Friday, February 19, 2021

Weekly Commentary: Wrecking Ball

I give it my best shot each week. My hope is to provide pertinent insight, though the overarching objective is to scrupulously chronicle this extraordinary period in history. Like other great Bubbles and manias, looking back at this era will leave most confounded. This week, in particular, I pondered how contemporaneous analysis might decades from now assist readers in comprehending today’s extraordinary dynamics. It was yet another alarmingly fascinating seven days.

February 18 – MarketWatch (Mark DeCambre): “That’s Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc., detailing… the dire situation in which the market stood in late January as individual investors on social-media platforms banded together to send a handful of heavily shorted stocks, including bricks-and-mortar videogame retailer GameStop…, with shockwaves registering throughout the market. As Peterffy explained…, the so-called short squeeze that played out was rocking clearinghouses and forcing a number of brokerages to attempt to protect themselves by raising margin requirements and capping trading in select stocks to prevent wider-reaching chaos in markets… ‘So as the price goes higher, the shorts default on the brokers, the brokers now must cover themselves, [and] that puts the price further up, so the brokers default on the clearinghouse, and you end up with a complete mess that is practically impossible to sort out… So that’s what almost happened.’”

From CNBC: “‘We have come dangerously close to the collapse of the entire system and the public seems to be completely unaware of that, including Congress and the regulators,’ Peterffy said…”

Listening Thursday to the House Financial Services Committee’s “GameStop” hearing, it was clear Washington has little appreciation for the seriousness of structural deficiencies revealed by recent market mayhem. The focus was more on blasting predatory Wall Street and the hedge funds, while looking into the cameras to defend the defenseless small investor. The broader point of a historic mania and potentially catastrophic infrastructure shortcomings was completely neglected. Millions of unusually synchronized buy orders almost led to a cascading market accident. It seems rather obvious at this point that existing market infrastructure will buckle under tens of millions of synchronized sell orders.

On the subject of buckling infrastructure, the Texas power grid.

February 19 – Independent (Louis Hall): “The power grid in Texas was ‘seconds and minutes’ away from a catastrophic failure that could have led to months of blackouts, officials with the corporation that operates the grid have said. Officials with the Electric Reliability Council of Texas told The Texas Tribune… that the state was dangerously close to the worst-case scenario, forcing grid operators to order transmission companies to quickly reduce power. According to the report, operators had to make the quick decision to employ what was intended to be rolling blackouts amid signs that massive amounts of energy supply were dropping off the grid. ‘It needed to be addressed immediately,’ said Bill Magness, president of ERCOT, told the newspaper. ‘It was seconds and minutes [from possible failure] given the amount of generation that was coming off the system.’”

As a nation, we were woefully unprepared for the pandemic. The drought and summer fires exposed serious deficiencies in California’s power grid. Now a deep freeze sees the second largest state suffer a catastrophic power failure – that was apparently close to a complete breakdown that would have required months to repair.

Millions of Americans (mostly in Texas) suffered through several days of extreme cold without power. There was death and serious hardship. Many resorted to sleeping in their cars to stay warm. More than 14 million in Texas were by Friday either without or under orders to boil tap water. Some locations were facing food scarcity. Hours were spent waiting to purchase fuel to power generators. Many hospitals were operating without secure energy or water supplies. It is what one might expect from a third world country, not the powerhouse U.S. producer of energy products.

February 19 – Bloomberg (Leslie Patton): “Restaurants in Texas are throwing out expired food, grocery stores are closing early amid stock shortages and residents are struggling to find basic necessities as a cold blast continues to upend supply chains… The situation is so dire in Houston, a major city for dining out, some people have running lists of restaurants that are open and have food supplies… The challenges are further limiting residents’ access to food as grocery store shelves remain barren in many areas. Supermarket chains such as Kroger Co. have implemented purchase limits on items such as eggs and milk, while HEB Grocery Co. said the weather is causing ‘severe disruption in the food supply chain.’”

Some will blame climate change. Others will point to Texas’s fixation on independence and animus toward regulation. At this point, some Republican lawmakers must feel cursed.

Former Texas governor and U.S. Energy Secretary Rick Perry: “Texans would be without electricity for longer than three days to keep the federal government out of their business. Try not to let whatever the crisis of the day is take your eye off of having a resilient grid that keeps America safe personally, economically, and strategically.”

Reliable energy is a necessity – more now than ever. It is a critical basic utility that must be safeguarded with competence, foresight and intense focus. The risks associated with power system failure are so high that reliability even under unusual circumstances can’t be left to chance. It cannot be only about low cost. Politics and ideology are anathema.

Clearly, there are serious shortcomings in how Texas and our nation’s energy infrastructure are being managed. The Lone Star State experienced serious cold weather infrastructure issues in 1989 and again in 2011 – and yet the risk of grid failure under extreme cold was largely disregarded. The commitment remained to deregulated low-cost energy, avoiding the massive investment necessary to ensure stable energy output and delivery during outlier winter weather episodes.

There is understandable outrage. Hearings and reports will be forthcoming – and there will be political ramifications. A push toward reregulation would seem inevitable. Massive investment to winterize systems will be required. And whether it is extreme occurrences in weather, viruses, or market dislocations, we can no longer disregard what were previously dismissed as being highly unlikely. Similarly, as a society we need to come to grips with systemic propensities that seem to ensure a lack of planning and preparation. The consequences of resource misallocation and structural maladjustment were this week on full display.

