Saturday, January 16, 2021

Saturday's News Links

[CNBC] Adrenaline-fueled rush for small caps, vaccine plays and story stocks dents passive-indexing trend

[CNBC] New Covid variant first found in UK could become dominant strain in U.S. by March, CDC says

[Reuters] U.S. state capitals on edge for armed protests as Trump presidency nears end

[Reuters] U.S. imposes fresh sanctions on Iran in final days of Trump presidency

[AP] Fleeing New Yorkers squeeze surrounding housing markets

[AP] Journalists prepare for protests where they could be targets

[AP] Donor backlash fuels GOP alarm about Senate fundraising

[WSJ] An Old Foe of Banks Could Be Wall Street’s New Top Cop

[WSJ] Why the New Covid-19 Variants Could Be More Infectious

[WSJ] More Cash Means More Problems for Big Banks

[WSJ] Chinese Property Developers Have Huge Debts to Refinance

[FT] Jenga-like structure builds in credit markets

[FT] EU sets out plans to curb reliance on dollar in post-Trump era

Weekly Commentary: The Reality of Financial Dominance

Please join Doug Noland and David McAlvany this Thursday, January 21st, at 4:00pm Eastern/ 2:00pm Mountain time for the Tactical Short Q4 recap conference call, “Managing in a Mania.” Click here to register.

The federal deficit for the first quarter of the new fiscal year was reported at $573 billion, up 61% y-o-y. Washington borrowed 45 cents of every dollar spent during the quarter. After the passage last month of the $900 billion stimulus legislation, estimates were placing this year’s deficit above $2.3 TN.

The Biden administration Thursday released details of its Covid stimulus package with a price tag of $1.9 TN. Goldman Sachs has since revised its estimate of the eventual size of this stimulus to $1.1 TN from $750 billion. Goldman believes tough negotiations are in store to garner the necessary Republican votes in the Senate. Democrats could push some of this spending through the budget “reconciliation” process requiring only a simple majority, although this would come with delays and other issues. The President-elect also announced a second major package addressing taxes and infrastructure would be coming later in the year.

It appears likely that this year’s fiscal deficit will now exceed even last year’s unprecedented $3.1 TN. The country is hurting, and social tensions are boiling over. I understand the argument that a deeply divided country can’t commence a healing process until our citizens get their feet back on the ground with confidence the economy is moving forward. Yet I dismiss the argument that low interest rates create the opportunity to assume larger debt loads. It’s a tragedy we came into this pandemic with such indebtedness and financial instability.

Our federal government is in the process of expanding debt by more than 30% of GDP in only two years. Hopefully not at double-digit annual rates, yet massive deficit spending is inevitable as far as the eye can see. Importantly, Washington is running massive deficits despite both record stock prices and corporate debt issuance – in the face of about the loosest financial conditions imaginable.

How enormous will deficits balloon when this historic financial Bubble bursts? Are $5.0 TN annual deficits an unreasonable guesstimate? No worries, apparently. There’s always the “whatever it takes” Federal Reserve balance sheet. In the financial and economic crisis scenario, does the Fed boost Treasury, MBS, corporate bond and EFT purchases to, say, $500 billion monthly?

Two headlines from Powell’s Thursday Princeton zoom call: “U.S. Federal Debt Not on Sustainable Path” and “High Public Debt Does Not Affect Monetary Policy.” Perhaps a more pertinent caption would read, “Monetary Policy Fomenting High Public Debt.” I might be persuaded to believe in the most extreme circumstances (i.e. war or during acute financial crisis) there may be justification for central banks temporarily pegging long-term market yields. Today is not such a scenario. The system is currently in a most desperate need of market discipline. At this point, only the markets can keep Washington from completely bankrupting our government with unmanageable debt.

Markus Brunnermeier, director of the Bendheim Center for Finance at Princeton “Let me move on to the next topic from price stability to financial stability, which is also a major concern for you and the Fed more generally. There is also this concept out there of Financial Dominance. So, if the financial sector - of course it’s very sound at this point but there might be over-leveraging going on on the corporate side – do you see that there is some threat from financial instability which might limit what monetary policy you can undertake at some point down the road? And do you think the macro-prudential tools the U.S. has are sufficient to avoid such a Financial Dominance circumstance?"

Fed Chair Jay Powell: “I would say we don’t feel any pressure from Financial Dominance… If Financial Dominance is the reluctance, or even the inability, of a central bank to tighten policy because of the leverage in the private sector – we don’t feel that. Our non-financial corporate sector did go into this downturn with relatively high leverage, but at these low interest rates the interest payments are actually not at terribly high levels by historical standards – they're sort of at a normal level. We have not seen the big uptick in defaults that we thought we might see… It’s just not something we are feeling or have ever felt, really. When the time comes to raise interest rates, we’ll certainly do that – and that time, by the way, is no time soon.”

Noland comment: I can only hope this is an issue of semantics. The Fed hasn’t employed traditional tightening measures since 1994 rate increases punctured a highly levered speculative Bubble (bond and derivatives markets). Fed funds ended 2002 at 1.25%, despite double-digit mortgage Credit growth. With household mortgage Credit having expanded 75% in five years in clear Bubble excess, Fed funds ended 2004 at 2.25%. After cutting rates to zero in late 2008, rates began 2018 at only 1.25%. Powell’s attempt to normalize policy rates ended rather abruptly at 2.25%, with a late-2018 bout of de-risking/deleveraging forcing the new Fed Chair to “pivot” right back to ultra-easy.

The key issue throughout this cycle has been speculative leverage as opposed to over-indebted corporations. The Fed obviously “feels pressure” – as its $3.1 TN response to March’s market dislocation demonstrates. It was not the economy forcing what seemed at the time daily boosts to the scope of Fed emergency balance sheet operations. It was, instead, the clear and present danger of an unraveling of unprecedented speculative leveraging that was behind previously unimaginable Fed liquidity injections. It can be called “Financial Dominance” or the layperson’s “trapped,” but markets operate today with high confidence that the Fed has no alternative but to maintain ultra-easy conditions – zero rates, massive ongoing balance sheet growth, and whatever it takes market liquidity backstopping. “Financial Dominance” is the Bubble’s lifeblood.

Brunnermeier “The public debt level, of course, has reached record highs. If you look at the CBO forecast, it’s going up tremendously over the next few years… How will this impact monetary policy…? It might be constraining through fiscal dominance of monetary policy down the road. And how important do you see the independence of the central bank, of the Fed, that at that time – when it has to step on the brakes a little bit – that it can actually raise interest rates? Do you think it’s very important – not only for the Fed but for other central banks around the globe as well? How would you stress the importance of independence…?"

Powell “The U.S. is not on a sustainable path at the federal government level in the simple sense that the debt is growing substantially faster than the economy. That means by definition it is unsustainable. That’s not to say that the level of debt is unsustainable. It’s not unsustainable, and it is far from unsustainable. I think we’re a long, long way from fiscal dominance in the United States, if we ever get to that place. It is certainly not a factor we consider in any way at this time. So high debt in no way impacts monetary policy now. We are squarely focused serving the public through to achieve maximum employment and stable prices. My strong view is that central bank independence is an institutional arrangement that has served the public well… I frankly feel that is well understood among elected representatives – on both sides of the aisle people do understand that having an independent central bank really does help, particularly in times of crisis, but also through the business cycle where you can really be focused on serving all the American people and ignore political considerations completely.”

