Friday, February 12, 2021

Weekly Commentary: The Short but Momentous History of Fed QE

Central banking traditionally operated as a judicious and conservative institution, with an overarching mandate focused on promoting monetary and financial stability. Historically, recognition that missteps can impart such profound societal hardship necessitated an incremental and risk-averse approach. Stability and doing no harm took precedence. At least that’s the manner in which central banking has been approached for generations.

The world is now in the throes of history’s greatest experiment in central bank doctrine and operations. It’s easy to forget that the Federal Reserve is only about 13 years into experimental QE activism. Indeed, central bankers have minimal history for a well-founded assessment of how QE operates, its various impacts and consequences, both intended and unintended. The lack of clarity beckons for circumspection.

It’s also clear that observation and evaluation of QE is left to us. Wall Street, of course, is bewitched by the Fed’s powerful tool. Meanwhile, the Federal Reserve is these days uninterested in assessing either QE’s effects or risks, while the economic community remains reticent. After doubling its balance sheet to $7.4 TN over the past 74 weeks, the Fed is now locked into a policy course that will see an additional $120 billion of liquidity injected into the markets on a monthly basis well into the future.

With 13 years of observation, we know for sure that all QE is not created equal. It is important to recall that the initial $1.0 TN of QE back in 2008 was employed to accommodate post-Bubble deleveraging. The Fed essentially transferred onto its balance sheet a Trillion of Treasuries and MBS (and some other instruments) accumulated by highly levered institutions during the Bubble period. The crisis-response expansion of Federal Reserve Credit was offset by a corresponding contraction of speculative leverage, leaving overall system liquidity only marginally impacted.

The “QE2” doubling of Fed Credit (to $4.5 TN) between 2011 and 2014 had a much more significant market impact. The S&P500 essentially doubled from 1,000 to 2,000, with the Nasdaq100 doubling to surpass 4,000. And while y-o-y nominal GDP growth did reach 5% in 2014, for the most part the economy was not overly responsive to QE stimulus. Ditto for consumer prices. Year-over-year CPI, which rose above 3.5% in 2011, was back below 2% in 2014. Clearly, QE2 monetary inflation had a much more pronounced impact on equities prices than on both the consumer price level and economic activity.

The general economy was in an impaired post-mortgage finance Bubble state, suffering the consequences of years of deep structural maladjustment. The housing sector was burdened by post-Bubble Credit impairment and associated deflationary forces, a powerful dynamic fueling disinflation in key segments of the economy. Even by 2014, annual growth in total Non-Financial Debt (NFD) of $1.5 TN was the lowest since 2011 and still only two-thirds the level from 2007.

The Fed’s reemployment of QE in September 2019 (with stocks at record highs and unemployment at multi-decade lows) was perilous policy activism. Rather than accommodating deleveraging (QE1) or countering disinflationary forces (QE2), the Fed resorted to aggressive QE measures to bolster a faltering Bubble. In particular, equities and corporate Credit markets had turned highly speculative. At $2.7 TN, NFD in 2018 had expanded the most since 2004 – and this strong Credit expansion continued into 2019. M2 grew a record $968 billion in 2019, or 6.7%. Home price inflation had gained momentum, with increasingly powerful inflationary biases having taken hold throughout securities and asset markets.

Unprecedented QE injections were then commenced last March to forcefully reverse de-risking/deleveraging dynamics – and they were then sustained even as “risk on” speculative leveraging and manic market speculation gathered powerful momentum.

The current QE backdrop is unprecedented. The Fed is creating $120 billion of additional market liquidity on a monthly basis in the face of extreme market developments: unprecedented debt and “money” supply expansion; record stock prices and valuations; the most speculative equities market in generations; booming leveraged speculation; record equities and corporate bond inflows; record corporate debt issuance; unprecedented public market participation; booming equities and options trading volumes; record low junk bond yields; along with overheated markets for IPOs and SPACs.

Evidenced by the GameStop and cryptocurrency spectacles, the Fed is today throwing additional fuel on historic speculative manias. Moreover, our central bank is sticking with its massive “money printing” operation despite previously unfathomable fiscal stimulus – with a two-year federal deficit poised to exceed $6.0 TN – or approaching 30% of GDP. NFD likely exceeded $7.0 TN last year, while M2 “money supply” inflated an incredible $3.724 TN, or 24%.

Harvard Professor Gregory Mankiw (Economic Club of New York Q&A 2/10/21): “After the great recession and the pandemic recession that we’re just getting out of now, the Fed’s balance sheet is vastly different – much larger - than it was, say, 15 years ago. Now I know this is not the time to shrink it – you’re not. But look past this current crisis, look ahead where we might be 15 years from now, do you envision the Fed going back to a smaller balance sheet – having a more modest role in the financial markets as it did in the past – or do you think we’re in a new world where this expanded balance sheet is a permanent fixture of the financial system?”

Federal Reserve Chair Jay Powell: “I do want to begin by agreeing with your first point, which is the economy is far away from maximum employment and stable prices – and the balance sheet will be the size that it needs be to provide support to the economy. As you know, we’re currently buying assets. It’s a key part of what we’re doing in providing overall accommodation to the economy. That is our focus. We’re not thinking about shrinking the balance sheet, just to be clear…

To get to your real question, in the long-run our balance sheet will be no larger than it needs to be to meet the demand for our liabilities and allow us to implement monetary policy effectively and efficiently. So, it really is, in the long-run, it’s demand for our liabilities – the two biggest which are currency and reserves… When the pool of assets declines over many years, as it did after the global financial crisis, it really is the public’s demand for our liabilities. We will return to a place – gradually with tons of transparency and not beginning anytime soon – to a place where really the size of our balance sheet is set by the public’s demand for our liabilities. It won’t be the $20 billion balance sheet that we had in 2005 – and that partly is just that demand for currency has been surprisingly high at a time when in many parts of the world people are declining to use currency. Demand for reserves – reserves are the most liquid asset, and they’re in high demand for banks to meet their liquidity requirements and payment utilities and all that. The longer-run – we will get back to that. We did ultimately do that after the global financial crisis. We froze the size of the balance sheet in 2014 – and then as the economy grows the balance sheet shrinks as a percent of GDP. In addition, reserves decline as currency and other liabilities sort of organically grow. So, the answer to your question is ‘yes’ with a long explanation.”

Noland: It’s not demand for reserves and currency that will dictate the future size of the Fed’s balance sheet. Unparalleled Federal Reserve monetary inflation has accommodated a historic financial Bubble. Going forward, the Fed’s role as market liquidity backstop (“lender of last resort”) will ensure ongoing massive asset purchases – with incessant risk of marketplace deleveraging and illiquidity governing an increasingly unwieldy Federal Reserve monetary inflation.

The system is beyond the point where “normalization” is possible. I titled a February 2011 CBB “No Exit” following the Fed’s release of its QE exit strategy. Sure, the Fed later in 2014 “froze” balance sheet growth, but only after doubling the balance sheet from 2011 levels and, in less than six years, inflating its holdings by $3.548 TN, or 390%.

The Fed did then shrink assets by $740 billion between December 2014 and August 2019, presenting a deceptively sanguine appraisal with respect to the ease of balance sheet contraction. Yet this was a near-zero interest-rate “risk on” backdrop, where the expansion of speculative leverage throughout the marketplace easily absorbed the Fed’s Treasury and MBS sales. It proved a fleeting phenomenon. The Fed’s 2014-2019 balance sheet contraction was fully reversed in only six months – with assets set to surpass $8.0 TN later this year.