Record stock prices. Less than two months into 2021, the small cap Russell 2000 has risen 14.8%, with the S&P400 Midcaps up 9.9%. The “average stock” Value Line Arithmetic Index enjoys a y-t-d gain of 11.8%. The Banks have jumped 16.4% and the Broker/Dealers 16.6%. Bitcoin has gained more than 90% so far this year to surpass $53,000.

Record IPO and SPAC issuance runs unabated. Full steam ahead for the historic corporate debt issuance boom, certainly including junk bonds. Seemingly any leveraged loan or merger/leveraged transaction enjoys the cheapest of financing costs. With a proposed $1.9 TN stimulus package, our federal government is poised for back-to-back $3 TN plus fiscal deficits. There is today unlimited finance available for about any zany idea imaginable. Indeed, we’re witnessing history’s greatest expansion of non-productive debt. I read this week that “Trillions” will be required to update our nation’s decrepit energy infrastructure. I appreciate there’s “money” slushing around everywhere - and Trillions more on the way. Yet, where will the money come from to modernize the national power grid?

There was reference to the spike in spot Texas electricity prices pushing the cost of recharging a Tesla from about $18 to $900. And while the price spike was fleeting, it does raise the broader issue of the disconnect between the push toward electrification and our woefully inadequate energy infrastructure. Who, after all, would invest in infrastructure when such incredible opportunities await in thousands of companies sporting breathtaking new technologies – EV and autonomous vehicles, AI, Cloud computing, Robotics, blockchain, cybersecurity, 5/6 G, the “genomic revolution”, Fintech, green technologies and on and on.

I’ll assume the Texas energy debacle will boost momentum for massive federal infrastructure spending. Let’s presume a Trillion dollar spending bill later in the year gets the ball rolling, ensuring another massive federal deficit next year – easily exceeding $2.0 TN. Several years of Trillion dollar annual infrastructure spending is not an unreasonable scenario. The power grid and energy infrastructure, highways, bridges, tunnels, rail, airports, etc. The green new deal. So, to answer the above question: our federal government will finance needed infrastructure through ongoing massive debt issuance – at least some of it conveniently monetized by the Federal Reserve. Between infrastructure investment and redistribution policies, multi-Trillion fiscal deficits as far as our eyes can see.

Ten-year Treasury yields rose another 14 bps this week to a one-year high 1.35%. After trading to a multiyear high 2.25% on Tuesday, the 10-year Treasury inflation “breakeven rate” ended the week at 2.12%. The Treasury yield curve (10 vs. 2yr) steepened another 13 bps this week to 123 bps, the widest in four years.

It’s worth noting the February Input Price component in the IHS Markit U.S. Manufacturing Purchasing Managers’ Index (PMI) survey surged eight points to an almost decade high 73.3. Output Prices jumped to the high since 2008. The Markit Services PMI Pricing component rose three points to 70.3, the high since October 2009. Elsewhere, the Producer Price Index jumped in January a much stronger-than-expected 1.3%, “the biggest gain since December 2009.” Notably, prices rose sharply for both Goods and Services components.

From CNBC (Diana Olick): “The median price of an existing home sold in January was $303,900, a 14.1% increase from January 2020. That is the highest January price that the Realtors have ever recorded.”

February 17 – Bloomberg (James Politi and Colby Smith): “Federal Reserve officials generally believe the threat posed by subdued inflation is greater than the danger of rapidly rising prices, as they begin to factor in the possible effect of President Joe Biden’s $1.9tn fiscal stimulus. The US central bank held an extensive discussion of inflationary trends last month in light of a possible acceleration in the economic recovery this year triggered by Biden’s stimulus package, according to minutes from the January meeting of the Federal Open Market Committee. ‘Participants generally viewed the risks to the outlook for inflation as having become more balanced than was the case over most of 2020, although most still viewed the risks as weighted to the downside,’ the FOMC minutes said.”

Fed officials this week seemed to be lined up to pacify the bond market with the view that heightened inflationary pressures were transitory and a non-issue. This should make bonds jittery. Traditionally, it was understood that central bank neglect in tamping down fledgling inflationary pressures risked a much more problematic tightening after inflation gained a foothold. The Fed is poised to disregard mounting inflation risk. It has painted itself into a corner with ill-conceived doctrine invoking above-target inflation to counter a previous period of below-target CPI.

Indicators of excessively loose monetary policy are everywhere – inflating asset prices, highly speculative securities markets, overheated housing markets, record trade deficits and, now even, heightened producer and consumer price pressures. Commodities prices have been surging. And this week JPMorgan boosted their forecasts for Q2 growth to 9.5% and the 2021 expansion to 6.4%.

At this point, the Fed should be in the process of rate normalization. Yet, contemplation of that move won’t begin until well after the winding down of QE. Amazingly, the Fed is sticking with its monthly $120 billion balance sheet expansion. At some point in the future, the Federal Reserve will telegraph its intention to begin some type of taper process. It will likely begin a cautious tapering some period following this signal – ensuring many months will pass before this round of QE has run its course. It is almost inconceivable that there will not be “taper tantrums” along the way that will further extend the Fed’s irrepressible “money printing” operations.

The point is the Fed is locked into the loosest and most asymmetric monetary policy imaginable. Slash rates to zero and inject Trillions of liquidity in days and weeks, while the return to any semblance of policy normalcy unfolds over quarters and years.

In a classic “careful what you wish for,” the Fed is going to get the massive fiscal stimulus it has beckoned for. And for some time to come, historic monetary and fiscal stimulus will support mounting inflationary pressures. I do not recall a period when the domestic environment was as ripe for inflationary pressures to gather momentum.