Noland Comment: The system is today one unexpected spike in market yields away from mayhem. Why are current deficits not alarming, when past deficits a fraction of today’s size were recognized as dangerous and unsustainable? What gives Powell the confidence that “we’re a long, long way from fiscal dominance”? One reason: because of contemporary, experimental monetary policy – more specifically the introduction of prolonged periods of zero rates and central bank asset purchases. 

I have much less confidence in debt sustainability than Powell, as I seriously question the sustainability of central bank inflationist doctrine. I don’t believe the Fed can continue to inflate “money” and manipulate the markets without ensuring at some point one catastrophic market reaction/adjustment. Excess, distortions and imbalances will mount until something snaps. When this experiment is recognized as having failed, Fed independence will be in serious jeopardy.

Brunnermeier “Hopefully the crisis will be behind us soon, with the new vaccines coming out. At some point we’ll have to start thinking about exit. I know that some of your colleagues – and even you - said it’s too early to even think about exit. But perhaps at some point we have to start to think about exit. I was wondering are there any lessons from taper tantrums – certain things we should avoid because taper tantrum was very detrimental to other economies outside the U.S. What are the lessons from the past experience…?”

Powell: “Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis is be careful not to exit too early. By the way, try not to talk about exit all the time if you’re not sending that signal because markets are listening. The economy is far from our goals, and as I’ve mentioned a couple times, we’re strongly committed to our framework and to using our monetary policy tools until the job is well and truly done. The taper tantrum highlights the real sensitivity that markets can have about the path of asset purchases. We know we need to be very careful in communicating about asset purchases… We will, of course, be very, very transparent as we get close. I would just say this on the current situation, when it does become appropriate for the committee to discuss specific dates - when we have clear evidence that we’re making progress toward our goals – and that we’re on track to make substantial further progress towards our goals – when that happens and we can see that clearly we’ll let the world know. We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases. So, that’s how we’re thinking about that.”

Noland Comment: “Be careful not to exit too early” is a “lesson of the global crisis”? You can’t be serious? The Fed doubled its balance sheet to $4.5 TN between 2011 and 2014 in a non-crisis environment. This was after formally communicating an “exit strategy” in 2011. Between 2008 and 2014, Fed holdings surged from $860 billion to $4.5 TN. At that point reducing assets to $3.72 TN doesn’t qualify as either “early” or an “exit,” especially when the Fed quickly reversed course in 2019.

At this point, I doubt an “exit” will ever be possible. Count me skeptical of the nice scenario of the “very transparent” Fed clearly communicating an approaching taper to a calm and rational marketplace. We’re so beyond that. The Federal Reserve’s life is about to turn much more complicated and challenging.

Inflation risk is the highest it’s been in years. The 10-year Treasury “breakeven” inflation rate added a couple more basis points this week to 2.09%, the high since October 2018. Commodity prices continue to rally, with the Bloomberg Commodities Index closing Friday near one-year highs. Services and manufacturing surveys indicate heightened price pressures. Yet my main point is different.

The world is awash in liquidity. Moreover, the dollar has weakened, and the central bank overseeing the world’s reserve currency is trapped in reckless monetary inflation. This backdrop has granted nations around the world the flexibility to recklessly inflate their money and Credit. I would argue global “money” and Credit are unhinged like never before. And it’s no longer hypothetical. Global central bank “money” is solidly on a trajectory that ensures intractable Acute Global Monetary Disorder.

Does this ensure accelerating general price inflation? Not necessarily. There remains the possibility for the bursting Bubble scenario with collapsing asset prices, de-leveraging, illiquidity and resulting deflationary pressures. But especially after what was experienced in 2020, we must assume global central banks would respond in concert with multi-Trillions of additional monetary inflation.

We’ve reached the point where a particularly problematic circumstance would appear a relatively high probability scenario: central banks being forced by synchronized global de-risking/deleveraging to move early and aggressively to flood the system with liquidity. Central banks, for the first time, would be inundating a system with liquidity despite increasingly entrenched inflationary pressures and biases. General price inflation could, finally, really catch fire.

January 13 – Bloomberg (Steve Matthews and Vivien Lou Chen): “Federal Reserve officials are beginning to split over when they may need to start pulling back on their massive monetary stimulus, drawing nervous glances from investors who remember how markets were roiled during the 2013 taper tantrum. In the past week, four of the Fed’s 18 policy makers have publicly raised the prospect they may discuss reducing bond buying -- currently running at $120 billion a month -- by year’s end. In contrast, several others have called the debate premature and Fed Vice Chairman Richard Clarida, the most senior central banker to weigh in, has said he doesn’t expect any changes before 2022.”

Powell may have tried to throw cold water on taper talk, but this issue is anything but resolved. Inflationary pressures are mounting, while egregious market speculative excess could not possibly be more conspicuous. M2 “money” supply was up $3.842 TN, or 25%, over the past year. With the Democrats in charge, already massive deficit spending will be supersized. It’s terrible to see our members of Congress living in fear. Any responsible central banker would look at today’s monetary environment and be panicked.

Another fascinating week in global finance. Interesting to see the People’s Bank of China and the Reserve Bank of India both moving to drain some excess liquidity. EM equities Bubbles indicated some vulnerability, with major equities indices sinking 3.8% in Brazil and 2.1% in South Korea. EM bond prices reversed lower. EM currencies were generally lower for the week, with notable weakness in European EM currencies. European equities faced selling pressure, with most major indices down around 2%. Italian 10-year yields jumped eight bps on renewed political instability (see Europe Bubble Watch), as Italian banks were hit 3%.

The S&P500 dropped 1.5%, giving back most of its y-t-d gain. With its 2.3% decline, the Nasdaq100 is now down for 2021. While speculation runs rampant at the fringe, the major indices are indicating vulnerability. Investment-grade and high yield CDS prices rose this week. The VIX jumped almost three points to 24.34, a notably elevated level considering equities are near record highs without a major impending event raising the fear level.

January 15 – Reuters (April Joyner): “Trading volume in U.S. equity options hit a new record on Friday… More than 49.5 million contracts traded during the session, Trade Alert said. Friday marked the expiration of monthly options contracts… This year, some 416 million U.S equity options contracts have already traded over 10 sessions. That’s equal to the total options volumes over the first four months of 2004…”

Markets are appearing more fragile to me. A historic mania faces a troubling reality: The pandemic continues to spiral out of control, with risk that these virus variants worsen an already horrible situation. The U.S. economy has notably weakened (i.e. employment, retail sales, small business confidence and consumer confidence). And while the bullish consensus sees only a few months until vaccines reignite recovery, there are major issues with the vaccine rollout as well as deepening scars as the U.S. pandemic downturn approaches its one-year anniversary.

Mainly, I sense Bubble vulnerability. Things evolved into an out-of-control liquidity-fueled mania, within a backdrop of acute economic, social and political instability. We’ve lost sight of the combustibility of this mix. When markets inevitably succumb, the dark social mood is poised to exacerbate the downturn.

For the Week:

The S&P500 fell 1.5% (up 0.3% y-t-d), and the Dow declined 0.9% (up 0.7%). The S&P 400 Midcaps added 0.3% (up 5.1%), and the small cap Russell 2000 jumped another 1.5% (up 7.5%). The Utilities increased 0.9% (up 0.8%). The Banks added 0.6% (up 9.2%), while the Broker/Dealers were little changed (up 5.5%). The Transports gained 0.5% (up 3.5%). The Nasdaq100 dropped 2.3% (down 0.7%). The Semiconductors rose 1.9% (up 7.1%). The Biotechs gained 1.1% (up 4.9%). With bullion falling $21, the HUI gold index sank 5.9% (down 5.0%).