At this point, it is difficult to envisage a scenario where the Federal Reserve’s balance sheet doesn’t continue to significantly inflate. The Fed is currently locked into a flawed strategy of ongoing market liquidity injections with a stated focus on full employment and above target consumer price inflation. This liquidity onslaught continues to fuel historic asset inflation and Bubble Dynamics – stocks, bonds, homes, derivatives, private business, cryptocurrencies, collectables, luxury properties, and so on. And the greater these Bubbles inflate, the more destabilizing even the contemplation of a Fed “taper” becomes.

The 10-year Treasury inflation “breakeven rate” added another two bps this week to 2.22%, the high since July 2014. Friday’s University of Michigan reading on consumer price inflation saw one-year inflation expectations in February surge to 3.3% (up from December’s 2.5%), also the high since July 2014. The Bloomberg Commodities Index closed out the week at the highest level since November 2018 – already up 7.7% y-t-d. Energy prices are surging. Ten- and 20-year Treasury yields ended the week at the highs since February.

February 11 – Bloomberg (Amanda Albright): “U.S. home prices, fueled by the lowest mortgage rates in history, rose at the fastest pace on record, surpassing the peak from the last property boom in 2005. The median price of a single-family home climbed 14.9% to $315,000 in the fourth quarter. That was the biggest surge in data going back to 1990… The Northeast led the way with a 21% gain…”

Mankiw: “Let’s imagine that your next job is not Fed Chair but a member of Congress. Would there be a particular issue you would want to champion – big problems out there we aren’t addressing as a nation that you think are high priorities…?”

Powell: “One I will mention that connects a lot with our work here…, it would be great if we had a national strategy to make the U.S. economy as big – the prosperity that the United States economy has as broadly shared as possible – and to have that economy be as big as it could possibly be. In other words, the productive capacity of the economy. Part of that is investing in the labor force. Part of it is having a tax code and regulatory policy that promotes growth. Growth is what enables incomes to rise generation upon generation. So, we want growth to be high, we also want it to be very widely spread. People come to Washington, they work on all these hot political issues, but we don't take a step back and say, ‘Okay, what is the supply side strategy that we need as a country to maximize the potential growth of the United States economy, and also the distribution of that – more broadly inclusive prosperity.’ So those are the things I would really want to work on if I were an elected representative.”

John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I found myself this week also recalling Dallas Fed President Robert McTeer’s comment from early-February 2001: “If we all join hands together and buy a new SUV, everything will be OK.” At the time, I was stunned by McTeer. The “tech” Bubble had been pierced and the scope of Bubble malinvestment was being revealed. Yet there was no recognition of the Fed’s role in promoting the Bubble or how distorted markets and Bubble excess had negatively impacted investment decisions and the economic structure. It was a harbinger of the subsequent 20 years.

It is impossible to maximize sustainable long-term growth and “broadly inclusive prosperity” during a period of massive monetary inflation, acute market speculative excess and flourishing Bubble Dynamics. “What is the supply-side strategy” when the marketplace is so indiscriminate in financing uneconomic businesses and enterprises? “If we all just hold hands (and plug noses) and continue to participate in the securities market mania, everything will be okay.”

The problem is contemporary central bank doctrine has morphed to the point that the prevailing objective is simply to sustain asset inflation. And at this point, it’s clear that QE has unleashed a dangerous mania while prolonging “Terminal Phase” excess. The current period of free “money” is financing all kinds of crazy crap, and the longer this period of egregious excess continues, the greater the impairment to the underlying economic structure. The longer this dynamic unfolds, the greater the scope of inequality, animosity and social strife.

And this gets us back to the critical issue of sound money. As a society, it is completely unrealistic to hope sustainable prosperity will somehow emerge from an extended period of Monetary Disorder. The underlying insecurity afflicting society will only continue to fester. Most will lose faith in an unfair and unjust system, with today’s Bubble excess creating enormous systemic risk. A bursting Bubble will inevitably inflict terrible hardship throughout the economy. In the meantime, runaway Monetary Inflation creates myriad risks to the fabric of society.

So, “What is the supply side strategy that we need as a country to maximize the potential growth of the United States?” Chair Powell poses the critical question, though it is hopelessly divorced from the reality of a historic monetary inflation, out of control Bubbles, market manias and resulting financial and economic dysfunction.

The policy focus at this point is little more than a desperate monetary inflation to incite higher markets and more borrowing and spending. There is no long-term strategy – how could there be? It’s ruinous inflationism. Capitalism has been crippled; the pricing mechanism sabotaged by central bankers hijacking the “cost of money.” Markets are broken, with the entire financial apparatus – from the Fed, to Wall Street, to Washington – geared toward imprudent spending and the reckless expansion of non-productive debt.

Without some semblance of sound money, the notion of sound investment, robust economic structure, real generational income growth, and broadly inclusive prosperity is, most regrettably, nothing more than a pipedream. Current policy and market structures ensure instability and persistent hardship.

Of the Trillions of fiscal spending, only a trickle finds its way toward investment in our future. Instead, most will be directed at redistribution measures – a policy approach viewed as necessary to counter systemic inequality. How crazy has this all become: Trillions of monetary stimulus stoke Bubble Dynamics and resulting inequality, while Trillions of fiscal stimulus are employed to counteract the inequities promoted by central bank activism.

Meanwhile, China has its own serious issues with monetary inflation and deep structural impairment. Aggregate Financing, China’s broad measure of system Credit, expanded $803 billion (second only to March 2020’s $805bn) during January, about 2% ahead of the previous record from January 2020. One-year growth of $5.432 TN was 35% ahead of the previous year’s growth and 46% above one-year growth from two years ago. Aggregate Financing expanded 13.0% over the past year to $45 TN. Aggregate Financing has expanded 57% since the PBOC began reporting this iteration of Credit data four years ago.

China’s financial system traditionally experiences huge lending growth to begin the year. Total Bank Loans expanded a record $555 billion during the first month of 2021, up 7% from January 2020 growth. Bank Loans were $3.085 TN higher y-o-y, an increase of 17.4% from comparable one-year growth from a year ago.

Corporate Bank Loans increased $396 billion in January, down 11% from January 2020’s $443 billion. One-year growth of $1.842 TN was up 22% from comparable 2020 growth, 31% from comparable 2019, and 71% from comparable 2018. Corporate Bond issuance added another $58 billion in January, the strongest expansion since April’s $143 billion.

Consumer Loan growth surged to a record $197 billion in January, up from December’s $86 billion and compared to January 2020’s $99 billion. Twelve-month growth of $1.320 TN was 20% ahead of one-year growth from the previous year. Consumer Loans were up 15.2% in one year, 32% in two years, 56% in three and 133% in five years.

Government Bonds increased $36 billion in January, the smallest gain since last February. However, 12-month growth of $1.211 TN was 47% ahead of comparable growth from a year ago. Government Bonds expanded 20% over the past year, 40% over two and 64% in three years.

Curiously, M2 expanded “only” $407 billion in January, down significantly from January 2020 growth ($568bn). One-year expansion slowed to 9.4%, the weakest reading since February 2020. Over the past three months, M2 growth of $982 billion was down 18.3% from comparable three-month growth from last year.

For the Week:

The S&P500 gained 1.2% (up 4.8% y-t-d), and the Dow increased 1.0% (up 2.8%). The Utilities fell 2.0% (down 0.3%). The Banks rose 2.2% (up 10.9%), and the Broker/Dealers surged 5.2% (up 14.4%). The Transports advanced 3.0% (up 5.3%). The S&P 400 Midcaps jumped 2.7% (up 10.3%), and the small cap Russell 2000 rose 2.5% (up 15.9%). The Nasdaq100 gained 1.5% (up 7.1%). The Semiconductors surged 7.9% (up 15.2%). The Biotechs were little changed (up 8.6%). Though bullion gained $10, the HUI gold index declined 0.8% (down 5.1%).