Importantly, the global backdrop is also highly conducive to upside inflation surprises. While generally not to the level of the U.S., nations around the world are running synchronized, dangerously loose monetary and fiscal policies. Reckless U.S. inflationism and resulting structural dollar weakness have afforded the entire world the leeway to inflate “money” and Credit. The upshot is a pool of dollar balances flooding the world coupled with rapidly inflating quantities of renminbi, euros, yen, pounds, “Aussie”, “kiwi” and “loonie” dollars, won, reals, pesos, rands, and scores of other currencies. The world is awash in liquidity and cheap “money” like never before. Global inflation risk is highly elevated.

Then why are 10-year Treasury yields today at only 1.34%? Because the current financial structure is unsustainable. U.S. equities and cryptocurrencies are in a historic mania. The U.S. corporate Credit boom is an accident in the making. Globally, precarious Bubble Dynamics encompass securities markets in about every nook and cranny. The degree of speculation and speculative leverage is unprecedented and unsustainable.

Meanwhile, mounting inflationary pressures pose a serious risk. Yet safe haven bonds, including Treasury, bunds and JGBs, are underpinned by the prospect of faltering global Bubbles and an associated “risk off” contraction of speculative Credit.

Global yields have moved meaningfully higher, and incipient forces of de-risking/deleveraging are emerging at the periphery. Local currency 10-year bond yields were this week up 87 bps in Lebanon (49.52%), 46 bps in Mexico (6.04%), 37 bps in Romania (3.13%), 31 bps in South Africa (8.86%), and 19 bps in Indonesia (6.50%). Over the past month, yields were up 53 bps in Russia, 35 bps in Slovakia, 34 bps in Brazil, and 26 bps in the Czech Republic.

While not as dramatic, dollar-denominated EM bonds have also been under pressure. This week saw Brazilian 10-year yields jump 16 bps, Mexico 14 bps, Indonesia 21 bps, and Peru 22 bps. Outside of EM, periphery European yields have reversed sharply higher. Ten-year yields jumped 20 bps this week in Spain, 15 bps in Italy, 15 bps in Portugal, and 14 bps in Greece. Bund yields rose 12 bps to negative 0.31%, the high since June 8th. Japanese 10-year yields rose four bps this week to 0.11%, the high going back to November 2018.

February 17 – Reuters (Marc Jones): “The COVID pandemic has added $24 trillion to the global debt mountain over the last year a new study has shown, leaving it at a record $281 trillion and the worldwide debt-to-GDP ratio at over 355%. The Institute of International Finance’s global debt monitor estimated government support programmes had accounted for half of the rise, while global firms, banks and households added $5.4 trillion, $3.9 trillion and $2.6 trillion respectively. It has meant that debt as a ratio of world economic output known as gross domestic product surged by 35 percentage points to over 355% of GDP. That upswing is well beyond the rise seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective debt-to-GDP jumps.”

It's frightening debt growth – with too little to show for. And no end in sight. Parabolic expansion of debt of increasingly poor quality. “Terminal Phase Excess” on an unprecedented global scale. Intensifying Monetary Disorder. Manic market Bubble Dynamics – and an ever-widening chasm between inflating asset prices (perceived wealth) and deflating global prospects. Record stock prices versus a near catastrophic collapse of Texas’s power grid. American society is taking too many blows. The Intensifying Drumbeat of a Wrecking Ball. If ramifications of a bursting Bubble are not worrying, you’re not paying attention.

For the Week:

The S&P500 declined 0.7% (up 4.0% y-t-d), while the Dow was little changed (up 2.9%). The Utilities dropped 2.2% (down 2.5%). The Banks surged 4.9% (up 16.4%), and the Broker/Dealers gained 1.9% (up 16.6%). The Transports added 0.8% (up 6.1%). The S&P 400 Midcaps slipped 0.4% (up 9.9%), and the small cap Russell 2000 retreated 1.0% (up 14.8%). The Nasdaq100 dropped 1.6% (up 5.4%). The Semiconductors were little changed (up 15.3%). The Biotechs fell 3.1% (up 5.3%). With bullion dropping $40, the HUI gold index sank 7.3% (down 12.0%).

Three-month Treasury bill rates ended the week at 0.0275%. Two-year government yields were unchanged at 0.11% (down 1bp y-t-d). Five-year T-note yields jumped nine bps to 0.58% (up 22bps). Ten-year Treasury yields surged 13 bps to 1.34% (up 42bps). Long bond yields rose 12 bps to 2.14% (up 49bps). Benchmark Fannie Mae MBS yields surged 20 bps to 1.73% (up 39bps).

Greek 10-year yields jumped 14 bps to 0.89% (up 27bps y-t-d). Ten-year Portuguese yields rose 15 bps to 0.25% (up 22bps). Italian 10-year yields surged 15 bps to 0.62% (up 8bps). Spain's 10-year yields surged 20 bps to 0.36% (up 31bps). German bund yields rose 12 bps to negative 0.31% (up 26bps). French yields jumped 14 bps to negative 0.06% (up 28bps). The French to German 10-year bond spread widened two to 25 bps. U.K. 10-year gilt yields surged 18 bps to 0.70% (up 50bps). U.K.'s FTSE equities index increased 0.5% (up 2.5% y-t-d).