Three-month Treasury bill rates ended the week at 0.075%. Two-year government yields were little changed at 0.135% (up 1bp y-t-d). Five-year T-note yields declined three bps to 0.45% (up 9bps). Ten-year Treasury yields dipped three bps to 1.08% (up 17bps). Long bond yields fell four bps to 1.83% (up 19bps). Benchmark Fannie Mae MBS yields added a basis point to 1.48% (up 14bps).

Greek 10-year yields rose seven bps to 0.65% (up 3bps y-t-d). Ten-year Portuguese yields gained three bps to zero (down 3bps). Italian 10-year yields jumped eight bps to 0.61% (up 7bps). Spain's 10-year yields gained two bps to 0.06% (up 1bp). German bund yields declined two bps to negative 0.54% (up 3bps). French yields were little changed at negative 0.32% (up 2bps). The French to German 10-year bond spread widened two to 22 bps. U.K. 10-year gilt yields were unchanged at 0.29% (up 9bps). U.K.'s FTSE equities index dropped 2.0% (up 4.3% y-t-d).

Japan's Nikkei Equities Index gained 1.4% (up 3.9% y-t-d). Japanese 10-year "JGB" yields added one basis point to 0.04% (up 2bps y-t-d). France's CAC40 fell 1.7% (up 1.1%). The German DAX equities index lost 1.9% (up 0.5%). Spain's IBEX 35 equities index dropped 2.1% (up 1.9%). Italy's FTSE MIB index fell 1.8% (up 0.7%). EM equities were mostly lower. Brazil's Bovespa index sank 3.8% (up 1.1%), and Mexico's Bolsa fell 1.8% (up 4.1%). South Korea's Kospi index declined 2.1% (up 7.4%). India's Sensex equities index increased 0.5% (up 2.7%). China's Shanghai Exchange was little changed (up 2.7%). Turkey's Borsa Istanbul National 100 index fell 1.0% (up 3.2%). Russia's MICEX equities index was little changed (up 4.9%).

Investment-grade bond funds saw inflows of $6.946 billion, while junk bond funds posted outflows of $1.260 billion (from Lipper).

Federal Reserve Credit last week fell $25.5bn to $7.281 TN. Over the past year, Fed Credit expanded $3.149 TN, or 76%. Fed Credit inflated $4.471 Trillion, or 159%, over the past 427 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $27.8bn to a record $3.517 TN. "Custody holdings" were up $97.1bn, or 2.8%, y-o-y.

M2 (narrow) "money" supply surged $107.4bn last week to $19.179 TN, with an unprecedented 45-week gain of $3.745 TN. "Narrow money" surged $3.842 TN, or 25%, over the past year. For the week, Currency increased $5.6bn. Total Checkable Deposits surged $212.7bn, while Savings Deposits dropped $103.1bn. Small Time deposits declined $4.9bn. Retail Money Funds slipped $2.9bn.

Total money market fund assets gained $6.0bn to $4.315 TN. Total money funds surged $685bn y-o-y, or 18.9%.

Total Commercial Paper dropped $44.4bn to $1.061 TN. CP was down $60.5bn, or 5.4%, year-over-year.

Freddie Mac 30-year fixed mortgage rates surged 14 bps to 2.79% (down 86bps y-o-y). Fifteen-year rates rose seven bps to 2.23% (down 86bps). Five-year hybrid ARM rates spiked 37 bps to 3.12% (down 27bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates adding a basis point to 2.95% (down 104bps).

Currency Watch:

For the week, the U.S. dollar index rallied 0.8% to 90.772 (up 0.9% y-t-d). For the week on the upside, the Brazilian real increased 2.3%, the Mexican peso 1.1%, the South African rand 0.4%, the British pound 0.2% and the Japanese yen 0.1%. On the downside, the Swedish krona declined 1.9%, the Norwegian krone 1.7%, the New Zealand dollar 1.5%, the euro 1.1%, the South Korean won 0.9%, the Australian dollar 0.7%, the Swiss franc 0.6%, the Singapore dollar 0.3%, and the Canadian dollar 0.2%. The Chinese renminbi declined 0.10% versus the dollar this week (up 0.71% y-t-d).

Commodities Watch:

January 13 – Wall Street Journal (Kirk Maltais): “Dwindling stockpiles of U.S. grains have sent prices for corn, soybeans and wheat skyrocketing. Corn futures closed trading Wednesday up 1.4% after rising Tuesday by the maximum allowed by the Chicago Board of Trade to more than $5.17 per bushel. The move followed the U.S. Department of Agriculture’s monthly supply and demand report showing corn production falling short of expectations. This week’s surge carried corn to its highest close since July 2013.”

The Bloomberg Commodities Index rose 1.0% (up 3.1% y-t-d). Spot Gold declined 1.1% to $1,828 (down 3.7%). Silver gained 0.9% to $24.866 (down 5.9%). WTI crude increased 12 cents to $52.36 (up 7.9%). Gasoline declined 0.9% (up 8%), while Natural Gas gained 1.4% (up 7.8%). Copper dropped 1.9% (up 2%). Wheat surged 5.8% (up 6%). Corn jumped 7.1% (up 10%). Bitcoin dropped $3,779 this week to $36,262 (up 24.7%).

Coronavirus Watch:

January 11 – CNBC (Noah Higgins-Dunn): “New, more contagious mutated variants of the coronavirus are ‘highly problematic’ and could cause more cases and hospitalizations if the virus’ spread isn’t immediately suppressed, the head of the World Health Organization said… The global health agency was alerted over the weekend of a new Covid-19 strain discovered in Japan… On Sunday, Japan’s National Institute of Infectious Diseases said it discovered a new coronavirus variant in four travelers arriving from Brazil. The variant appears to have some of the same mutations as other strains discovered in the United Kingdom and South Africa, the institute said.”

January 13 – Financial Times (Clive Cookson and Michael Pooler): “Highly contagious new variants of coronavirus will emerge more frequently and spur further infection waves such as those threatening to overwhelm hospitals in the UK and South Africa, one of the world’s leading infectious disease experts has warned. Salim Abdool Karim, chairman of South Africa’s Covid-19 ministerial advisory committee, also said it was too early to know the extent to which existing vaccines would provide immunity to the new variants.”

January 14 – CNBC (Emily DeCiccio): “Dr. Scott Gottlieb emphasized the importance of getting as many people vaccinated as possible, and warned of a potentially dire spring and summer without protective immunity as new Covid variants appear across the globe. ‘If we can’t get more protective immunity into the population, we could be facing a situation where we have, sort of, a perpetual infection heading into the spring and summer as these variants get a foothold here,’ said the former FDA chief…”

January 13 – Reuters (Kate Kelland): “People who have had COVID-19 are highly likely to have immunity to it for at least five months, but there is evidence that those with antibodies may still be able to carry and spread the virus, a study of British healthcare workers has found.”

January 12 – CNBC (Yen Nee Lee): “The Covid-19 vaccine developed by China’s Sinovac Biotech is just 50.4% effective in a Brazilian trial — barely meeting the threshold for regulatory approval and well below the initially reported efficacy rate, according to several media reports. Brazil is the first to complete late-stage trial of the vaccine CoronaVac.”