Three-month Treasury bill rates ended the week at 0.035%. Two-year government yields added a basis point to 0.11% (down 1 bp y-t-d). Five-year T-note yields increased three bps to 0.49% (up 13bps). Ten-year Treasury yields rose five bps to 1.21% (up 30bps). Long bond yields gained four bps to 2.01% (up 37bps). Benchmark Fannie Mae MBS yields jumped seven bps to 1.53% (up 19bps).

Greek 10-year yields slipped a basis point to 0.75% (up 13bps y-t-d). Ten-year Portuguese yields gained four bps to 0.11% (up 8bps). Italian 10-year yields dropped six bps to 0.48% (down 7bps). Spain's 10-year yields increased three bps to 0.16% (up 11bps). German bund yields rose two bps to negative 0.43% (up 14bps). French yields gained three bps to negative 0.20% (up 14bps). The French to German 10-year bond spread widened one to 23 bps. U.K. 10-year gilt yields jumped five bps to 0.52% (up 32bps). U.K.'s FTSE equities index rose 1.5% (up 2.0% y-t-d).

Japan's Nikkei Equities Index jumped 2.6% (up 7.6% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.07% (up 5bps y-t-d). France's CAC40 increased 0.8% (up 2.7%). The German DAX equities index was unchanged (up 2.4%). Spain's IBEX 35 equities index fell 1.9% (down 0.2%). Italy's FTSE MIB index gained 1.4% (up 5.3%). EM equities were mixed. Brazil's Bovespa index declined 0.7% (up 0.3%), while Mexico's Bolsa was little changed (up 0.3%). South Korea's Kospi index dipped 0.6% (up 7.9%). India's Sensex equities index rose 1.6% (up 7.9%). China's Shanghai Exchange surged 4.5% (up 5.2%). Turkey's Borsa Istanbul National 100 index increased 0.7% (up 4.2%). Russia's MICEX equities index rose 1.0% (up 4.2%).

Investment-grade bond funds saw inflows of $2.730 billion, while junk bond funds posted outflows of $228 million (from Lipper).

Federal Reserve Credit last week jumped $21.2bn to a record $7.388 TN. Over the past year, Fed Credit expanded $3.253 TN, or 79%. Fed Credit inflated $4.577 Trillion, or 163%, over the past 431 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $4.4bn to $3.536 TN. "Custody holdings" were up $77.3bn, or 2.2%, y-o-y.

M2 (narrow) "money" supply added $3.0bn last week to $19.415 TN. "Narrow money" surged $3.947 TN, or 25.5%, over the past year. For the week, Currency increased $4.6bn. Total Checkable Deposits declined $4.8bn, while Savings Deposits added $4.2bn. Small Time deposits fell $4.2bn. Retail Money Funds increased $3.3bn.

Total money market fund assets gained $6.2bn to $4.317 TN. Total money funds surged $692bn y-o-y, or 19.1%.

Total Commercial Paper jumped $19.7bn to $1.077 TN. CP was down $37bn, or 3.3%, year-over-year.

Freddie Mac 30-year fixed mortgage rates were unchanged at 2.73% (down 77bps y-o-y). Fifteen-year rates slipped two bps to 2.19% (down 78bps). Five-year hybrid ARM rates added a basis point to 2.79% (down 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 2.84% (down 77bps).

Currency Watch:

February 11 – Bloomberg (Netty Ismail and Fiona MacDonald): “The Kuwaiti dinar’s peg to a basket of currencies is coming under scrutiny as concerns grow that one of the world’s richest nations is running short of cash. Derivatives are showing signs of pressure after 12-month forward contracts on the Kuwaiti dinar rose to about 305 points in the offshore market Thursday, the highest since the oil rout in March.”

For the week, the U.S. dollar index declined 0.6% to 90.48 (up 0.6% y-t-d). For the week on the upside, the South African rand increased 2.0%, the South Korean won 1.5%, the Australian dollar 1.1%, the Swedish krona 0.8%, the British pound 0.8%, the Swiss franc 0.8%, the Norwegian krone 0.8%, the Singapore dollar 0.7%, the Mexican peso 0.7%, the euro 0.6%, the Canadian dollar 0.5%, the Japanese yen 0.4%, and the New Zealand dollar 0.4%. The Chinese renminbi increased 0.11% versus the dollar this week (up 1.07% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.9% (up 7.7% y-t-d). Spot Gold rallied 0.6% to $1,824 (down 3.9%). Silver jumped 1.6% $27.36 (up 3.6%). WTI crude surged $2.65 to $59.47 (up 23%). Gasoline jumped 2.6% (up 20%), and Natural Gas gained 1.7% (up 15%). Copper surged 4.5% (up 8%). Wheat slipped 0.7% (unchanged). Corn fell 2.2% (up 11%). Bitcoin jumped $10,088, or 26.6%, this week to $47,947 (up 65%).

Coronavirus Watch:

February 7 – Reuters (Mike Stone): “President Joe Biden said that it will be difficult for the United States to reach herd immunity, at least 75% of the population inoculated against the coronavirus, by the end of this summer. ‘The idea that this can be done and we can get to herd immunity much before the end of next -- this summer, is -- is very difficult,’ Biden told CBS…”

February 9 – Financial Times (Donato Paolo Mancini): “One of the UK government’s top scientific advisers has warned that early signs the Oxford/AstraZeneca vaccine is less effective at stopping mild and moderate cases of the South African coronavirus variant are a ‘worrying harbinger’ for 2021. Sir Jeremy Farrar… told the Financial Times that this year was ‘very unpredictable’ as new viral variants less susceptible to current control methods were likely to undermine efforts to contain the virus. Signs of the reduced efficacy of the Oxford/AstraZeneca vaccine against the 501. V2 variant in a limited South Africa study have already caused the country to suspend rollout of the jab, pending more data.”

February 7 – Reuters (Alexander Winning and Olivia Kumwenda-Mtambo): “South Africa will put on hold use of AstraZeneca’s COVID-19 shot in its vaccination programme, after data showed it gave minimal protection against mild-to-moderate infection caused by the country’s dominant coronavirus variant.”

February 9 – CNBC (Lora Kolodny): “About 10 to 30% of all Covid patients will suffer from long-haul symptoms, according to the latest research from Mt. Sinai’s Center for Post-Covid Care. Those numbers should be a ‘wake-up call’ for young people and motivate them to avoid infection, Dr. Peter Hotez of Texas Children’s Hospital said… Patients with post acute Covid syndrome typically experience serious fatigue, shortness of breath, digestive issues, ‘brain fog’ and a racing heart. Some can even develop type 1 diabetes after a Covid infection, Dr. Hotez said. Endocrinologists are still trying to understand exactly why this occurs.”

Market Mania Watch:

February 12 – Bloomberg (Ksenia Galouchko): “Investors poured a record amount of money into equity funds, especially technology stocks, prompting strategists at Bank of America Corp. to warn that the exuberance may precede a correction. Stock funds had inflows of $58 billion in the week through Feb. 10, led by investments into U.S. equities and the tech sector, according to BofA and EPFR Global data. Market players pulled almost $11 billion from cash funds and about $800 million from gold, while bonds got a $13 billion inflow… BofA’s gauge of market sentiment-- the so-called Bull & Bear indicator-- is approaching levels of extreme bullishness, which can trigger a sell signal that hasn’t been set off since January 2018…”

February 11 – Bloomberg (Cormac Mullen): “The frenzy of trading in U.S. equities is showing no signs of abating and looks set to surpass levels seen during the worst of the pandemic panic in March. Over the last 20 days, an average 15.8 billion shares have traded each day on all U.S. exchanges, according to data compiled by Bloomberg. That’s just below the 16.1 billion average hit on March 25, which was the highest in at least over a decade…”

February 9 – Washington Post (Douglas MacMillan and Yeganeh Torbati): “Last month’s GameStop trading mania was sparked by members of a popular Reddit investing community who said they hoped to strike back at the Wall Street elites who had long dismissed them as dumb money. But growing evidence casts doubt on the idea that the episode mostly benefited small-time investors. Giant mutual funds that own the largest stakes in GameStop saw the biggest gains in value. Hedge funds… appear to have bought and sold millions of shares during the stock’s most volatile period of trading... And, in at least some cases, novice investors lost their shirts. Instead of heralding a new wave of investor populism, the rise and fall of GameStop’s stock may end up reinforcing what professional investors have known for a long time: Wall Street is very good at making money, and more often than not, smaller investors lose out to wealthy traders and giant institutions.”