Japan's Nikkei Equities Index gained 1.7% (up 9.4% y-t-d). Japanese 10-year "JGB" yields jumped four bps to 0.11% (up 9bps y-t-d). France's CAC40 rose 1.2% (up 4.0%). The German DAX equities index slipped 0.4% (up 2.0%). Spain's IBEX 35 equities index advanced 1.2% (up 1.0%). Italy's FTSE MIB index fell 1.2% (up 4.1%). EM equities were mixed. Brazil's Bovespa index declined 0.8% (down 0.5%), while Mexico's Bolsa jumped 1.6% (up 1.9%). South Korea's Kospi index added 0.2% (up 8.1%). India's Sensex equities index declined 1.3% (up 6.6%). China's Shanghai Exchange gained 1.1% (up 6.4%). Turkey's Borsa Istanbul National 100 index rose 1.4% (up 5.7%). Russia's MICEX equities index increased 0.9% (up 5.1%).

Investment-grade bond funds saw inflows of $4.529 billion, while junk bond funds posted outflows of $1.347 billion (from Lipper).

Federal Reserve Credit last week surged $124bn to a record $7.512 TN. Over the past year, Fed Credit expanded $3.368 TN, or 81.2%. Fed Credit inflated $4.701 Trillion, or 166%, over the past 432 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $14.1bn to $3.550 TN. "Custody holdings" were up $87bn, or 2.5%, y-o-y.

I've monitored the Fed's weekly "H.6 - Money Stock Measures" data on Thursday afternoons for more than 30 years. This exercise ended this week, as the Fed dropped its weekly data in favor of a monthly report.

Total money market fund assets gained $16.0bn to $4.333 TN. Total money funds surged $700bn y-o-y, or 19.3%.

Total Commercial Paper slipped $1.1bn to $1.076 TN. CP was down $47.9bn, or 4.3%, year-over-year.

Freddie Mac 30-year fixed mortgage rates jumped eight bps to a 14-week high 2.81% (down 68bps y-o-y). Fifteen-year rates added two bps to 2.21% (down 78bps). Five-year hybrid ARM rates declined two bps to 2.77% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 17 bps to 3.01% (down 73bps).

Currency Watch:

For the week, the U.S. dollar index was little changed at 90.364 (up 0.5% y-t-d). For the week on the upside, the Australian dollar increased 1.4%, the British pound 1.2%, the New Zealand dollar 1.1%, the Canadian dollar 0.6%, the Swedish krona 0.3%, the South Korean won 0.1%, and the Singapore dollar 0.1%. For the week on the downside, the Mexican peso declined 2.3%, the South African rand 1.0%, the Swiss franc 0.5%, the Japanese yen 0.5%, the Brazilian real 0.2%, and the Norwegian krone 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 1.08% y-t-d).

Commodities Watch:

February 17 – Bloomberg (Naureen S. Malik, Gerson Freitas Jr. and Michael Tobin): “There’s no sign yet of a pause in the dramatic rally in natural gas prices across the central U.S., where spot rates have now breached the $1,000 mark, more than 100 times their level just a week earlier. Prices for immediate delivery are skyrocketing as consumers scramble to find additional supply. U.S. production has fallen to a four-year low, causing a shortage that has left millions of homes and business in the dark and forced food giant Cargill Inc. to halt production at three of its meat processing plants… Supply for next-day delivery at the Oneok Gas Transportation hub in Oklahoma traded at $1,250 per million British thermal units on Wednesday… That’s up from $999 on Tuesday, and just $9 a week ago.”

The Bloomberg Commodities Index added 1.5% (up 9.3% y-t-d). Spot Gold fell 2.2% to $1,784 (down 6.0%). Silver slipped 0.3% to $27.29 (up 3.4%). WTI crude dipped 23 cents to $59.24 (up 22%). Gasoline surged 6.8% (up 28%), and Natural Gas jumped 5.4% (up 21%). Copper surged 7.6% (up 16%). Wheat rose 2.2% (2%). Corn gained 1.0% (up 12%). Bitcoin jumped $7,682, or 16%, this week to $55,629 (up 91%).

Coronavirus Watch:

February 15 – Associated Press (Sudhin Thanawala and Kate Brumback): “Average daily new coronavirus cases in the United States dipped below 100,000 in recent days for the first time in months, but experts cautioned… infections remain high and precautions to slow the pandemic must remain in place. The seven-day rolling average of new infections was well above 200,000 for much of December and went to roughly 250,000 in January…”

Market Mania Watch:

February 17 – Bloomberg (Robert Schmidt, Ben Bain and Jeff Kearns): “House Democrats sparred with the leaders of Robinhood Markets and Citadel Thursday, with lawmakers pressing the firms on whether they’re profiting at the expense of retail investors and complaining that they got few satisfying answers. At a closely watched Financial Services Committee hearing sparked by the frenzied trading in GameStop stock, Robinhood’s Vlad Tenev and Citadel’s Ken Griffin took fire on issues ranging from trading halts provoked by capital shortfalls to whether ‘free trades’ are really free. While both were adamant that their businesses have helped small-time investors gain access to markets that have long been the domain of Wall Street, lawmakers were frequently dubious of the chief executives’ often complex arguments.”

February 15 – Bloomberg (Cecile Gutscher): “Global investors are the least fearful they’ve been in two decades, and perhaps the most greedy. A JPMorgan… gauge of cross-asset complacency based on valuations, positioning and price momentum is nearing the highest level since the time the dot-com bubble burst and some companies found out burning cash faster than they made it wasn’t quite effective as a long-term survival strategy. Some of that get-rich-quick spirit has already been in display in 2021 from Bitcoin’s flirting with the $50,000 mark to the craze for cannabis firms and speculative warfare over penny stocks. Global equities have added $7 trillion since New Year, digital currencies have ballooned to a market value of $1.4 trillion and high-yield bond sales are raking in records.”