Market Mania Watch:

January 10 – Bloomberg (Joanna Ossinger, Lu Wang and Elena Popina): “Like a slot machine paying off on every pull, the stock market’s most reliable bets lately have often been its riskiest. Go long a company that sounds like something Elon Musk mentioned in a tweet (but wasn’t)? Signal Advance Inc. just soared 12-fold. Lend money to a software maker to buy Bitcoin? A Microstrategy Inc. convertible bond is up 50% in four weeks… Back up the truck on bullish options after the Nasdaq 100 doubled in 24 months? Wednesday was the fourth-busiest day ever for call trading in the U.S. (the other three were last year). Throw a dart, hit a winner… Emboldened by Federal Reserve stimulus, vaccines and the psychological conditioning that arises when no bad patch lasts, everyone from retail newbies to institutional managers is rushing to cash in on the 10-month-old meltup… Predicting exactly when such fevers will break is a near impossible task. But bubble warnings are starting to blare from every corner.”

January 14 – Financial Times (Chris Flood): “New business for managers of exchange traded funds jumped by more than a third during 2020 with record net investor inflows pushing global ETF assets to an all-time high of $8tn… Investors worldwide allocated $762.9bn into ETFs (funds and products) last year, up 34% on the net inflows of $569bn registered in 2019, according to… ETFGI. Last year’s haul was also 16.6% higher than the previous annual inflow record of $654bn set in 2017… ‘No one could possibly have predicted back in March during the stock market correction that the ETF industry would end the year with record investor inflows and global ETF assets at a record $8tn. It is truly astonishing,’ said Deborah Fuhr, the founder of ETFGI.”

January 14 – Bloomberg (Katherine Greifeld): “As stocks extend their relentless rally from last year’s bottom, one measure in the options market is flashing a warning signal. Over the last 30 days, an average of more than 22 million calls traded across U.S. exchanges -- close to a record… That’s forced the dealers selling those contracts to buy the underlying shares to offset any option price drift, boosting their potential selling pressure to an all-time high, according to at least one model. To some, the feverish call-buying is fueling a bullish feedback loop in equities as market makers hedge their positions. Retail traders have stoked the frenzy, with JPMorgan... analysts noting that small-trader call option buying has rebounded abruptly after December’s seasonal dip.”

January 12 – Bloomberg (Elena Popina, Sarah Ponczek and Nick Baker): “For a stark illustration of how dominant individual investors have become in U.S. equities, check out the proportion of volume happening in the tiniest stocks. While it’s not unheard of to see a microcap like pet-medicine maker Zomedica Corp. top the most-active list with a billion shares traded, as it did Monday, it is notable when it and five other companies selling for less than $1 make up almost a fifth of overall volume.”

January 14 – Bloomberg (Vildana Hajric, Claire Ballentine and Michael P. Regan): “Reasonable people can argue about whether the broader stock market is overheating. But in certain corners of the equity universe where tiny investors dominate, it’s hard to say everything is going normally. Fact: shortly before 1 p.m. New York time Thursday, there were six penny stocks posting daily gains of at least 9,900%. Off-exchange venues where unlisted equities trade had seen about 38 billion shares change hands, up sevenfold from the average a year ago. Ascribe it to what you want: a boom in retail trading triggered by injections of government cash, stay-at-home orders and commission-free brokerages, maybe even the buy-low approach on steroids. More than 1 trillion shares changed hands in December over lightly regulated quotation systems run by firms like OTC Markets.”

January 14 – Bloomberg (Sarah Ponczek and Elena Popina): “In New York, there’s Broadway, off Broadway, and off-off Broadway. A similar hierarchy exists in the modern equity market, and it’s in the third category of way-off-exchange trading where today’s retail speculator is really going to work. While there have been many examples of volume explosions in low-priced NYSE and Nasdaq stocks in the last few months, a whole other ecosystem of speculation exists outside the regulatory reach of these venues -- and lately it’s been booming. Out past the broker-operated venues where Robinhood trades get executed, it’s lightly regulated quotation systems run by firms like OTC Markets, where more than 1 trillion shares in some of the riskiest companies changed hands last month. In a world where all it takes for a company to go crazy is a celebrity tout or quasi-mention by Elon Musk tweets, it should be no surprise that penny stocks are back in vogue.”

January 14 – Bloomberg (Sam Potter and Katherine Greifeld): “Bets against the world’s largest exchange-traded fund have plunged back to pre-pandemic levels seen about a year ago… Fueled by vaccine hopes and reflationary signals, short interest in the $334 billion SPDR S&P 500 ETF Trust (ticker SPY) now sits at just 2% of shares outstanding, according to IHS Markit Ltd. data. Barring melt-ups in 2017 and early 2020, these levels have rarely been seen over the past decade.”

January 13 – Financial Times (Chris Flood): “Vanguard’s assets under management have surged beyond the $7tn mark for the first time after the investment industry’s fiercest price competitor attracted net cash inflows of $186bn last year.”

Market Instability Watch:

January 13 – Reuters (Lewis Krauskopf): “The U.S. stock market is mostly unfazed by the political turmoil in Washington and fears of violence ahead of President-elect Joe Biden’s inauguration, with investors squarely focused on the probability of another sizeable stimulus package to boost economic growth and the rollout of coronavirus vaccines. The benchmark S&P 500 index stands near record highs…”

January 13 – Financial Times (Colby Smith and Tommy Stubbington): “A bruising start to the year for US government bonds has been accompanied by a striking shift in investor behaviour, with Treasuries becoming more sensitive to expected changes in fiscal rather than monetary policy. Victories in key Senate run-offs last week sparked investor bets that the incoming Biden administration will inject another major stimulus into the world’s largest economy. That boosted growth and inflation expectations, knocking bonds… The selling has continued in the face of the economic damage unleashed by the latest wave of the pandemic. Typically, such ultra-safe assets rally in times of economic strife as investors bet that central banks will respond with rate cuts or asset purchases.”

January 14 – Bloomberg (Danielle Moran and Romy Varghese): “Investors are flooding the state and local government debt market with cash, driving the biggest weekly influx ever into mutual funds focused on the riskiest municipal securities. Buyers added $2.6 billion to municipal-bond mutual funds in the week ended Wednesday, the 10th straight inflow and the third biggest on record… High-yield funds collected $1.1 billion, outpacing the previous record of $796 million in 2017…”

Social and Political Instability Watch:

January 12 – Reuters (Tim Ahmann): “An FBI office in Virginia issued an internal warning the day before rioters supporting President Donald Trump stormed the U.S. Capitol that extremists were planning to come to Washington and were talking of ‘war,’ the Washington Post reported…”

January 11 – Associated Press (Jay Reeves, Lisa Mascaro and Calvin Woodward): “Under battle flags bearing Donald Trump’s name, the Capitol’s attackers pinned a bloodied police officer in a doorway, his twisted face and screams captured on video. They mortally wounded another officer with a blunt weapon and body-slammed a third over a railing into the crowd. ‘Hang Mike Pence!’ the insurrectionists chanted as they pressed inside, beating police with pipes. They demanded House Speaker Nancy Pelosi’s whereabouts, too. They hunted any and all lawmakers: ‘Where are they?’ Outside, makeshift gallows stood, complete with sturdy wooden steps and the noose. Guns and pipe bombs had been stashed in the vicinity. Only days later is the extent of the danger from one of the darkest episodes in American democracy coming into focus.”

January 12 – Reuters (Idrees Ali): “The U.S. military’s Joint Chiefs of Staff, the uniformed leaders of the military branches, on Tuesday put out a rare message to service members saying the violent riots last week were an assault on America’s constitutional process and against the law. The joint message broke nearly a week of silence by the military leaders after the assault on the Capitol by supporters of President Donald Trump sent lawmakers into hiding and left five people dead.”

