 24-hour period so shaken two presidencies, the very Capitol of the United States and the nation itself as they did on Wednesday. The remarkable scenes of political violence that broke out amid what was to be a peaceful confirmation of the transfer of power are testing America’s democratic institutions, and it’s far from clear how they will respond. President Trump’s term, which began with Republicans fully in charge of Washington and the promise of a new kind of populist leadership, effectively came to an end Wednesday with his party aflame and out of power, some of its top leaders excoriated by a president they had loyally supported, and a mob of Trump supporters occupying and vandalizing the Capitol. The effects will ripple out for years to come, and the full consequences will be left for historians to sort out.”

January 7 – Associated Press (Ted Anthony): “To see it unspool — to watch the jumbled images ricochet, live, across the world’s endless screens — was, as an American, a struggle to believe your eyes. But there it was, in the capital city of the United States in early January 2021: a real-time breaking and entering the likes of which the republic has never seen. The U.S. Capitol was overrun by violent supporters of Donald Trump, who exhorted them to march on the domed building as lawmakers inside carried out their constitutional duty by certifying his electoral defeat. The proceedings were quickly abandoned as the selfie-snapping mob smashed windows, marched through hallways and rummaged through lawmakers’ desks.”

January 3 – New York Times (Jeanna Smialek and Catie Edmondson): “Over the past four years, President Trump and his allies in Congress have all but obliterated the Republican Party’s self-professed commitment to less spending and smaller deficits, pushing policies that have bloated the federal budget deficit to record levels. Even before the pandemic ravaged the economy, the deficit… had ballooned, driven by a $1.5 trillion tax cut and more generous government spending. Then Congress adopted two stimulus packages totaling more than $3 trillion… U.S. debt has grown so much that in 2020 it was projected to surpass the size of the entire annual economy for the first time since World War II. That spending… has upended the politics of what was once a bipartisan concern, leaving Washington’s fiscal hawks in an increasingly lonely corner in the economic debate.”

January 6 – CNBC (Jesse Pound): “The New York Stock Exchange will delist three Chinese telecommunication giants after all, saying its second reversal in two days came after new guidance from the Treasury Department. The NYSE announced… it will remove U.S.-traded shares of China Telecom, China Mobile and China Unicom from the Big Board to comply with an executive order signed by President Donald Trump.”

January 6 – MarketWatch (Andrew Restuccia and John D. McKinnon): “President Donald Trump signed an executive order banning transactions with eight Chinese-connected apps, including the Alipay payment platform owned by Chinese billionaire Jack Ma’s Ant Group Co. The order also bans transactions with the WeChat Pay app owned by Chinese tech giant Tencent Holdings Ltd., along with six other apps. The order… takes effect in 45 days, after Trump leaves office.”

Biden Administration Watch:

January 8 – Wall Street Journal (Emily Glazer, Collin Eaton and Orla McCaffrey): “Businesses are scrambling to assess the impact of Democrats winning control of the Senate, a development that took some by surprise and is expected to accelerate Biden administration policy changes and increased regulatory scrutiny of industries such as finance and oil. Companies and trade groups are bracing for further government oversight after Democrats won both seats in Tuesday’s Georgia runoff election. While narrow control of the Senate makes it difficult for Democrats to pursue ambitious legislation, it puts the party in control of key committees and clears the way for President-elect Joe Biden’s cabinet nominees to head agencies that regulate a wide array of industries.”

January 6 – Reuters (Richard Cowan): “U.S. Senate Minority Leader Chuck Schumer on Wednesday predicted Democrats will win control of the Senate for the next two years once all votes are counted in a special election in Georgia, as he promised to deliver ‘bold change’ for America. Schumer, who is poised to become Senate majority leader, told reporters: ‘One of the first things that I want to do when our new senators are seated is deliver the $2,000 check’ to help people get through the coronavirus pandemic.”