February 9 – Bloomberg (Davide Scigliuzzo): “Struggling borrowers and once-distressed issuers may be all that’s left for investors looking to juice returns in a market where bonds are now ‘high yield’ in name only. The relentless hunt for risk assets pushed yields on junk bonds below 4% for the first time in the market’s history... The tidal wave of demand has slashed borrowing costs and opened up financing avenues for even the least credit-worthy firms, handing them an unprecedented opportunity to raise cash. Some $855 billion of junk-rated corporate debt, or around 58% of the entire market, is now trading at a yield of under 4%...”

February 10 – Bloomberg (Shelly Hagan): “A top Bank of Canada official called the recent spike in cryptocurrency prices ‘speculative mania,’ and said such assets don’t have the qualities to become the money of the future. In a speech on ‘payments innovation,’ Deputy Governor Tim Lane said costly verification methods and unstable purchasing power makes cryptocurrencies like Bitcoin a ‘flawed’ method of payment. ‘The recent spike in their prices looks less like a trend and more like a speculative mania -- an atmosphere in which one high-profile tweet is enough to trigger a sudden jump in price,’ Lane said… The remarks underscore the extent to which top policy makers are taking notice as a speculative fever sweeps cryptocurrency markets.”

February 7 – Bloomberg (Olga Kharif): “Money for nothing. That’s what a fast growing array of financial products dubbed flash loans are promising the crypto faithful. The practice is the latest attempt by the digital-asset crowd to rewrite the rules of financial transactions, removing many of the current gatekeepers from the picture in the search to achieve what they call decentralized finance, or DeFi. As with most things crypto, the promise is great, with the perils often equally so. Here’s how flash loans typically work: Borrowers can take collateral-free loans from lenders and use the proceeds for whatever they want. One of the most popular uses is to arbitrage discrepancies in coin prices on different exchanges.”

February 8 – Bloomberg (Mark Chediak and Catherine Traywick): “There is nothing about the finances of Blink Charging Co. that would suggest it’s one of the hottest stocks in America. It’s never posted an annual profit in its 11-year history; it warned last year it could go bankrupt; it’s losing market share, pulls in anemic revenue and has churned through management in recent years. And yet a hot stock it is. Investors have bid Blink’s share price up 3,000% over the past eight months. Only seven stocks -- out of about 2,700 that are worth at least $1 billion -- have risen more over that time. The reason: Blink is a green-energy company, an owner and operator of charging stations that power up electric vehicles. And if investors are certain of one thing in the mania that is sweeping through financial markets, it is that green companies are can’t-miss, must-own investments of the future.”

February 10 – Bloomberg (Tasos Vossos): “The corporate world’s zeal for selling long-dated debt is hitting bondholders as long-feared interest rate risks finally break out. Bonds with at least 10 years left to maturity have produced losses of around 3.2%, the worst start to a year since 2018 and more than twice the broader credit market’s decline… In the euro market, long bonds have fallen 0.8% in total-return terms against a broadly stable market. As issuers rush to borrow for longer and the reflation trade guides yields higher, those losses may mount.”

Market Instability Watch:

February 8 – Bloomberg (Elizabeth Stanton, Stephen Spratt and John Ainger): “Global markets from U.S. and European bonds to stocks and oil are sending a clear signal: inflation is finally coming back. The market-implied pace of U.S. consumer-price increases briefly accelerated to the fastest since 2014, and 30-year Treasury yields temporarily topped 2% for the first time in a year as rising expectations for an economic recovery fueled an oil rally. Over in Europe, a swap-market gauge of future inflation is close to its highest level since 2019.”

February 6 – CNBC (Julie Hyman): “The latest move in the GameStop roller coaster was a 19% jump in the shares in Friday’s session that wasn’t enough to prevent an 80% slide on the week. While the short squeeze in GameStop and other heavily-shorted names may be abating for now, the factors underlying the action aren’t going away anytime soon… [Mohamed] El-Erian said while the outburst may have been brief, it sent a signal. ‘The biggest signal for someone who’s investing in the market as a whole is that there is a lot of risk-taking, and a lot of leverage. And rightly so, because liquidity is abundant, and the cost of borrowing is so low. But a lot of leverage tends to create excessive risk-taking,’ he said. ‘And therefore, the risk of a market accident goes up. Last week we came very, very close to a market accident — very close. It was avoided through various things, but we came very close.’”

February 8 – Financial Times (Adam Samson and Colby Smith): “Long-term US bond yields have struck their highest level in a year in the latest sign that investors expect President Joe Biden’s stimulus plan will boost US economic growth and eventually lead to higher levels of inflation. The 30-year Treasury yield briefly traded above 2% for the first time since last February on Monday, extending a rise that has seen it climb around 0.36 percentage points since the end of last year.”

February 8 – Bloomberg (Carolina Gonzalez): “The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields. The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening… Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.”

February 8 – Financial Times (Joe Rennison): “The sensitivity of US corporate bonds to a rise in interest rates is near record levels, just as higher growth and inflation are expected to return in coming months as the nation’s… economy recovers. Duration, which captures the expected time it will take for the price of the debt to be repaid in total cash flow, has been on an upward march for a couple of years. The rise has been driven by a rush of companies issuing longer-maturity debt at a time when borrowing costs are low. The average duration for investment-grade corporate bonds now stands at 8.3 years, according to… ICE Data Services, up from 7.7 years at the start of 2020 and just 6.5 years a decade ago.”

Biden Administration Watch:

February 8 – Bloomberg (Rich Miller): “In making the case for a mammoth $1.9 trillion economic relief package, President Joe Biden and his acolytes had maintained that economists across the board agreed that now is the time to go big in the fight against the pandemic. Well, so much for that. A number of prominent economists and former policy makers -- from Democrat Lawrence Summers to Republican Douglas Holtz-Eakin -- have raised questions in the past week about the size of the package. So too have some economy watchers in the financial markets.”

February 8 – New York Times (Neil Irwin): “A fierce debate is underway among centrist and left-leaning economists, taking place in newspaper op-eds, heated exchanges on Twitter, and even at the White House lectern. Unlike most internecine battles within a narrow intellectual tribe, this one will shape the future of the American economy and the political fortunes of the Biden administration. The core question is whether the administration’s $1.9 trillion pandemic rescue plan is too big. Is action on that scale needed to contain the economic damage from the coronavirus and get the economy quickly on track to full health? Or is it far too big relative to the hole the economy’s in, thus setting the stage for a burst of inflation followed by a potential recession, as leading center-left economists including Larry Summers (the former Treasury secretary) and Olivier Blanchard (a former chief economist at the International Monetary Fund) have argued in recent days?”

February 8 – Bloomberg (Mario Parker and Nancy Cook): “President Joe Biden and White House officials are siding with liberal Democrats stung by past efforts to reach compromise with Republicans and refusing to heed GOP appeals to scale back the administration’s $1.9 trillion stimulus. Biden entered talks last week with a group of Republican senators who proposed a bill just one-third the size of his pandemic-relief package. They were the first lawmakers he invited to the White House as president… But on Monday… White House Press Secretary Jen Psaki said the stimulus will probably advance under a procedure that requires only simple majority support in the Senate.”