January 12 – Reuters (Elizabeth Culliford): “Online misinformation that led to violent unrest at the Capitol last week has gone beyond false claims and has reached the point of ‘radicalization,’ researchers told a Reuters Next panel… ‘This is not about false claims, or even conspiracies, but many of the people at the Capitol are now part of a completely alternate reality,’ said Claire Wardle, co-founder of anti-disinformation non-profit First Draft. She added that people must stop thinking about online conspiracies as existing separately from real-world harm: ‘They’re not just sitting at home in their pajamas clicking ‘yes I agree,’ they’re out there with ... guns and pipe bombs.’”

January 11 – Financial Times (Anna Nicolaou and Alex Barker): “Rightwing media was scrambling to address its role in covering claims that the presidential election was stolen from Donald Trump, after baseless accusations of mass voter fraud fuelled an attack on the US Capitol last week. In recent months conservative pundits on networks ranging from Fox News and niche rivals like Newsmax to talk radio stations have peddled inaccurate claims of election fraud that supported Mr Trump’s mission to overturn the presidential election results. However, after a violent mob over-ran the US Capitol last week, some conservative media groups are backing away from the theory that Joe Biden only won the election due to mass voter fraud. Cumulus Media, a large US radio broadcaster home to popular rightwing personalities such as Mark Levin, ordered its on-air hosts to stop suggesting that the election result was still in question.”

January 12 – Financial Times (Laura Noonan and Andrew Edgecliffe-Johnson): “Many of the biggest corporate donors on Wall Street and across the US are reviewing their political spending after last week’s assault on the Capitol building, threatening to pull millions of dollars from lawmakers whose opposition to the presidential election result contributed to the unrest. Banks such as JPMorgan Chase and Citigroup and the technology groups Facebook and Microsoft were among those suspending all donations from their political action committees, or PACs. Others cut off funding only to the Republicans who voted against certifying Joe Biden’s election victory. Companies taking that step included AT&T, the largest public company donor to those lawmakers; Amazon, the ecommerce group; Dow, the chemical company; and American Express.”

January 11 – Reuters (Praveen Paramasivam, Arundhati Sarkar, Trisha Roy, Akanksha Rana and Noor Zainab Hussain): “A number of large U.S. companies, including AT&T Inc, American Express and Dow Inc, have said they would cut off campaign contributions to those who voted to challenge President-elect Joe Biden's victory, with Republicans in the U.S. Congress facing growing blowback from Corporate America.”

Global Bubble Watch:

January 10 – Reuters (Kate Abnett): “The European Union’s top diplomat said… last week’s siege of the U.S. Capitol exposed the dangers of allowing the degradation of democratic values to go unchecked and disinformation to spread on social media. ‘What we saw on Wednesday was only the climax of very worrying developments happening globally in recent years. It must be a wake-up call for all democracy advocates,’ EU foreign policy chief Josep Borrell said… ‘Everybody needs to understand that if we accept setbacks after setbacks, even if they seem minor, democracy and its values and institutions can eventually and irreversibly perish,’ said Borrell…”

January 12 – Financial Times (Michael J. Howell): “Money moves markets. Following the Covid emergency, huge amounts of new liquidity were pumped into the system by the world’s central bankers and financiers to help support hard-pressed economies. These flows totalled a whopping $21tn, equal to a quarter of global GDP and paced by $6tn of central bank quantitative easing, or QE. Global liquidity looks set to rise by a further $15tn in 2021, with central banks already pencilling in a further $3-4tn of QE. By year-end, the stock of global liquidity is slated to test $175tn, or twice global GDP. Twenty years ago, global liquidity could only just match that total.”

January 12 – Reuters (Tom Westbrook and Scott Murdoch): “A busy start to the year for Asia’s debt markets reflects global cash pouring into the region and companies in a hurry to lock in funding before a record pile of dues must be repaid. There was $22.8 billion raised in credit in the first week of January, a record for first full trading week of the year in Asia… A record $283.3 billion in existing debt is due to mature over 2021.”

Trump Administration Watch:

January 11 – Bloomberg: “The Trump administration’s final days are proving as confounding as ever for companies and investors stuck in the middle of an increasingly contentious U.S.-China relationship. After a week of widespread confusion over the scope of a U.S. ban on investments in businesses linked to China’s military, both Washington and Beijing took steps over the weekend that threaten to further ratchet up tensions and cloud the outlook for cross-border commerce. Secretary of State Michael Pompeo upended decades of U.S. policy on Saturday by removing self-imposed restrictions on how government officials interact with Taiwan, eliciting swift calls for retaliation by China’s state-run media. Pompeo’s announcement came just a few hours before Beijing issued new rules that would allow Chinese courts to punish global companies for complying with foreign sanctions -- a move that could theoretically force businesses to choose between the world’s two largest economies.”

January 12 – Reuters (Nandita Bose): “President Donald Trump blamed Big Tech companies… for dividing the country days after Twitter and Facebook banned him on their platforms for encouraging the attack on the U.S. Capitol building. ‘I think that Big Tech is doing a horrible thing for our country and to our country, and I believe it’s going to be a catastrophic mistake for them. They’re dividing and divisive,’ Trump told reporters…”

Biden Administration Watch:

January 15 – Wall Street Journal (Greg Ip): “There are two ways for the federal government to address income inequality. One is to redistribute more money to people at the bottom of the income ladder. The other is to use the tools of fiscal and monetary policy to drive unemployment low enough to drive up demand and wages for those workers. President elect Joe Biden is trying to do both. A sizable chunk of the $1.9 trillion fiscal plan he laid out Thursday is aimed at lower-income people, and, in combination with ultralow interest rates and widespread vaccination, the stimulus could drive down unemployment far faster than after any other recent recession. Mr. Biden proposed raising the child tax credit 50% to $3,000 or more for the year and making it refundable, meaning families who owe less tax than the credit would get a check for the difference. He would extend and boost enhanced weekly unemployment insurance benefits by $100 from the $300 in December's stimulus package to $400. He would extend a 15% increase in food stamps through the summer, raise the maximum earned-income tax credit for childless adults by nearly $1,000 and extend it to more people.”

January 12 – Bloomberg (Erik Wasson): “President-elect Joe Biden will seek a deal with Republicans on another round of Covid-19 relief, rather than attempting to ram a package through without their support, according to two people… The approach could mean a smaller initial package that features some priorities favored by Senate Republican leader Mitch McConnell. The idea is to forgo using a special budget process that would remove the need to get the support of at least 10 Republicans in the Senate, which will be split 50-50 and under Democratic control only thanks to the vice president’s vote.”

January 12 – Bloomberg (Saleha Mohsin, Jennifer Epstein, Robert Schmidt and Ben Bain): “Gary Gensler is President-elect Joe Biden’s likely pick to lead the Securities and Exchange Commission, according to two people…, a move that would put a former regulator who is known for sparring with financial executives atop Wall Street’s main overseer. Gensler, 63, ran the Commodity Futures Trading Commission during the Obama administration, a post where he was the driving force behind the government’s new oversight regime of the massive over-the-counter swaps market. The role put him in frequent combat with banks, which resisted his push to bring transparency and guardrails to a corner of finance that helped ignite the 2008 credit crunch.”