February 16 – Bloomberg (Ksenia Galouchko): “Bank of America Corp. clients with $614 billion combined are in the throes of an unprecedented frenzy of risk-taking, as more Wall Street banks sound the alarm on greed across markets. After a week which recorded the strongest-ever inflow into stocks, a record net 25% of investors surveyed by the investment bank this month are taking higher-than-normal risks. Cash levels slumped to the lowest since 2013, while optimism on cyclical risk assets rose to the highest since 2011. All this is being fueled by unprecedented optimism on the growth outlook, with 84% of fund managers expecting global corporate profits to improve over the next 12 months.”

February 13 – Bloomberg (Claire Ballentine and Sam Potter): “While many active stock-pickers these days are worrying about money walking out of the door, Cathie Wood will soon have the opposite problem. Her firm, Ark Investment Management, could be getting too successful for its own good. Already in February, Ark’s small lineup of exchange-traded funds has added another $7 billion in assets. That’s on top of January’s roughly $8 billion flow, taking the money manager’s ETF assets to $58 billion. ‘Too much money’ is not a phrase heard often on Wall Street, but for a thematic fund specialist like Ark, it could be a headache. The business Wood founded seven years ago invests in future-focused trends like genomics and robotics, and there are only so many stocks that fit the bill.”

February 19 – Bloomberg (Dan Reichl): “Howard Lutnick, chief executive officer of Cantor Fitzgerald LP, said the dramatic rise in values of Bitcoin and Tesla Inc. was driven by retail investors in much the same manner that led to last month’s surge in GameStop Corp. shares. ‘With all due respect: What’s Tesla been? Why was Tesla up?’ Lutnick said… ‘It’s because retail kept buying it. Why is Bitcoin where it is? Because retail keeps buying it. This is just another form of the same thing. GameStop was Bitcoin and Tesla.”

February 16 – Bloomberg (Sarah Ponczek): “GameStop mania is off the front page, but the spirit that fed it still rules many corners of the market. Penny stocks are an area where sentiment remains boiling hot, earning the scrutiny of federal regulators. Way-off-exchange venues, where lightly regulated companies have repeatedly been drawn into social media-fueled trading vortexes, saw more than 1 trillion shares change hands in December for the first time in a decade. It happened again in January. This month, daily volume is tracking 64% above those levels, a pace that could push the monthly total toward 2 trillion.”

February 13 – Reuters (Noor Zainab Hussain, Uday Sampath and Joshua Franklin): “Richard Branson and Barry Sternlicht were among more than two dozen investor groups that filed with U.S. regulators… to raise new blank-check acquisition companies, setting a new record. The 28 filings for new special purpose acquisition companies (SPACs) underscore their growing appeal on Wall Street. SPACs raised a record $82 billion last year, and the trend has gathered further steam in the early weeks of 2021.”

Market Instability Watch:

February 18 – Financial Times (Aziza Kasumov and Colby Smith): “The drop in US government bond prices in the opening weeks of 2021 poses a threat to Wall Street’s record run, analysts and investors have said. High prices and vanishingly slim yields on Treasury bonds have provided a key support for equities since the shock of the coronavirus outbreak last year. But, stung by expectations for rising inflation, yields have swept higher, with the 10-year benchmark yield briefly touching 1.3% this week, from a little above 0.9% at the start of the year. Already, February is shaping up to provide one of the biggest monthly increases in yields since 2018. Investors are now scrambling to identify the potential tipping point for equities.”

February 18 – Reuters (Dhara Ranasinghe and Karin Strohecker): “In May 2013, bond investors threw a tantrum after hints the U.S. Federal Reserve might slow the money-printing presses. A similar selloff now, with another $70 trillion added to global debt, could prove to be far more vicious. A 2013-style ‘taper tantrum’ was named as one of the top market risks in BofA’s February poll of fund managers who fear a pick-up in inflation expectations might soon persuade central banks to start withdrawing or ‘tapering’ stimulus. Some like former U.S. Treasury Secretary Larry Summers even predict this will happen sooner than anticipated if huge government spending sparks runaway inflation.”

February 17 – Bloomberg (Stephen Spratt): “U.S. Treasuries are in for more wild gyrations, with volatility markets signaling that the benchmark bond yield could surge or drop by almost 30 bps in the next three months. The three-month implied volatility on 10-year swap rates -- a measure of how much bonds are expected to move -- jumped by the most since March on Tuesday, surpassing the levels heading into the 2020 U.S. election. With the move, what’s known as the terminal breakeven indicates that traders are pricing for 10-year Treasury yields to either jump to 1.6%... from current levels, or drop all the way back to 1%.”

February 16 – Bloomberg (Paul Dobson and Stephen Spratt): “U.S. investors return Tuesday from the Presidents’ Day holiday to find the reflation trade in full force and global bond markets in retreat. How bad can it get for fixed-income investors, and where can they find solace? It’s the worst start to a year for the Bloomberg Barclays Global Aggregate Index since 2013. Bonds fell in the first months of that year even before the so-called taper tantrum, when then-Federal Reserve Chairman Ben Bernanke triggered a jump in yields by suggesting the central bank could begin to reduce asset purchases.”