February 9 – Bloomberg: “Major changes to Medicaid are included in the House Energy and Commerce Committee’s stimulus proposal. State and local governments will receive $350 billion in aid, according to a draft of a stimulus bill. House Democrats have budgeted for commodity purchases to help U.S. farms. President Joe Biden backed a proposal for quicker phase-outs of planned $1,400 stimulus checks. House and Senate Democrats are clashing on the design of expanded support for the unemployed, an early sign of the intra-party squabbling in the $1.9 trillion pandemic relief bill in the coming weeks.”

February 8 – Reuters (David Shepardson): “Democrats in the U.S. Congress are to release a sweeping plan on Monday to provide more than $50 billion in additional assistance to U.S. airlines, transit systems, airports and passenger railroad Amtrak and create a $3 billion program to assist aviation manufacturers with payroll costs, according to documents…”

February 10 – Associated Press (Paul Wiseman): “In his first weeks in office, President Joe Biden has wasted no time in dumping a batch of major Trump administration policies. He rejoined the Paris climate agreement. He ended a ban on travelers from mostly Muslim countries. He canceled the Keystone XL oil pipeline. He reversed a ban on transgender people serving in the military. And so on. Biden and his team are tiptoeing, though, around one of Donald Trump’s most divisive signature legacies: His go-it-alone moves to start a trade war with China and bludgeon some of America’s closest allies with a gale of tariffs on their steel, aluminum and other goods.”

February 10 – Reuters (David Brunnstrom, Michael Martina, Yew Lun Tian and Ben Blanchard): “U.S. President Joe Biden and his Chinese counterpart Xi Jinping held their first telephone call as leaders, with Biden saying a free and open Indo-Pacific was a priority and Xi warning confrontation would be a ‘disaster’ for both nations… Biden also underscored his ‘fundamental concerns about Beijing’s coercive and unfair practices, its crackdown in Hong Kong, reported human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan’, the White House said…”

February 7 – CNBC (Amanda Macias): “President Joe Biden said his administration was ready for ‘extreme competition’ with China but that his approach would be different than his predecessor. ‘I’m not going to do it the way Trump did. We are going to focus on the international rules of the road,’ Biden told in a CBS interview… ‘We need not have a conflict but there is going to be extreme competition,’ he added.”

February 10 – Reuters (Andrea Shalal and Patricia Zengerle): “President Joe Biden’s pick as budget director… struck a critical tone against China, voicing concern about potential security threats posed by Chinese technology and accusing Beijing of failing to meet bilateral commitments. Neera Tanden, nominated to head the Office of Management and Budget…, told senators she would work with Congress to shore up the security of U.S. supply chains and work with allies to put more pressure on Beijing to adhere to global trade rules. ‘The bilateral relationship between China and the United States, in the last several years is one where China did not uphold ... its end of the bargain,’ Tanden said… ‘It is vital that we ensure that China change course,’ she said. ‘It is important that we marshal allies to put pressure on China to ensure that they have a fair trading system where American companies can truly compete against China.’”

February 10 – Reuters (Ben Blanchard): “Taiwan’s government expressed its thanks to and ‘admiration’ for U.S. President Joe Biden… after he told his Chinese counterpart Xi Jinping of his concerns about Beijing’s pressure against the island China... Biden’s government, which took office on Jan. 20, has moved to reassure democratic Taiwan that its commitment to them is ‘rock solid’, especially after China stepped up its military activity near the island shortly after Biden’s inauguration.”

February 11 – Financial Times (Demetri Sevastopulo and Katrina Manson): “Joe Biden has created a Pentagon task force to help craft a comprehensive China policy that will examine everything from the deployment of US forces around the world to relations with the Chinese military. The US president announced the formation of the working group during a visit to the Pentagon…”

Federal Reserve Watch:

February 10 – Financial Times (Editorial Board): “The job of the Federal Reserve, the central bank’s former chair Bill Martin once said, is to take away the punchbowl just as the party is getting started. With the prospect of a rapid economic bounceback in the US in the latter half of 2021 thanks to the combination of vaccines and fiscal stimulus, many are now asking whether the Fed’s commitments to keep rates low through to 2022 will mean that it could, in fact, be spiking the punch. If the Twenties do ‘roar’, as many economists are suggesting, then it could be as much for higher inflation as economic growth. The Federal Reserve must be mindful of these risks. Former treasury secretary Larry Summers and former IMF chief economist Oliver Blanchard both warned congressional Democrats earlier this week that passing a $1.9tn spending package, on top of last year’s $900bn stimulus, could contribute to the economy ‘overheating’. Summers argues that the size of the spending package, about 9% of pre-pandemic national income, would be much larger than the estimate of the shortfall in economic output…”

February 10 – Reuters (Howard Schneider and Ann Saphir): “Invoking post-World War II efforts to reach full employment and pledging continued loose monetary policy to help the process, Federal Reserve Chair Jerome Powell made a broad call Wednesday for a ‘society-wide commitment’ to get Americans back to work, particularly minorities and those ousted from lower-paying jobs during the pandemic. ‘Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy… It will require a society-wide commitment, with contributions from across government and the private sector.’”

February 10 – Financial Times (James Politi): “When the Federal Reserve last year laid out a new mantra for monetary policy, conditions in the US economy were so poor that the dovish shift was expected to guarantee ultra-easy money for years to come. But the likelihood of additional large-scale fiscal stimulus under President Joe Biden and a possible jump in inflation is now increasing pressure on the US central bank to signal how and when it might start dialling back its monetary support. ‘At some point, they will have to acknowledge [the looming fiscal support] and incorporate it in their forecasts,’ said Aneta Markowska, chief financial economist at Jefferies. ‘It does improve growth prospects, and because they said they would be data dependent, it does potentially accelerate the timeframe for normalisation. That’s going to be a balancing act.’”

February 8 – Reuters (Jonnelle Marte): “U.S. monetary policy will stay accommodative for a ‘very long time’ because the economy is far from the Federal Reserve’s goals for maximum employment and price stability, Cleveland Fed President Loretta Mester said… ‘We’re going to be accommodative for a very long time because the economy just needs it to get back on its feet,’ Mester said…”

U.S. Bubble Watch:

February 10 – Reuters (David Lawder): “The U.S. government posted a budget deficit of $163 billion in January, a record high for the month and a $130 billion jump from the deficit in the same month last year, as a new round of direct payments to individuals were distributed… Receipts for January rose 3% from the year-earlier period to $385 billion, while outlays grew 35% to $547 billion. Both receipts and outlays were record highs for January. For the first four months of the 2021 fiscal year, the deficit rose 89% to $736 billion, with receipts rising 1% to $1.19 trillion and outlays increasing 23% to $1.92 trillion.”

February 8 – Reuters (Kanishka Singh): “Economists at Goldman Sachs… bumped their U.S. GDP forecast for the second quarter up to 11% from 10% and said additional fiscal measures are likely to be valued at $1.5 trillion, up from their previous $1.1 trillion estimate. On an annual basis, they raised their forecasts for 2021 and 2022 growth by 0.2 percentage points each, to 6.8% and 4.5%, respectively.”