Federal Reserve Watch:

January 12 – CNBC (Jeff Cox): “Long-dormant inflation could rebound more quickly than anticipated as the economy shakes off the effects of the coronavirus pandemic, Kansas City Federal Reserve President Esther George said… Current measures show that inflation remains subdued… However, George noted that the Fed’s preferred inflation gauge is weighed down by some of the sectors hardest hit during the Covid-19 crisis… ‘In contrast to these sectors, price inflation for many other categories of consumption (particularly goods) has moved up, sometimes quite sharply,’ George said… ‘Such a scenario does not suggest higher inflation is a near-term threat, but rather that inflation could approach the Committee’s average inflation objective more quickly than some might expect.’”

January 11 – Reuters (Ann Saphir): “Dallas Federal Reserve President Robert Kaplan… said that despite what he expects to be a challenging next few months because of surging coronavirus cases, the U.S. economy probably isn’t going to shrink this quarter and will deliver 5% growth for the year as the whole. Unemployment will likely drop to 4.5% or 4.75% by the end of the year, from 6.7% now, Kaplan said…”

January 11 – Bloomberg (Steve Matthews and Catarina Saraiva): “Federal Reserve officials said that more fiscal support and the mass distribution of vaccines could lead to a strong U.S. economic recovery in the second half, setting the stage for a discussion of potential tapering of bond buying before year’s end. ‘I do think you’re looking at a second half that is going to be very strong and the question I think is how do we get through where we are today to that second half,’ Fed Richmond Bank President Thomas Barkin, who votes on monetary policy this year, told CNBC…”

January 12 – Bloomberg (Steve Matthews and Craig Torres): “Don’t discuss reducing the amount of monetary-policy support for the U.S. economy while the pandemic is still raging, said two Federal Reserve officials after some of their colleagues mooted a debate later this year. ‘We want to get through the pandemic and sort of see where the dust settles, then we will be able to think about where to go with balance-sheet policy,’ Federal Reserve Bank of St. Louis President James Bullard said… Boston Fed chief Eric Rosengren… also made clear he didn’t want to get into the debate of when to pare back that massive support. ‘I expect it to be a little while before we’re even talking about tapering on our purchases of government and mortgage-backed securities,’ he said…”

January 13 – Reuters (Howard Schneider and Ann Saphir): “Federal Reserve Vice Chair Richard Clarida… reiterated that the U.S. central bank won’t raise interest rates until inflation reaches 2%, and he expressed confidence that market participants believe in that promise, a key element in the Fed’s strategy. ‘We are not going to lift off until we get inflation at 2% for a year. ... We are trying to tie our hands. We are saying we are not going to hike until we get to 2%,’ Clarida told a conference… ‘It actually doesn’t seem lacking credibility to markets that we are going to do that.’”

January 11 – Reuters (Ann Saphir): “Richmond Federal Reserve President Thomas Barkin… said he is more worried about the labor market than possible excess inflation as he assesses the effects of the pandemic, the rollout of vaccines, and past and future fiscal relief on the economic outlook… Fiscal relief is likely ‘to support spending over several years’ and even if there is inflation, the Fed has the tools to control it, he said.”

January 11 – Yahoo Finance (Brian Cheung): “Federal Reserve Bank of Atlanta President Raphael Bostic said… that the economy has a ‘way to go’ before the central bank pulls back on policy, but said that a rate hike could be back on the table in the later part of 2022. ‘I do think there is some possibility that the economy could come back a bit stronger than some people are expecting,’ Bostic said… ‘And if that happens, I am prepared to support pulling back and recalibrating a bit of our accommodation.’”

January 13 – Reuters (Howard Schneider and Ann Saphir): “The Fed’s current pace of bond-buying will likely remain in place ‘for quite some time’ Fed Governor Lael Brainard said… in remarks emphasizing how much progress still needs to be made for the U.S. central bank to achieve its inflation and employment goals. The Fed ‘has stated clearly that it needs to see substantial further progress towards our goals before adjusting purchases. The economy is far away from our goals in terms of both employment and inflation and even under an optimistic outlook it will take time to achieve substantial further progress,’ Brainard said…”

January 11 – Wall Street Journal (Kate Davidson): “The Federal Reserve sent $88.5 billion in profits to the U.S. Treasury Department in 2020, a nearly two-thirds increase from the previous year as lower rates held down the central bank’s interest expense. The Fed’s payments to the Treasury had fallen over the previous four years as interest rates rose, boosting the interest it paid on reserves, or money that private banks keep at the Fed’s regional reserve banks.”

U.S. Bubble Watch:

January 13 – Bloomberg (Katia Dmitrieva): “The U.S. federal budget deficit continued to balloon at the end of last year on spending to cushion the pandemic’s economic fallout, with the incoming Biden administration preparing to deploy more government funds. The gap was $572.9 billion in the October-December period, a record for the fiscal year’s first quarter and up 61% from a year earlier... December’s $143.6 billion deficit, also a record for that month, compared with $13.3 billion during the same month in 2019.”

January 13 – Reuters: “U.S. consumer prices increased solidly in December amid a surge in the cost of gasoline, though underlying inflation remained tame… The… consumer price index increased 0.4% last month after gaining 0.2% in November. An 8.4% jump in gasoline prices accounted for more than 60% of the rise in the CPI. In the 12 months through December the CPI advanced 1.4% after increasing 1.2% in November.”

January 14 – Bloomberg (Olivia Rockeman): “Applications for U.S. state unemployment benefits surged last week by the most since late March, pointing to persistent labor-market pain as coronavirus infections continue to soar and potentially adding to momentum for a larger federal stimulus plan. Initial jobless claims in regular state programs rose by 181,000 to 965,000 in the week ended Jan. 9, according to… data… that showed a broad number of states with large increases. On an unadjusted basis, the figure jumped to 1.15 million. The scope of the increase caught many economists by surprise…”

January 15 – Bloomberg (Olivia Rockeman): “U.S. retail sales declined at the close of the holiday-shopping season, wrapping up a painful year for the nation’s merchants... Total retail receipts decreased 0.7% in December from the prior month after a downwardly revised 1.4% drop in November… The median forecast in a Bloomberg survey of economists called for no change… The unadjusted value of sales increased just 0.6% in 2020 compared with a year earlier, the weakest in 11 years. ‘The December retail results were an absolute disaster,’ Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said… ‘Clearly, consumer spending slowed down sharply in November and December as the virus gained ground and forced closures of stores and restaurants in many key states.’”

January 12 – Bloomberg (Julia Fanzeres): “U.S. small-business optimism slumped in December to a seven-month low as Covid-19 infections spread at a record rate and governments tightened restrictions on activity. The National Federation of Independent Business index of sentiment decreased by 5.5 points to 95.9… The figure was weaker than the median projection of 100.2… Nine out of the 10 subindexes declined in December.”

January 14 – Reuters (Lucia Mutikani): “Applications to start new U.S. businesses plunged in the fourth quarter as COVID-19 continued to ravage the economy, supporting views that it could take years to recover the millions of jobs lost during pandemic. The Commerce Department said… business applications dropped 28.5% to a seasonally adjusted 1.115 million last quarter. All four regions recorded a decrease, with steep declines in the Midwest, South and West.”

January 14 – Bloomberg (Craig Giammona and Alex Wittenberg): “Mortgage rates in the U.S. climbed to the highest level in two months. The average for a 30-year, fixed loan reached 2.79%, up from 2.65% last week and the highest since Nov. 12, Freddie Mac said…”

January 12 – Bloomberg (Prashant Gopal): “The pandemic housing market rally, a bright spot for the U.S. economy, may already have peaked as the growth in home prices starts to slow. The asking price for a typical single-family home jumped 13.8% last from a year earlier, according to an index from Haus… That was down from a peak of 16.5% growth in late July. ‘The rate of growth was unsustainable,’ said Ralph McLaughlin, chief economist at Haus.”