February 17 – Bloomberg (Lilian Karunungan): “Weakness in both the dollar and euro is posing a dilemma for investors about which is the best source of funding for emerging-market carry trades. On balance, the U.S. currency is still first choice. The dollar has been sliding since the second quarter of 2020 as the Federal Reserve cut interest rates to a record low and spiraling coronavirus infections pummeled the U.S. economy. The euro has begun a swoon of its own in recent weeks, briefly dropping below the key $1.20 level, as delays in coronavirus vaccinations sets back expectations for a European economic recovery.”

February 17 – Bloomberg (Yakob Peterseil): “The world’s largest volatility ETF topped $2.5 billion in assets for the first time, prompting speculation that Reddit traders have turned their attention to betting on market turmoil. The ProShares Ultra VIX Short-Term Futures ETF (ticker UVXY) has nearly doubled its assets this year amid a streak of inflows that included a record $280 million in a single day. Such growth in a ‘relatively obscure’ exchange-traded fund has the likes of Michael Purves of Tallbacken Capital Advisors LLC pointing the finger at the newbie day traders shaking up Wall Street. ‘Why the UVXY is growing exponentially likely has something to with its growing attention in social media platforms like Reddit/WSB,’ Tallbacken’s CEO wrote in a recent note. He noted that the security has been the subject of postings on the WallStreetBets forum…”

February 17 – Bloomberg (Katie Greifeld): “Investors are building bets against the largest corporate debt exchange-traded fund as spreads shrink and interest rates rise. Short interest as a percentage of shares outstanding on the $48 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) jumped to more than 15%, up from 5.9% at the start of the year, according to… IHS Markit Ltd. That’s the highest level since last March, when high-quality bonds sold off as investors raced to raise cash in the face of a quickly spreading pandemic.”

Inflation Watch:

February 17 – Yahoo Finance (Brian Cheung): “Federal Reserve officials are offering a delicate message about the post-pandemic economy: expect prices to rise, but not to the point of runaway inflation. ‘I don't expect inflation to be a problem, in part because I think the Fed will take care of it if it does become a problem,’ Boston Fed President Eric Rosengren said… Rosengren, along with other Fed officials, have said in recent weeks that a snapback in economic activity could push prices up — but only moderately. Kansas City Fed President Esther George said… air travel and restaurant prices could rise as the vaccine brings back normal economic activity. And in Texas, Dallas Fed President Robert Kaplan pointed to firmer gasoline prices and temporary issues in the supply chains for semiconductors, wood products, metals and packaging products.”

February 17 – Bloomberg (Lucia Mutikani): “U.S. producer prices increased by the most since 2009 in January as the cost of goods and services surged, suggesting inflation at the factory gate was starting to creep up. The producer price index for final demand jumped 1.3% last month, the biggest gain since December 2009 when the government revamped the series, the Labor Department said on Wednesday. That followed a 0.3% rise in December. In the 12 months through January, the PPI accelerated 1.7% after rising 0.8% in December. A 1.3% rise in the prices of services accounted for two-thirds of the increase in the PPI. That was the biggest gain since December 2009…”

February 16 – Bloomberg (Michael Hirtzer, Megan Durisin and Tatiana Freitas): “There are signs that the food inflation that’s gripped the world over the past year, raising prices of everything from shredded cheese to peanut butter, is about to get worse. The Covid-19 pandemic upended food supply chains, paralyzing shipping, sickening workers that keep the world fed and ultimately raising consumer grocery costs around the globe last year. Now farmers… are getting squeezed by the highest corn and soybean prices in seven years. It’s lifted the costs of feeding their herds by 30% or more. To stay profitable, producers including Tyson Foods Inc. are increasing prices, which will ripple through supply chains and show up in the coming months as higher price tags for beef, pork and chicken around the world.”

February 18 – Wall Street Journal (Joe Wallace): “It has rarely been more expensive to move sugar, coffee and copper around the world by sea. Ocean freight rates began to soar last summer, and haven’t let up. That is partly because consumers, unable to spend money in restaurants, have splashed out on goods that move by sea. Retailers and manufacturers, meanwhile, have rushed to rebuild inventories. The shortage of 40-foot steel shipping containers has snarled global supply chains for commodities, hiking prices for some raw materials… At $4,709 per container, rates from Asia to the U.S. West Coast are almost four times higher than they were in March 2020. For taking goods to the East Coast, rates have more than doubled to $5,658 per container.”

February 16 – Reuters (Richa Naidu and Siddharth Cavale): “Kraft Heinz Co and Conagra Brands Inc said they may choose to raise prices this year on some products that use wheat, sugar and other commodities that are becoming increasingly expensive due to high demand. Conagra CEO Sean Connolly said the company, which makes Duncan Hines cake mixes and Marie Callender’s pulled pork mac and cheese bowls, will need to implement inflation-justified price increases this year…”

February 16 – Wall Street Journal (Ryan Dezember): “Lumber prices have shot to fresh records, defying the normal winter slowdown in wood-product sales in a sign that the pandemic building boom is bowling into 2021. Records have been set across species, products and grades, according to pricing service Random Lengths. It has never cost more to buy oriented strand board, known as OSB and used for walls, Southern yellow pine, which is favored for fences and decks, or ponderosa pine, which is popular in cabinetry and interior trim.”