Election Watch:

January 7 – CNN (Gregory Krieg and Dan Merica): “The Democratic sweep of Georgia's Senate seats has ushered in a heady new reality for President-elect Joe Biden, who will take office in two weeks with a mandate to act and the numbers on Capitol Hill to deliver on some of his most ambitious promises. Freed from the constraints that soon-to-be Republican Minority Leader Mitch McConnell was poised to place on his agenda, Biden now also faces new pressure to act swiftly while keeping his narrow Democratic majorities in the House and Senate unified -- a tricky task that could make or break his presidency in its first year. The party's wish list is long and every senator will effectively have veto power on each piece of legislation. But the early hurdles that many in the party were fretting over days ago fell overnight.”

Federal Reserve Watch:

January 6 – Reuters (Howard Schneider, Jonnelle Marte and Ann Saphir): “The Federal Reserve was nearly unanimous in its decision last month to leave its bond-buying program unchanged, but left a wide berth for officials to decide in the future if and when changes should be made, according to minutes of the… December policy meeting. ‘All participants’ agreed the Fed should commit to leaving the program in place until there was ‘substantial further progress’ towards its economic goals, and ‘nearly all’ favored keeping the current mix of assets purchased intact…”

January 4 – Reuters (Ann Saphir): “Chicago Federal Reserve President Charles Evans… had a message for markets: vaccines may bring the coronavirus pandemic under control this year, but the U.S. central bank is nowhere close to ending its super-easy monetary policy. ‘To meet our objectives and manage risks, the Fed’s policy stance will have to be accommodative for quite a while,’ Evans said… ‘Economic agents should be prepared for a period of very low interest rates and an expansion of our balance sheet as we work to achieve both our dual mandate objectives.’”

January 5 – Reuters (Chris Reese): “Chicago Federal Reserve President Charles Evans… reiterated his view the U.S. central bank ought to aggressively woo higher inflation after years of under-running its 2% target. ‘Frankly if we got 3% inflation that would not be so bad,’ Evans told a virtual meeting of the American Economic Association, as long as it is not accelerating uncontrollably.”

January 7 – Reuters (Howard Schneider): “The combination of easy monetary policy, ample government spending, and a possible economic surge once the pandemic lifts could spark faster-than-expected inflation, St. Louis Federal Reserve President James Bullard said… The Fed in recent years has struggled to lift the pace of price appreciation to its 2% target, but now ‘you have very powerful fiscal policy in place and perhaps more to come, you have a Fed that has backed away from a preemptive strategy...and wants to temporarily have inflation above target, and you have the economy poised to boom at the end of the pandemic,’ Bullard said. ‘Those things all seem to suggest that the stage is set for higher inflation.’”

January 7 – Bloomberg (Matthew Boesler): “The U.S. central bank may begin paring back its bond-buying program as soon as the end of this year, Federal Reserve Bank of Philadelphia President Patrick Harker said. ‘I could see, potentially, that occurring at the very end of 2021 or early 2022. But it is all going to depend on the course of the economy, which will depend on the course of the virus,” Harker said.. ‘It could cause disruption in the markets if we try to do it too soon… So, I have many degrees of caution on this, to just be steady as she goes until we start to really see the economy healing.’”

January 5 – Reuters (Jonnelle Marte): “U.S. economic growth could surge later this year if most Americans are vaccinated against the coronavirus, but the gains would unlikely be enough for the Federal Reserve to withdraw its support, Cleveland Fed President Loretta Mester said… ‘Monetary policy will need to remain highly accommodative for quite some time because achieving our monetary policy goals is likely to be a journey and not a sprint,’ Mester said…”

U.S. Bubble Watch:

January 7 – Bloomberg (Eric Martin): “The U.S. trade deficit widened to the second-largest on record in November as merchandise imports reached a more than one-year high in the midst of the holiday shopping season, causing the shortfall in goods to climb to the highest yet. The gap in trade of goods and services expanded to $68.1 billion in November from $63.1 billion in October… The merchandise-trade deficit increased 6.2% to $86.4 billion, the biggest on record, while the nation’s surplus in services to $18.2 billion, the lowest since August 2012.”