January 13 – CNBC (Diana Olick): “After setting more than a dozen record lows last year, mortgage rates began 2021 on an upward climb, and that lit a fire under borrowers, fearing they might miss the last of the lowest rates. Mortgage applications to refinance a home loan spiked 20% last week… That was the highest level since last March. Volume was 93% higher than a year ago… Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, rose 8% for the week and were 10% higher than a year ago.”

January 15 – Bloomberg (Michelle F. Davis): “JPMorgan... made more money in the fourth quarter than it ever has, as it signaled more optimism about borrowers being able to repay their loans and the pandemic-fueled trading surge continued. The biggest U.S. bank posted a jump in trading and investment-banking fees that helped its Wall Street unit close out its most profitable year ever. The bank also released loan-loss reserves for the second quarter in a row, a sign that defaults won’t take as big a toll as previously expected… The fourth-quarter haul lifted JPMorgan’s annual profit to $29 billion in a year that saw unprecedented surges in unemployment and economic disruptions tied to pandemic lockdowns. That was more than any other major U.S. bank has earned in any year.”

January 12 – Bloomberg (Noah Buhayar): “San Francisco’s office market is being hit so hard by the pandemic that, by some measures, it’s worse than the global financial crisis or dot-com collapse. The city’s office-vacancy rate reached 16.7% at the end of 2020, up 11 percentage points from a year prior, according to… Cushman & Wakefield. That’s a higher level than in the aftermath of the 2008 recession.”

Fixed Income Watch:

January 12 – Wall Street Journal (Heather Gillers): “Municipal-bond issuance in 2020 was the highest in a decade, reflecting the collapse of interest rates and the increased costs cities and state governments are facing from Covid-19 shutdowns. Bonds for new projects reached $252 billion last year, according to Refinitiv, a small increase from the previous year and the highest since 2010... The new borrowing drove the total amount of outstanding muni debt above $3.9 trillion for the first time since 2013…”

January 12 – Bloomberg (Fola Akinnibi): “The muni-bond market has never looked more expensive. A key measure of relative value in the $3.9 trillion market for state and local government debt, the ratio of top-rated 10-year muni yields to U.S. Treasury securities, is holding at 67%. That’s the lowest level since at least 2001 and in stark contrast to March, when the ratio stood at 215%, according to the Bloomberg BVAL index.”

January 14 – Financial Times (Joe Rennison): “Private equity groups are seizing on ultra-low borrowing costs to fund a flurry of acquisitions that will load up indebted companies with yet more loans, underlining concerns over the threat posed by excessive leverage. BC Partners is set to borrow $480m… to fund its buyout of healthcare provider Women’s Care Florida. The deal would put the company’s adjusted debt to more than nine times its earnings before interest, taxation, depreciation and amortization… Odyssey Investment Partners is also using both first and second lien loans totalling almost $600m to fund its purchase of Protective Industrial Products… Meanwhile, Clearlake Capital is buying healthcare software company nThrive’s technology division with debt totalling $600m. Following a massive rally in debt prices, all three deals are being marketed with an all-in yield below 6% for the senior loans. That marks a dramatic change from the coronavirus-induced market tumult last year, where average yields on leveraged loans spiralled to more than 13% in March…”

January 11 – Reuters (Imani Moise): “U.S. banks are struggling to understand how their residential mortgage portfolios will perform this year, because borrower-assistance programs during the pandemic have clouded who will be able to pay when forbearance periods and enhanced jobless benefits expire. Lenders are bracing for losses across most credit products, but mortgages stand out because the share of those loans in forbearance has started to creep up… The key difference: the mortgage forbearance program is imposed by U.S. agencies that back the vast majority of housing debt and it does not require borrowers to show proof of hardship…”

January 11 – Financial Times (Joe Rennison): “US cities are losing their allure for renters, placing early signs of strain on the $50bn market in bonds backed by mortgages on apartment blocks… Data company Trepp has identified 50 so-called multifamily loans with a balance of $1.5bn where the occupancy rate of buildings dropped by 15 percentage points cent last year. Investors in the $1.2tn market for commercial mortgage-backed securities, where loans backed by properties like apartment buildings are bundled together to underpin the sale of fresh debt, are watching closely.”

January 13 – Wall Street Journal (Alexander Gladstone): “Delays in administering Covid-19 vaccine shots pose a fresh risk to investors who bet on a speedy vaccination process to help risky U.S. companies bounce back from the pandemic. The approval of coronavirus vaccines made by Pfizer Inc. and Moderna Inc. last year propelled rescue financing packages for several cash-strapped companies, supplying them with what investors thought would be enough liquidity to keep them afloat until widespread immunity took hold. Cineworld Group PLC, AMC Entertainment Holdings Inc., Carnival Corp. and other companies with bleak outlooks because of the pandemic found financial lifelines to tide them over.”

China Watch:

January 10 – Reuters (Yimou Lee, David Brunnstrom and Humeyra Pamuk): “China condemned the United States… for scrapping curbs on interactions with Taiwan officials, saying nobody could prevent China’s ‘reunification’, while Taiwan’s foreign minister hailed the U.S. move as a sign of ‘global partnership’… China, which claims democratic Taiwan as its own territory, said it was ‘resolutely opposed’ to the decision and condemned it. ‘The Chinese people’s resolve to defend our sovereignty and territorial integrity is unshakable and we will not permit any person or force to stop the process of China’s reunification,’ Foreign Ministry spokesman Zhao Lijian told reporters.”

January 11 – Bloomberg: “President Xi Jinping issued an unusually upbeat assessment about China’s future, noting that ‘time and the situation’ were on the country’s side in a new year marked by domestic turmoil in the U.S. The Chinese leader told a gathering of provincial and ministerial-level officials… he saw ‘opportunities in general outweighing challenges,’ a marked shift from his sometimes dire-sounding warnings of recent months. While he repeated an oft-used allusion to the challenges posed by President Donald Trump’s ‘America First’ policies, he expressed new confidence that China would gain in the long run. ‘The world is undergoing profound changes unseen in a century, but time and the situation are in our favor,’ Xi told the study session at Communist Party School… ‘This is where our determination and confidence are coming from.’”

January 13 – Wall Street Journal (Stella Yifan Xie, Eun-Young Jeong and Mike Cherney): “China ended the Year of Covid in many ways stronger than it started, accelerating its movement toward the center of a global economy long dominated by the U.S. While the U.S. and Europe wait for vaccine rollouts to get fully back on track, China is the only major economy expected to report growth for 2020… It has expanded its role in global trade and shored up its position as the world’s factory floor… China’s consumer market—lifted by its quick recovery from Covid-19—keeps gaining momentum, making it a bigger driver of global companies’ earnings. And the country has solidified its standing as a force in global financial markets, with a record share of initial public offerings and secondary listings in 2020, large capital inflows into stocks and bonds, and indexes that far outperformed even the U.S.’s strong showing.”

January 13 – Bloomberg: “China’s export boom continued into December, pushing the trade surplus to a record high in the month… Fueling the shipments surge is insatiable global appetite for work-from-home technology and health care equipment as Covid-19 continues to surge in many places around the world. Demand is so strong that’s it’s contributing to a bottleneck at ports as manufacturers complain of a shortage of shipping containers and surging costs… Exports grew 18.1% in dollar terms in December from a year earlier -- softer than November’s bumper 21.1% expansion -- while imports rose 6.5%...”