February 11 – Wall Street Journal (Nicole Friedman): “U.S. home prices are rising at an accelerating pace…, as the strongest housing boom in more than a decade is boosting home values from major metro areas to small cities and vacation spots. The median sales price for existing homes in each of more than 180 metro areas tracked by the National Association of Realtors rose in the fourth quarter from a year earlier… That is the second consecutive quarter that every metro area… posted an annual price increase… In the fourth quarter, 161 metro areas posted double-digit-percentage price increases, up from 115 metro areas with double-digit gains in the third quarter… The biggest home-price gainers in the fourth quarter were in the Northeast, led by the area around the seaport city of Bridgeport, Conn., where prices shot up 39.2% from a year earlier. In Pittsfield, Mass., they rose 32.2%, while in the coastal resort town of Atlantic City, N.J., home prices gained 30%. Other top performers included popular vacation spots like Naples, Fla., and towns within driving distance of urban centers such as Kingston, in New York’s Hudson Valley.”

February 9 – Bloomberg (Prashant Gopal and Alex Wittenberg): “Maybe you’ve heard: The pandemic is killing cities, fueling a rush to spacious houses in the suburbs. But beyond pricey New York and San Francisco, real estate demand is booming in downtowns across America. From Pittsburgh to Detroit and Phoenix, condos and townhouses within stumbling distance of bars and restaurants are hot. Like the families now upgrading to bigger suburban homes, young white-collar workers are taking advantage of record-low mortgage rates and flexible remote-work policies to move to desirable cities with relative affordability. Home prices in urban U.S. markets rose 15% in the three months through late January, slightly ahead of the annual pace in suburbia, according to… Redfin…”

February 11 – CNBC (Jeff Cox): “First-time claims for unemployment insurance totaled 793,000 last week as declining Covid-19 cases provided little relief for the jobs market. The total for the week ended Feb. 6 was above the 760,000 forecast from economists… but a slight decrease from the previous week’s upwardly revised total of 812,000.”

February 10 – Reuters (Lucia Mutikani): “U.S. consumer prices rose moderately in January and underlying inflation remained benign as the pandemic continues to be a drag on the labor market and services industry. The… consumer price index increased 0.3% last month after climbing a revised 0.2% in December. In the 12 months through January the CPI rose 1.4% after gaining a revised 1.3% December.”

February 10 – Wall Street Journal (Ben Eisen): “Last year was a banner one for debt, but it didn’t look that way for America’s big banks. Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg… analyst at Barclays. The 0.5% drop was just the second decline in 28 years. Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan... had more loans at the end of the year than the start. Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021.”

February 9 – Wall Street Journal (Orla McCaffrey): “When Jen and Brian Bononi signed up to postpone their mortgage payments last April, they thought it would be for six months at most. Close to a year later, little has changed for the couple. Ms. Bononi’s autoimmune disorder makes finding another job as a social worker during the Covid-19 pandemic dangerous. And Mr. Bononi’s income as a behavioral-health counselor isn’t enough by itself to cover their monthly mortgage payment of roughly $2,000 on top of their other expenses. Mortgage forbearance has been a financial lifeline for many Americans navigating the pandemic-ravaged economy… But the relief programs, largely designed to last a maximum of 12 months, are set to expire in the coming months, a serious challenge for borrowers who are still out of work or are earning less than they did pre-pandemic. More than half of 2.7 million active forbearance plans are set to end for good in March, April, May or June…”

February 12 – Reuters (Suzanne Barlyn): “Florida property insurers are jacking up rates by double-digit percentages, blaming the hikes on lingering damage from past hurricanes, a wave of litigation, and a law that encourages lawyers to sue by allowing courts to award them big fees. The rate increases in Florida, the third-largest property insurance market among U.S. states, are the highest in memory, according to some insurance agents and residents. One danger, they say, is that the new rates could make owning a home in Florida unaffordable.”

February 10 – CNBC (Michael Wayland): “General Motors… reported fourth-quarter earnings that easily beat Wall Street expectations, but the company warned that a global semiconductor chip shortage could cut its earnings by $2 billion this year. Automakers and parts suppliers began warning of the shortage late last year after demand for vehicles rebounded more strongly than expected following a two-month shutdown of production plants due to the coronavirus pandemic.”

February 11 – Bloomberg (Kim Chipman): “The global pandemic isn’t hurting the value of farmland in the heart of the U.S. Corn Belt. Agriculture land values rose 6% last year, the biggest gain since 2012, across the Seventh Federal Reserve District, a five-state region including all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin.”

February 11 – Bloomberg (Devon Pendleton and Ben Stupples): “A company catering to women and led by women has made its 31-year-old female founder a billionaire. Shares of Bumble Inc., the owner of the dating app where women make the first move, soared 67% in its trading debut to $72…, valuing Chief Executive Officer Whitney Wolfe Herd’s stake at $1.5 billion.”

February 10 – Reuters (Anna Irrera and Tom Wilson): “Tesla boss Elon Musk is a poster child of low-carbon technology. Yet the electric carmaker’s backing of bitcoin this week could turbo-charge global use of a currency that’s estimated to cause more pollution than a small country every year. Tesla Inc revealed on Monday it had bought $1.5 billion of bitcoin and would soon accept it as payment for cars, sending the price of the cryptocurrency though the roof… The digital currency is created when high-powered computers compete against other machines to solve complex mathematical puzzles, an energy-intensive process that currently often relies on fossil fuels, particularly coal, the dirtiest of them all. At current rates, such bitcoin ‘mining’ devours about the same amount of energy annually as the Netherlands did in 2019…”

February 9 – Bloomberg: “Tesla Inc. has issued back-to-back mea culpas in a matter of days in China, showing deference to government authorities in stark contrast with Chief Executive Officer Elon Musk’s years of combativeness in the U.S. Shortly after… news Monday that five Chinese regulators had summoned Tesla representatives over several quality and safety issues, the company pledged to strictly abide by Chinese laws and regulations and strengthen internal management… Musk… has been much feistier back home. When the U.S. Securities and Exchange Commission sued the CEO over his 2018 tweets claiming to have ‘funding secured’ to take Tesla private, Musk lashed out, calling it the ‘Shortseller Enrichment Commission’ and saying he did not respect the agency. He hung up on the chairman of the National Transportation Safety Board earlier that year after a testy call about its investigation of a fatal Model X crash involving Autopilot.”

February 11 – Bloomberg (Will Davies): “Kimbal Musk, the younger brother of Elon Musk and a Tesla Inc. board member, sold $25.6 million of shares in the electric-car maker, according to a filing...”

Fixed Income Watch:

February 12 – Financial Times (Joe Rennison): “It has never been cheaper for companies with a ‘junk’ credit rating to borrow cash in the US, as the voracious appetite from investors for riskier debt sends the interest rates paid on recent bond deals to record lows. Health insurance company Centene Corporation became the latest junk-rated issuer to secure a borrowing cost below 3 per cent this week, wiping more than $40m from its annual interest bill. It raised $2.2bn at a coupon of 2.5 per cent for a 10-year bond.”

February 11 – Bloomberg (Amanda Albright): “American municipal bonds are yielding less than they have in generations and a key measure shows that valuations are at an all-time high, which would seem to give investors little room to keep piling in. But they are. Every week since early November, investors have added an average of $2.3 billion to mutual funds focused on state and local government bonds, more than four times the typical amount over the past decade… They’ve also plowed into exchange-traded funds, which in January raked in the most on record.”

February 10 – Bloomberg (Anastasia Bergeron): “The University of Washington is selling $325 million of bonds for school projects and to refinance debt, joining a record borrowing spree by colleges seizing on the lowest interest rates in decades… Colleges and universities sold more than $40 billion of bonds in the municipal- and corporate-securities markets last year, a record…”

China Watch:

February 7 – Reuters (Cate Cadell and Stella Qiu): “China’s foreign currency reserves fell slightly in January, official data showed on Sunday, likely due to valuation effects as the dollar posted a small gain against a basket of major currencies. China’s foreign exchange reserves, the largest in the world, fell to $3.211 trillion last month…”

February 10 – Reuters (Ryan Woo and Gabriel Crossley): “China’s factory gate prices rose in annual terms in January for the first time in a year, as months of strong manufacturing growth in the world’s second-largest economy pushed raw material costs higher. The producer price index (PPI) rose 0.3% from a year earlier…”

February 7 – Bloomberg: “China’s army of tiny hedge funds are pulling further ahead of their better-known foreign competitors with outsized gains helping them attract more assets. The nearly 15,000 funds offered by Chinese managers returned 30% on average last year, with the best-performers surging 10-fold, according to Shenzhen PaiPaiWang Investment & Management Co… The out-performance is another impediment to global funds… which have struggled to make inroads into China’s 3.8 trillion yuan ($588bn) hedge fund market since it was opened to foreign firms four years ago. Local funds added a record 1.3 trillion yuan in assets last year.”