January 8 – CNBC (Jeff Cox): “Job creation came to a halt in December as restrictions brought on by surging Covid-19 cases hammered virus-sensitive industries, particularly bars and restaurants, which lost nearly half a million positions. …Nonfarm payrolls fell by 140,000. That was below expectations for 50,000… It was the first monthly drop since April. The unemployment rate was unchanged at 6.7%, compared to a 6.8% estimate. An alternative unemployment measures that includes discouraged workers and those holding part-time jobs for economic reasons declined to 11.7% from 12%.”

January 5 – Reuters (Lucia Mutikani): “U.S. factory activity accelerated to its highest level in nearly 2-1/2 years in December as the coronavirus pandemic continues to pull demand away from services towards goods, though spiraling new infections are causing bottlenecks in supply chains… The ISM’s index of national factory activity increased to a reading of 60.7 last month. That was the highest level since August 2018 and followed a reading of 57.5 in November.”

January 6 – CNBC (Diana Olick): “The stunning surge in home buying, brought on by the coronavirus pandemic, may finally be easing up… Mortgage applications to purchase a home fell 0.8% in the two weeks ended Jan. 1… More telling was that purchase volume was just 3% higher than the same period a year earlier.”

January 8 – Wall Street Journal (Ryan Dezember): “There haven’t been so many single-family homes under construction in the U.S. since 2007, yet many of these new houses won’t be for sale. Investors are building tens of thousands of houses expressly to rent in a bet that Americans will keep flocking to spacious suburban living even if they can’t afford to buy homes. The Covid-19 pandemic sparked a race for space among Americans, and home prices have surged to records. The gains have outpaced wage growth, straining affordability… Homeownership is unaffordable for average wage earners in 55% of U.S. counties, up from 43% a year earlier, according to Attom Data Solutions… Meanwhile, single-family landlords have reported record occupancy and fast-rising rents since the pandemic began.”

January 3 – Bloomberg (Fareed Sahloul and Aaron Kirchfeld): “Christmas was canceled for dealmakers after a record-breaking final burst of M&A activity at the end of the year. A total of 2,496 transactions were announced globally in the final two weeks of 2020… That’s the most for a festive fortnight on record… More than $187 billion of deals came during the period, led by buyout firm Thoma Bravo’s $9.6 billion purchase of property software maker RealPage Inc.”

January 2 – Bloomberg (Vildana Hajric and Elena Popina): “The IPO market is manic. Stocks haven’t been this expensive since the dot-com era. The Nasdaq 100 has doubled in two years, leaving its valuation bloated -- all while volatility remains stubbornly high. It’s a setup that’s left investors sitting on fat returns from 2020, a year that defied easy explanation. It’s also one that has a growing cohort of experts warning about a bubble. Knowing when market rallies turn from logical to excessive is always tough. It was nearly impossible as 2020 ended, with interest rates pinned near zero and the federal government unleashing another $900 billion into the economy. But history offers clues, and a raft of current market conditions meet criteria that would likely be found on a bubble checklist.”

January 5 – Wall Street Journal (Amrith Ramkumar): “Big banks earned billions of dollars in fees setting up so-called blank-check companies in 2020, highlighting how booming capital markets are helping Wall Street weather the coronavirus. U.S.-listed special-purpose acquisition companies, or SPACs, raised $82 billion in 2020, a more-than-sixfold increase from the year before and a figure greater than all of the money previously raised, according to Dealogic. They even attracted a star-studded group of backers, ranging from basketball legend Shaquille O’Neal to former House of Representatives Speaker Paul Ryan. As celebrities and well-known institutions entered the sector, the biggest banks also increased their activity.”

January 5 – Bloomberg (Jeremy Hill and Katherine Doherty): “More large U.S. companies filed for bankruptcy in 2020 than in any year since the global financial crisis, after the pandemic tipped swaths of the economy into distress. Energy, retail and consumer services companies led a total of 244 filings… That was the most since 2009, when 293 U.S. companies sought protection from creditors. Credit markets have rallied, lifting many borrowers out of distress, but bankruptcy experts predict another wave of filings that could start in the second quarter of 2021 as cash runs out.”