January 14 – Reuters (Lusha Zhang, Liangping Gao and Ryan Woo): “China’s new homes prices grew moderately in December…, as government measures aimed at cooling the property market took their toll. Average new home prices in 70 major cities rose 0.1% month-on-month in December… The pace of growth was unchanged from November. New home prices rose 3.8% in December versus a year earlier…”

January 13 – Bloomberg: “China’s banking regulator is strengthening oversight of consumer finance firms with a new annual scoring system, continuing to step up scrutiny as the likes of Ant Group Co. are setting up new units in the industry. The firms will be scored on how well they manage their corporate governance, risk, capital and information technology, divided into five groups of different levels of oversight, the China Banking and Insurance Regulatory Commission said…”

January 12 – Bloomberg: “Investor confidence in China Fortune Land Development Co. Ltd. is tumbling as concerns grow about its debt repayment abilities just as Beijing steps up efforts to cut risk in the real estate sector. The mid-sized developer’s dollar bonds fell to record lows earlier Tuesday, with some rebounding but a note due 2024 still down at 49.8 cents… The bond was quoted at around 86 cents at the end of last year. The firm’s onshore bonds also slumped, with one due December 2025 down 58% at 43 yuan.”

January 11 – Financial Times (Kathrin Hille): “Human resources executives at Hwa Meei Optical are working overtime. The Taiwanese sunglasses and goggles maker is looking to hire 30 workers, many of them urgently, for a new factory. Having based most of its production in China for more than two decades, Hwa Meei is now expanding at home… Hwa Meei is not an outlier. Hundreds of thousands of Taiwanese enterprises are bidding farewell to China because of rising costs and trade tensions between Washington and Beijing, marking a dramatic shift for Taiwan’s corporate landscape with significant implications for global manufacturing.”

Central Bank Watch:

January 14 – Bloomberg: “China’s central bank withdrew cash from the financial system for the first time in six months, after excess liquidity had pushed an interbank borrowing cost to an all-time low. The People’s Bank of China offered just 500 billion yuan ($77 billion) of medium-term loans to lenders on Friday, resulting in a net drainage of 40.5 billion yuan for January. Analysts had predicted a net injection of 230 billion yuan… The move signals that the PBOC’s monetary easing of the past two months may be ending.”

January 15 – Bloomberg (Anurag Joshi): “The Reserve Bank of India’s move to drain excess cash from the financial system may have inadvertently ruined the debt party for the nation’s weaker borrowers. Average yields on three-year rupee bonds rated BBB have risen 28 bps this week through Thursday, on track for their biggest weekly increase since 2018… Borrowing costs for top-rated issuers have climbed by a similar amount, but they generally have greater access to funding than weaker peers. The surge comes after the RBI announced plans last week to restore normalcy to liquidity operations in markets in a phased manner.”

EM Watch:

January 11 – Bloomberg (Suvashree Ghosh and Rahul Satija): “India’s central bank expects banks’ bad-loan ratios to almost double this year and warned that soaring markets and a weakened economy threaten financial stability. The Reserve Bank of India forecasts non-performing assets will rise to 13.5% of total advances by the end of September from 7.5% a year ago… If the number holds through the fiscal year ending March 2022, it would be the worst since 1999. ‘Domestically, corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic, but stresses would be visible with a lag,’ the Reserve Bank said. ‘This has implications for the banking sector as corporate and banking sector vulnerabilities are interlinked.’”

Europe Watch:

January 15 – Financial Times (Miles Johnson): “Italian prime minister Giuseppe Conte will face a crunch parliamentary vote on his future next week as he scrambles to find enough lawmakers to prop up his government after a junior partner quit his coalition. Mr Conte needs to win the support of a majority of Italian senators ahead of a confidence vote in the upper house on Tuesday… The political turmoil comes as Italy’s death toll from Covid-19 climbed to more than 80,000 — the second-highest in Europe after the UK — and the government battles a brutal economic recession.”

January 13 – Financial Times (Miles Johnson): “The Italian government was plunged into crisis… after the resignation of three ministers from the ruling coalition put the future of prime minister Giuseppe Conte in doubt. The departures came as Matteo Renzi, the former prime minister and leader of the small Italia Viva party, pulled his support from Mr Conte’s coalition. That decision followed weeks of sustained criticism of the government’s economic response to the coronavirus pandemic.”

January 14 – Bloomberg (Chiara Albanese and John Follain): “Italian Prime Minister Giuseppe Conte is struggling to hold onto power after a junior partner in his coalition pulled out, robbing him of his majority in parliament. Former Premier Matteo Renzi said… ministers from his Italy Alive party would quit the cabinet, attacking Conte for failing to do enough to tackle the country’s problems. Though the party is tiny, Conte relied on it to maintain his majority. Conte may seek a confidence vote in parliament next week… Renzi’s decision sparks a government crisis which could last days or even weeks, and has no clear solution in sight. Before making any other moves, Conte will have to formally accept the resignations of Renzi’s two ministers. Still, Conte has several paths to remain in power…”

January 15 – CNBC (Silvia Amaro): “The whole Dutch government collectively resigned on Friday after a scandal involving the mismanagement of childcare funds, which drove thousands of families into financial hardship. An investigation revealed in December that tax officials wrongly accused thousands of working families of fraud and ordered them to repay childcare benefits between 2013 and 2019.”

January 14 – Associated Press (David McHugh): “The German economy, Europe’s largest, shrank by 5% in the pandemic year 2020, ending a decade of growth as lockdowns wiped out much business and consumer activity. As dreary as the numbers were, the drop was smaller than many had expected…”

January 12 – Bloomberg (Paul Gordon and Alexander Weber): “The euro-area economy is poised to shrink again at the start of this year as the resurgent pandemic plunges the region into a double-dip recession. Analysts at banks including JPMorgan… and UBS Group AG are downgrading forecasts to account for renewed lockdowns… and the prospect that the new coronavirus variant ravaging the U.K. will do the same on the continent. Add vaccination delays to trade disruptions because of Brexit, and the scene is set for a second straight quarter of falling gross domestic product.”

Japan Watch:

January 12 – Associated Press (Mari Yamaguchi): “Japan expanded a coronavirus state of emergency to seven more prefectures…, affecting more than half the population amid a surge in infections across the country. Prime Minister Yoshide Suga also said Japan will suspend fast-track entry exceptions for business visitors or others with residency permits, fully banning foreign visitors while the state of emergency is in place.”

Leveraged Speculation Watch:

January 12 – Bloomberg (Justina Lee): “Stock market records are doing little to revive fortunes in factor investing, a $2 trillion corner of the quant world that dissects stocks by attributes like how cheap they look or how fast they’ve risen. The strategies are failing to live up to their diversification label in an era when recession-spurring lockdowns, rally-inducing stimulus and game-changing vaccines are all moving markets. Factor correlations have risen to the highest in at least two decades. In total-return terms, the AQR Equity Market Neutral Fund -- which tries to balance long and short bets across a range of factors to protect against market turmoil -- lost 5.7% last quarter. The Vanguard Market Neutral Fund, which takes a similar approach, has notched months of losses.”

Geopolitical Watch:

January 11 – Reuters (James Pomfret): “The arrest of more than 50 democrats in Hong Kong last week intensifies a drive by Beijing to stifle any return of a populist challenge to Chinese rule and more measures are likely, according to two individuals with direct knowledge of China’s plans. While stressing that plans haven’t been finalised, the individuals said it was possible that Hong Kong elections - already postponed until September on coronavirus grounds - could face reforms that one person said were aimed at reducing the influence of democrats.”