Biden Administration Watch:

February 16 – Bloomberg (Laura Davison and Erik Wasson): “The House is aiming to vote Feb. 26 on President Joe Biden’s $1.9 trillion stimulus plan, as Democrats pivot quickly to their top priorities after Donald Trump’s impeachment trial ended in acquittal. House Majority Leader Steny Hoyer laid out the schedule in a call with fellow Democrats… The tight timeline reflects the urgency to approve another round of stimulus payments, jobless compensation and funding for schools and vaccines before key benefits from the last round of pandemic aid expire on March 14. In less than four weeks, Democrats are attempting to pass a bill out of the House and get all 50 Senate Democrats to back the legislation.”

February 16 – Financial Times (Chris Giles): “Joe Biden’s strategy for the US economy is the most radical departure from prevailing policies since Ronald Reagan’s free market reforms 40 years ago. With plans for public borrowing and spending on a scale not seen since the second world war, the administration is undertaking a huge fiscal experiment. The whole world is watching. If Biden’s coronavirus recovery plans are vindicated, they will demonstrate it is possible to ‘build back better’ from the pandemic and that advanced economies have been overly obsessed with inflation for the past 30 years. It will put government back at the heart of day-to-day economic management. If the plan comes off, it will show that unnecessary timidity in recent decades has let millions suffer unnecessary unemployment, starved many areas of opportunities for improved living standards and widened inequalities.”

February 14 – Financial Times (Demetri Sevastopulo and Donato Paolo Mancini): “The White House has called on China to hand over data from the early stages of the coronavirus pandemic and expressed ‘deep concerns’ about a World Health Organization fact-finding mission to Wuhan. After a four-week visit to Wuhan…, the WHO this week said it was ‘extremely unlikely’ that the pathogen had leaked from a Chinese laboratory… ‘We have deep concerns about the way in which the early findings of the Covid-19 investigation were communicated and questions about the process,’ Jake Sullivan, national security adviser, said…”

February 16 – Wall Street Journal (Dylan Tokar): “The U.S. Securities and Exchange Commission’s acting Democratic leadership hasn’t wasted time letting Wall Street know a new cop is on the beat. SEC Acting Chair Allison Herren Lee last week said the regulator would roll back a policy giving publicly traded companies greater certainty about whether they will be able to maintain access to key regulatory exemptions after settling securities law violations. The move came as the SEC awaits the confirmation of Gary Gensler , President Biden’s nominee to head the agency. The policy reversal followed another move to return discretion to SEC enforcement staff to approve formal investigation orders.”

Federal Reserve Watch:

February 18 – Bloomberg (Rich Miller): “Federal Reserve staff members gave a potentially more worrisome assessment of the risks to financial stability in the central bank’s policy meeting last month than the one presented publicly by Chair Jerome Powell. …Powell called financial stability vulnerabilities overall ‘moderate.’ Central bank staff gave a less sanguine assessment in their presentation at the January meeting, telling policy makers that vulnerabilities on balance were ‘notable,’ according to the minutes of the gathering… In their detailed presentation to the FOMC last month, Fed staff ‘assessed asset valuation pressures as elevated’ -- their highest characterization of risk.”

February 17 – Bloomberg (Matthew Boesler and Steve Matthews): “Federal Reserve officials in January expected it would be ‘some time’ before conditions to scale back their massive bond purchases were met, leaving open the question of whether any tapering could start before 2022. ‘With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved,’ according to minutes of their Jan. 26-27 gathering… The account reinforced the dovish message from Fed Chair Jerome Powell, who said last week that the U.S. is ‘very far from a strong labor market whose benefits are broadly shared,” noting employment was still nearly 10 million jobs below levels that prevailed before the coronavirus pandemic began.’”

February 16 – Reuters (Howard Schneider): “The United States could face financial stress even as the pandemic eases if homeowners and businesses fall behind on mortgages and business leases while the economy recovers, Kansas City Federal Reserve President Esther George said… George’s remarks… injected a note of caution to the generally optimistic view that her colleagues and private forecasters have of the coming year… The risk, she said, is that mortgages that have been put into forbearance during the pandemic will fall officially into arrears, while businesses that may have paid their rent using the proceeds of government loans will now have to fend for themselves.”

February 16 – Bloomberg (Matthew Boesler and Steve Matthews): “Federal Reserve officials said the economy continues to be disrupted by the pandemic with one regional central bank chief dismissing the threat that inflation could get out of hand. ‘I don’t think that’s a risk we should think about right now,’ San Francisco Fed President Mary Daly told a virtual discussion... ‘We should be less fearful about inflation around the corner and recognize that fear costs millions of jobs.’ She is a voter on monetary policy this year.”

February 17 – Reuters (Howard Schneider): “Inflation is unlikely to hit the Federal Reserve’s 2% target on a sustained basis at least through 2022, Boston Fed President Eric Rosengren said…, adding that he was not concerned about an immediate jump in prices that is expected to occur as the coronavirus pandemic eases… ‘Food and energy prices may go up as certain areas of the economy are facing some shortages,’ Rosengren said. ‘But what we really want for inflation is kind of the broad-based inflation rate to be at a sustained level of 2%. I don’t think we are going to see that this year. I would be surprised if we see it before the end of next year.’”

U.S. Bubble Watch:

February 17 – Reuters (Lucia Mutikani): “U.S. retail sales rebounded sharply in January after households received additional pandemic relief money from the government, suggesting a pick-up in economic activity after being restrained by a fresh wave of COVID-19 infections late last year… Retail sales surged by a seasonally adjusted 5.3% last month after decreasing 1.0% in December. Economists polled by Reuters had forecast sales increasing 1.1% in January. Retail sales increased 7.4% from a year ago.”