January 3 – Financial Times (Myles McCormick): “Defaults by US oil and gas producers are set to outstrip all other sectors again in 2021 as an industry battered by this year’s price crash faces yet more pain, according to a forecast from a rating agency. Energy will account for $15bn-$18bn of US high-yield bond defaults in 2021, Fitch predicted. That is more than double both healthcare and industrials, the next most affected sectors… The volume will be well below the $28bn racked up by energy companies in the past year… But the persistence of elevated distress levels will dash hopes of a respite for the industry after one of its toughest years in recent history.”

January 3 – Wall Street Journal (Konrad Putzier): “Hotel owners are bracing for a difficult 2021, as the sector continues to reel from a historic drop in bookings caused by the Covid-19 pandemic… The start of Covid vaccinations in the U.S. and Europe raised the prospect that people would start traveling again and sent shares in hotel owners and operators soaring. But investors and analysts say bookings will take years to rise back to pre-pandemic levels. Meanwhile, the industry faces growing financial stress as property owners struggle to pay their mortgage bills, wages and other expenses.”

January 5 – Bloomberg (John Gittelsohn): “Office vacancies in Manhattan jumped to a 21st century record as the Covid-19 pandemic froze new rental deals and sublease openings soared. Last year ended with a 15.1% vacancy rate, up from 11.1% in 2019 and the highest in data going back to 1999, according to… Savills, a commercial-property services firm. That left 68.4 million square feet empty, including 18.6 million square feet of sublease space listed by current tenants looking to downsize. New leases in the fourth quarter dropped 64% from a year earlier to 4.6 million square feet.”

January 4 – Reuters (Michael Erman): “Drugmakers including Abbvie Inc and Bristol Myers Squibb raised U.S. list prices on more than 500 drugs to kick off 2021, according to an analysis by health care research firm 46brooklyn… Nearly all the increases were below 10%, and the median hike was 4.8%, down slightly from last year, 46brooklyn said.”

Fixed Income Watch:

January 4 – Reuters (Karen Pierog): “U.S. states, cities, schools and other issuers sold $451.2 billion of municipal bonds last year, the highest amount on records that date back to 1980, according to Refinitiv… With the U.S. Federal Reserve pushing interest rates to historical lows to combat the economic fallout from the ongoing coronavirus pandemic, muni bond sales were up 11% compared to 2019. Issuers took advantage of the low rates to refund nearly $200 billion of outstanding debt, the most since 2017. Taxable bonds accounted for 31% of issuance.”

January 8 – Financial Times (Robert Armstrong and Patrick Mathurin): “US mortgage volumes could top $3tn this year as rising competition among lenders and an activist Federal Reserve combine to put further downward pressure on borrowing rates, according to industry executives and analysts. Rates are poised to fall as a scarcity of inventory pushes home prices up, increasing loan sizes and putting the industry on track to approach the $3tn level — which has been topped only in 2003 and 2020. ‘It’s going to be a big year,’ said Stan Middleman, chief executive of Freedom Mortgage. ‘The prognosticators are calling for mid-two trillions, I think it's going to be closer to three.’”

China Watch:

January 6 – Reuters (Gabriel Crossley): “China said… the United States will pay a ‘heavy price’ for its wrongdoing, after U.S. Secretary of State Mike Pompeo said it may sanction those involved in Hong Kong arrests and that the U.S.’ U.N. ambassador would visit Taiwan. Foreign Ministry spokeswoman Hua Chunying, speaking to reporters, urged the United States to immediately stop interfering in China’s internal affairs.”

January 7 – Bloomberg: “Chinese officials and social media users mocked Wednesday’s chaotic scenes in Washington as Donald Trump supporters stormed the US Capitol building and delayed the confirmation of Joe Biden’s presidential election victory. The disarray in the halls of Congress was a propaganda coup for President Xi Jinping’s administration. On Thursday, a Chinese foreign ministry spokesperson likened the US unrest to Hong Kong’s pro-democracy protests in 2019. In July last year, protesters broke into and vandalised Hong Kong’s Legislative Council, the territory’s de facto parliament. ‘When similar things happened in Hong Kong, some Americans and US media reacted differently,’ Hua Chunying said.”