February 6 – New York Times (Alexandra Stevenson): “Its lenders are pushing for bankruptcy. Its chairman and co-founder has been quietly stripped of power. Nearly $10 billion of its money has been embezzled. HNA Group, the vast Chinese conglomerate that threw tens of billions of dollars at trophy businesses around the world, is nearing the biggest corporate collapse in recent Chinese history. Its dismantling is an extraordinary turn of events for the company that began as a regional airline in China’s southern province of Hainan and grew to own large stakes in Hilton Hotels, Deutsche Bank, Virgin Australia and others. At its height, HNA employed 400,000 people around the world. For China’s leadership, HNA is now a cautionary tale. Its story offers a glimpse of how Beijing treats its most powerful entrepreneurs.”

Global Bubble Watch:

February 9 – Reuters (Tetsushi Kajimoto): “The Group of Seven (G7) financial leaders would kick off debate on Friday on emerging market debt problems, implementation of digital taxation and central bank digital currency, Japanese Finance Minister Taro Aso said… Britain will chair a meeting of G7 finance ministers and central bank governors on Feb. 12 to try to map a way out of the global economic crisis inflicted by COVID-19 and find a solution to an international tax wrangle.”

February 8 – Reuters (Karin Strohecker): “For Cleanne Brito Machado, like millions of people in developing countries around the world, shopping for staple foods such as rice, beans, oil or potatoes now means making hard choices… A mix of currency depreciation, rising commodity prices and coronavirus disruptions saw food inflation soar 14% last year in Latin America’s largest economy - the biggest increase in nearly two decades. The headline figure masks hikes in staples, such as a 76% jump in rice or a doubling of soy oil prices.”

February 11 – Reuters (Toby Sterling): “The chip shortages slowing car production are a symptom of broader increased demand that is placing strains on suppliers across the semiconductor sector, according to Dutch equipment maker ASML. One of ASML’s top executives said that higher demand for most types of computer chips… looks stronger and more permanent than most players in the industry, including ASML, had expected… ‘I think all over the place...the demand to our customers -- so the semiconductor manufacturers -- I would say that all over the place you see a stressful situation,’ Ron Kool, an executive vice president at ASML, told Reuters.”

February 10 – Bloomberg (Finbarr Flynn): “The market value of global high-yield bonds rose to a record of more than $3.1 trillion…, even as valuations for investment-grade peers have fallen slightly from recent highs… Unprecedented central bank and fiscal stimulus to fight the economic impact of the pandemic has pushed down yields, driving investors deeper into riskier types of debt.”

February 10 – CNBC (Elliot Smith): “Container shipping firms are locked in a ‘significant bottleneck’ as resurgent global demand stretches capacity and drives up freight rates, Maersk CEO Soren Skou told CNBC… ‘So we are trying to deal with a surge in demand which is completely unprecedented, both a surge in demand because the consumers are spending, but also a surge in demand because a large restocking started, as large retailers actually stopped buying stuff in Asia in the second quarter of 2020 and well into the summer,’ he said.”

February 12 – Bloomberg (David Goodman): “The U.K. economy grew at double the pace expected in the fourth quarter, showing signs of resilience to coronavirus restrictions at the end of a year that delivered the worst recession since 1709.”

February 8 – Bloomberg (Matthew Brockett): “New Zealand is clamping down on property investors in an attempt to rein in spiraling house prices. The central bank said… it will reinstate mortgage lending restrictions on March 1 and tighten them further for investors from May 1… ‘A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt,’ Reserve Bank Deputy Governor Geoff Bascand said… ‘Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn.’”

February 9 – Reuters (Julia Payne): “National oil companies (NOCs) risk squandering $400 billion on expensive oil and gas projects over the next decade that may only break even if the world fails to meet the Paris climate goals, a non-governmental organisation said… In a new report called Risky Bet, the Natural Resource Governance Institute (NRGI) estimated that NOCs could invest $1.9 trillion over the next ten years, meaning one-fifth of those investments would be unviable unless the oil price stayed above $40 a barrel.”

Central Bank Watch:

February 11 – Bloomberg (Max de Haldevang): “Mexico’s central bank unanimously voted to cut its key interest rate to the lowest point since mid-2016, leading economists to forecast more easing ahead… Banco de Mexico… chopped borrowing costs by a quarter point to 4% on Thursday, after core inflation remained stable in January, despite overall price increases accelerating above expectations.”

EM Watch:

February 7 – Bloomberg (Marcus Wong): “The reflation trade driving a sell-off in Treasuries will have investors watching to see if this results in a spike in emerging-market yields. The pace of any such yield surge carries far more weight for developing-nation bonds than the levels reached. Bonds from Indonesia, Mexico and Malaysia are the most vulnerable to sudden surges, because they historically have fiscal and/or current-account deficits, or both, according to a Bloomberg study of 15 emerging markets.”

Europe Watch:

February 11 – CNBC (Silvia Amaro): “Mario Draghi has gathered enough support from Italian lawmakers and is now highly likely to lead that country’s next government. Members of the leftist Five-Star Movement opted to back Draghi, prime minister-designate, in an online poll conducted Thursday… Draghi looks to have a solid majority in Rome and no single party would be able to derail his administration. He will now face confidence votes in Parliament next week and will present his Cabinet to the president on Friday.”

Japan Watch:

February 8 – Bloomberg (Yuko Takeo): “Japanese wages fell in December for a ninth straight month, declining the most since June 2015, as employers remained fearful of the profit outlook amid a global resurgence of the coronavirus. Labor cash earnings slid 3.2% from a year earlier, weighed down by a drop in year-end bonuses…”

February 7 – Reuters (Leika Kihara): “Japanese bank deposits surged at a record annual pace in January… Total deposits at commercial banks rose a record 9.8% in January from a year earlier to hit 806.2 trillion yen ($7.6 trillion), accelerating from a 9.3% gain in December…”

Leveraged Speculation Watch:

February 9 – Bloomberg (Melissa Karsh): “KKR & Co. deployed a record $12.5 billion in the fourth quarter, finding buying opportunities in the market turbulence of the Covid-19 pandemic. …KKR also had a record fundraising for the year, taking in about $44 billion… KKR ‘had the most active fundraising and deployment year in our history,’ co-Chief Executive Officers Henry Kravis and George Roberts said… Private equity firms have been bringing in cash at a rapid pace and KKR has been among the most active dealmakers.”

February 6 – Financial Times (Laurence Fletcher): “Hedge funds have once again found themselves in their customary role as Wall Street’s biggest villains. In a frenzied few weeks of trading, investors co-ordinating their actions on social media platform Reddit succeeded spectacularly in their aim of damaging the hedge fund of one of Wall Street’s most respected traders, Melvin’s Gabe Plotkin, a protégé of billionaire Steve Cohen. The fund lost billions of dollars on its GameStop short position and was forced to seek a bailout. As Redditors savoured their victory, the sentiment towards hedge funds is clear. One wrote on r/WallStreetBets: ‘This has exposed a fraud the hedge funds have been running on the markets since before the last market crash.’ Among the more printable quotes from Reddit was: ‘Consider it the first head on a pike for the other hedge funds to see. Always room for more if they don’t learn their lesson.’”