January 5 – Financial Times (Thomas Hale): “The People’s Bank of China has taken steps to ease financial conditions after interbank rates doubled in the second half of the year, reflecting the challenge it faces in navigating a return to normal monetary conditions. The central bank supplied more liquidity than the market anticipated in mid-December via its medium-term lending facility, through which it provides one-year loans to the banking system. The scale of a reverse repo operation in late December — another way of injecting cash into the system — also exceeded expectations, analysts said. The moves to ease banks’ access to funding come after conditions tightened in the second half of 2020 as China’s economic recovery gathered pace. They also illustrate the pressure facing the central bank as it grapples to control leverage across a rapid but uneven economic recovery without excessively constraining the flow of money to businesses and households.”

January 8 – Bloomberg: “China urgently needs to take steps to contain financial stability risks as the economy’s recovery takes hold, according to the International Monetary Fund. Virus relief measures that are ‘potentially distortionary’ should be gradually phased out, the… lender said in its annual… report… Repayment holidays for borrowers and relaxed rules on how to treat non-performing loans ‘run the risk of increasing moral hazard and undoing recent progress in strengthening bank transparency and governance.’ Debt levels have climbed during the pandemic, especially in the private sector, the fund said, while credit quality likely deteriorated due to looser rules for dealing with bad loans.”

January 3 – Bloomberg (Gabriel Crossley): “Activity in China’s factory sector rose in December as the world’s second-largest economy sustained its recovery to pre-pandemic levels, a business survey showed…, however, increasing cost pressures slowed the pace of expansion. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 53.0 from November’s 54.9… The private sector survey also showed input prices rose sharply, at the fastest pace since 2017, with pricier raw materials, especially metals, blamed for the increase.”

January 4 – Bloomberg: “Shares of Chinese banks and developers tumbled on Monday after regulators made an unprecedented move to cap loans for the real estate sector, the latest effort to snuff out systemic risks. The CSI 300 Financials Index dropped 1.2%, while the gauge of Shanghai-listed property developers fell 2.3% to the lowest in six months. Under new rules, the nation’s largest state-owned lenders must trim their loan exposure to the property sector to 40% or less. Banks’ mortgage lending should be no more than 32.5% of their outstanding credit…”

January 3 – Bloomberg: “A Chinese court ruled that a local ratings firm should help compensate some creditors for a construction firm’s 1.4 billion yuan ($216 million) bond defaults three years ago, a first in the country as Beijing raises pressure on agencies to improve their due diligence.”

January 4 – New York Times (Austin Ramzy): “The Chinese legal authorities have threatened to revoke the licenses of two lawyers hired to help a group of Hong Kong protesters who were arrested last year while trying to flee to Taiwan by speedboat. Ten of the activists were convicted last week by a court in the mainland Chinese city of Shenzhen of illegal boundary crossing and sentenced to prison terms ranging from seven months to three years.”

January 5 – Reuters (Yanni Chow and Yoyo Chow): “Hong Kong police arrested 53 people in dawn raids on democracy activists… in the biggest crackdown since China last year imposed a security law which opponents say is aimed at quashing dissent in the former British colony. Hong Kong’s most prominent pro-democracy advocates were arrested in raids on 72 premises as the authorities said last year’s unofficial vote to choose opposition candidates in city elections was part of a plan to ‘overthrow’ the government.”

January 6 – Bloomberg (Iain Marlow and Kari Lindberg): “China’s unprecedented arrest of dozens of leading Hong Kong opposition figures illustrates the depth of Joe Biden’s challenges with Beijing. By the time he becomes U.S. president, there might not be much democracy left to save in the Asian financial hub. The Hong Kong police… rounded up more than 50 activists, former lawmakers and academics, as well as an American rights lawyer, in a series of morning raids across the former British colony involving more than 1,000 officers. All had helped organize an unofficial primary in July to nominate opposition candidates for a legislative election that was later postponed. The crackdown was the largest to date in a single day under a Beijing-drafted national security law that carries sentences as long as life in prison, shocking even for a city where opposition figures have increasingly found themselves facing criminal charges for attending protests, holding banners or getting into legislative chamber scuffles.”

EM Watch:

January 8 – Bloomberg (Srinivasan Sivabalan): “The emerging-market equity benchmark rose to a record Friday, topping its previous high reached before the 2008 financial crisis, as a flood of liquidity and optimism over a global economic rebound fuel risk appetite. The MSCI Emerging Markets Index rose 1.8% to 1,345.64…, extending its recovery from the March rout to 79%. The milestone comes after stock valuations and market capitalization both reached record highs in a rally that’s added $10.6 trillion in a little over nine months, the fastest bout of wealth creation in the history of emerging markets.”

Europe Watch:

January 7 – Bloomberg (Andrew Blackman and Naomi Kresge): “Chancellor Angela Merkel warned that ‘the most difficult months’ in the fight against the coronavirus pandemic still lie ahead. After extending and tightening lockdown restrictions earlier this week, Merkel’s stern message came as daily fatalities in Germany exceeded 1,000 for a second consecutive day, pushing the death toll to nearly 38,000.”

Japan Watch:

January 7 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Yoshihide Suga declared a state of emergency… for Tokyo and adjacent areas, trying to stem Covid-19 infections that hit a daily record in the capital.”

Leveraged Speculation Watch:

January 6 – Financial Times (Laurence Fletcher): “Winton Group, once one of the world’s biggest and most successful hedge fund firms, has suffered a nearly 80% drop in its assets over the past five years, with poor returns and client withdrawals accelerating in a tough 2020. Investor assets at the London-based firm, founded in 1997 by billionaire scientist and quantitative investing pioneer David Harding, tumbled from $33.7bn at the end of 2015 to $7.3bn by late 2020…”

January 6 – Bloomberg (Nishant Kumar): “Crispin Odey’s flagship hedge fund lost money again in 2020, deepening the gloom for the bearish manager… His Odey European Inc. hedge fund fell 30.5% despite a big gain during the pandemic-fueled selloff in March… That’s the fifth annual decline in the past six years and compares with a 5.8% average gain across all hedge funds through November.”

Geopolitical Watch:

January 7 – Reuters (Ben Blanchard, Michelle Nichols and Cate Cadell): “The U.S. ambassador to the United Nations, Kelly Craft, will visit Taiwan next week for meetings with senior Taiwanese leaders, Taiwan’s government and the U.S. mission to the U.N. said, prompting China to warn they were playing with fire… Chinese fighter jets approached the island in August and September during the last two visits - by U.S. Secretary of Health and Human Services Alex Azar and U.S. Under Secretary of State… Keith Krach…”

January 5 – Reuters (Gabriel Crossley and Ben Blanchard): “China said… it would make a ‘necessary response’ to a planned military dialogue between the United States and Chinese-claimed Taiwan, saying it firmly opposed the event. China has been angered by stepped up support for the democratic island by outgoing U.S. President Donald Trump’s administration, including new arms sales and visits to Taipei by senior U.S. officials, which have strained already poor Beijing-Washington ties.”

January 3 – Associated Press (Jon Gambrell and Isabel Debre): “Iran began enriching uranium Monday to levels unseen since its 2015 nuclear deal with world powers and also seized a South Korean-flagged tanker near the crucial Strait of Hormuz, a double-barreled challenge to the West that further raised Mideast tensions. Both decisions appeared aimed at increasing Tehran’s leverage in the waning days in office for President Donald Trump… Increasing enrichment at its underground Fordo facility puts Tehran a technical step away from weapons-grade levels of 90%, while also pressuring President-elect Joe Biden to quickly negotiate.”