February 7 – Bloomberg (Yueqi Yang): “Two Sigma Investments and DE Shaw are among the quant hedge funds that suffered losses in some funds in January as retail investors on Reddit fueled market swings… Two Sigma lost 5.3% in its Absolute Return fund and 8.6% in its Absolute Return Enhanced fund… Its Compass macro fund and risk premia funds were about flat last month… DE Shaw gained 0.9% in its main Composite fund but lost 2.3% in its global macro Oculus fund…”

February 10 – Bloomberg (Hema Parmar and Katherine Burton): “Jim Simons added $2.6 billion to his vast wealth in 2020. His clients weren’t so fortunate. Investors in three hedge funds run by Simons’s Renaissance Technologies lost billions of dollars as the firm’s computer models were flummoxed by the market’s gyrations. Meanwhile, Simons ranked second on Bloomberg’s list of the highest-paid managers…”

February 10 – Bloomberg (Tom Maloney and Hema Parmar): “It’s more than enough money, at going prices, to buy one GameStop, two AMC Entertainments and four Bed Bath & Beyonds. Not shares -- those darlings of the r/wallstreetbets crowd -– but the entire companies. The estimated sum is $23.2 billion, and it’s the amount that the hedge fund managers on Bloomberg’s annual list of the top 15 earners collectively made in 2020, a year that will loom large in the annals of Wall Street. Amid Covid-19, Black Lives Matter, Brexit and more, almost all of these money managers would have become billionaires in a single year -- had most of them not been billionaires already. The biggest winner, Chase Coleman, gained $3 billion personally in 2020…”

February 7 – Bloomberg (Hema Parmar): “Renaissance Technologies, the investing giant that just posted its worst-ever returns across its public funds, has been hit with at least $5 billion in redemptions. Clients pulled a net $1.85 billion across the three hedge funds in December and requested a net $1.9 billion back in January… Investors are poised to yank another $1.65 billion this month, the letters show.”

February 11 – Bloomberg (Katherine Burton): “A Palm Beach house built on a piece of land once owned by former President Donald Trump was bought by Tiger Global Management executive Scott Shleifer. Shleifer is the co-founder of the private-equity unit of Tiger Global Management, which oversees about $40 billion. The nine-bedroom, 21,000-square-foot house was listed for $140 million a few weeks ago.”

February 11 – Dow Jones (Katherine Clarke): “In 2016, when David Tepper moved his home and business to Florida, he set off alarms with lawmakers at his prior home state of New Jersey: He and his business pay so much in state tax that his departure put New Jersey's budget at risk. In 2020, New Jersey lawmakers announced that Mr. Tepper had returned, shoring up the state's finances. Those alarms may start sounding again: Mr. Tepper is planting another flag in Florida soil. The billionaire hedge-fund manager… is in contract to buy a roughly $73 million mansion in Palm Beach…”

February 7 – New York Times (Kate Kelly and Matthew Goldstein): “Fahmi Quadir fears for her safety, so whenever she travels, she shares her GPS coordinates with her lawyer and a colleague. Nate Koppikar was once tailed by a private investigator into the bathroom in his own office. And Gabe Plotkin recently hired security after threats to his family. Digging up dirt on big companies… doesn’t make you very popular. Ms. Quadir, Mr. Koppikar and Mr. Plotkin are short sellers… For this, they are reviled by executives and shareholders alike. Short-selling itself is banned in some countries. Dealing with such hatred, Ms. Quadir said, is ‘a cost of doing business.’”

Geopolitical Watch:

February 8 – Reuters (Se Young Lee): “Two U.S. carrier groups conducted joint exercises in the South China Sea…, days after a U.S. warship sailed near Chinese-controlled islands in the disputed waters, as China denounced the United States for damaging peace and stability. The Theodore Roosevelt Carrier Strike Group and the Nimitz Carrier Strike Group ‘conducted a multitude of exercises aimed at increasing interoperability between assets as well as command and control capabilities’, the U.S. Navy said, marking the first dual carrier operations in the busy waterway since July 2020.”

February 6 – Financial Times (Demetri Sevastopulo): “Antony Blinken, US secretary of state, warned China that Washington would hold Beijing ‘accountable for its abuses’, in the first high-level interaction between the countries since Joe Biden became president. Following a call with Yang Jiechi, China’s top foreign policy official, Blinken said he had told his counterpart that the Biden administration would stand up for democratic values while holding Beijing to account. ‘I made clear the US will defend our national interests, stand up for our democratic values, and hold Beijing accountable for its abuses of the international system,’ Blinken tweeted…”

February 7 – Financial Times (Diana Choyleva): “The danger is rising that long-running tensions between China and the US over Taiwan could lead to military hostilities. That puts the island in the front rank of geopolitical risks for US President Joe Biden. Conflict need not come about by design. Revelations that Chinese military aircraft simulated missile attacks on a nearby US aircraft carrier during an incursion into Taiwanese airspace, three days after Mr Biden’s inauguration, underscore how misunderstandings could escalate with potentially devastating consequences. My research team believes that the chances of avoiding conflict over Taiwan have fallen dramatically. This notion will strike many as far-fetched.”

February 8 – Financial Times (Kathrin Hille): “Taiwan’s top trade official has called the global shortage of auto chips an opportunity for Taipei to build closer relations with western nations. ‘Everyone sees this situation and thinks that they cannot ignore Taiwan any longer,’ John Deng, Taiwan’s trade representative, told the Financial Times. ‘This is definitely beneficial to Taiwan’s trade agenda.’ The remarks follow weeks of lobbying by various governments with Taiwan, a hub for global semiconductor production, for more capacity to be allocated to automobile chips.”

February 6 – CNBC (Spencer Kimball): “U.S. Secretary of State Antony Blinken has called for China to condemn the military coup in Myanmar and warned Beijing that Washington will work with its allies to hold the People’s Republic accountable for what he described as its efforts to threaten international stability particularly in the Taiwan Strait.”

February 10 – Reuters (Francois Murphy): “Iran has carried out its plan to produce uranium metal, the U.N. atomic watchdog confirmed…, despite Western powers having warned Iran that would breach their 2015 nuclear deal as uranium metal can be used to make the core of an atom bomb.”

February 10 – Associated Press: “Police cracked down on demonstrators opposing Myanmar’s military coup, firing warning shots and shooting water cannons to disperse crowds that took to the streets again Tuesday in defiance of new protest bans. Reports of many injured demonstrators drew strong concern from the U.N.’s office in Myanmar.”

February 11 – Reuters (Maria Kiselyova, Dmitry Antonov in Moscow and Paul Carrel): “Russia said on Friday it would be ready to sever ties with the European Union if the bloc hit it with painful economic sanctions, a statement that Germany described as disconcerting and incomprehensible.”

Friday Evening Links

[Yahoo/Bloomberg] U.S. Stocks Climb to Record; Crude Oil Rallies: Markets Wrap 

[Yahoo/Bloomberg] Brent Oil Posts Fourth Weekly Gain With Global Surplus Dwindling

[Reuters] Yellen urges G7 to "go big" on stimulus, says U.S. committed to multilateralism

[CNBC] House advances $1,400 payments, unemployment boost as part of Covid relief plan

[CNBC] Covid live updates: CDC sets guidelines for school reopenings; pandemic closures still worry business owners

[Reuters] Lower-income households dim U.S. consumer sentiment

[Yahoo/Bloomberg] Warren Buffett’s Favorite Valuation Metric Is Ringing an Alarm

[Bloomberg] U.S. Home Builders Urge Biden to Help Slow Housing Inflation