February 19 – CNBC (Diana Olick): “After a brief pullback in December, homebuyers returned to the market, although they are still being hampered by record low supply… Sales ended the month at a seasonally adjusted, annualized rate of 6.69 million units, which was 23.7% higher compared with January 2020. That is the second-highest sales pace since April 2006… There were 1.04 million homes for sale at the end of January, a 26% drop from a year ago. At the current sales pace, there is now a 1.9-month supply, the lowest since the Realtors began tracking this metric in 1982… The lack of supply in the face of strong demand continues to push prices higher and higher. The median price of an existing home sold in January was $303,900, a 14.1% increase from January 2020. That is the highest January price that the Realtors have ever recorded.”

February 18 – Bloomberg (Reade Pickert): “Applications for U.S. state unemployment insurance jumped to a four-week high, indicating the labor market is suffering fresh setbacks even as the coronavirus pandemic shows signs of ebbing. Initial jobless claims in regular state programs totaled 861,000 in the week ended Feb. 13, up 13,000 from the prior week… Last week’s report had originally shown a decrease but was revised up to show a 36,000 increase.”

February 18 – Bloomberg (Olivia Rockeman): “U.S. home-construction starts fell in January for the first time in five months, signaling that rising residential real estate prices may be constraining buyer demand. Residential starts dropped by 6% from the prior month to a 1.58 million annualized rate… The median in a Bloomberg survey… had called for a decline to a 1.66 million annualized rate… Single-family housing starts, which were at the highest since 2006 by the end of last year, decreased by 12.2% to a 1.16 million pace. Multifamily starts, which tend to be volatile, surged 17.1% to a 418,000 pace, the fastest since July.”

February 17 – CNBC (Diana Olick): “Another week of rising rates spurred homeowners and buyers to pull back from the mortgage market, and the trend is not expected to turn any time soon. Total mortgage application volume fell 5.1% last week from the previous week… Mortgage applications to purchase a home fell 6% for the week and were 15% higher than a year earlier.”

February 17 – Reuters (Jonnelle Marte): “The coronavirus pandemic changed the way U.S. consumers use credit, as lower interest rates spurred a boom in home buying and refinancing and virus-related shutdowns led to a drop in credit card use and an increase in paying off debt, according to… the New York Federal Reserve. Total household debt last year increased by $414 billion to $14.56 trillion at the end of December… Mortgage balances, which make up the largest share of household debt, grew by $182 billion in 2020 - the largest increase since 2007.”

February 17 – Reuters (Howard Schneider): “Long one of the nation’s ‘it’ destinations, San Francisco was already a land of unaffordable housing before the coronavirus hit, and with the median single-family home price still hovering above $1.5 million even as of December thousands of residents are leaving the Golden Gate city. Data from high-tech sources like cellphone location trackers to old-school change-of-address forms have started to put some scale around the reversal of fortune…, with anywhere from 1.5% to perhaps 3% of its population exiting for surrounding counties or other states over the past year. Housing prices are beginning to follow suit. ‘The Bay Area is hurting,’ cellphone data firm Unacast here said in an analysis concluding that about 46,000 people had left the Bay Area's 10 counties…”

February 17 – Wall Street Journal (Inti Pacheco): “Executives and directors at Pfizer Inc., Moderna Inc. and other companies developing Covid-19 vaccines sold approximately $496 million of stock last year, reaping rewards of positive vaccine developments that drove up the value of the drugmakers’ shares.”

Fixed Income Watch:

February 15 – Wall Street Journal (Sam Goldfarb and Matt Wirz): “Investors’ near-insatiable demand for even the riskiest corporate debt is fueling a Wall Street lending boom, offering lifelines for struggling companies even as the coronavirus pandemic still drags on the economy. Companies… have issued a record $139 billion of bonds and loans with below-investment-grade ratings from the start of the year through Feb. 10, according to… a unit of S&P Global Market Intelligence. More than $13 billion of that debt had ratings triple-C or lower—the riskiest tier save for outright default—about twice the previous record pace. Despite the onslaught of new bonds, riskier companies can now borrow at interest rates once reserved for the safest type of debt.”

February 16 – Wall Street Journal (Frances Yoon): “A gap has opened up between rates on junk bonds from China and the U.S., fueling interest in higher-yielding Chinese debt. This year is likely to bring a series of defaults from China after a string of blowups in 2020. But some investors say they are being compensated well for the risk—and Chinese companies are still less likely to run into financial trouble than their American counterparts. As of Monday, yields on an ICE BofA index of Chinese offshore high-yield corporate bonds stood at 9.18%, a roughly 4.5-percentage-point premium over U.S. yields. That gulf has largely been driven by a rally pushing down U.S. yields and contrasts with an average difference over the last 10 years of 2.15 percentage point. At the same time, about 2.5% of Chinese offshore high-yield debt by face value is likely to default this year, according to forecasts from JPMorgan…”

February 16 – Bloomberg (Shahien Nasiripour): “The largest U.S. banks increased their holdings of federally-backed mortgage securities by about $7 billion during the first week of February, raising their total stake to a record 15.8% of their combined assets… The share of safe assets -- virtually riskless investments such as cash, Treasuries, and securities effectively guaranteed by the U.S. government -- dropped to 34.3% from 34.5%. Loans and leases were little changed at 50.2% of total assets. As a percentage of deposits, loans and leases fell to 63.4% -- a record low. As a percentage of total assets, Treasuries and agency securities were the highest since Dec. 14, 1994.”

February 16 – Bloomberg (Jeremy Hill and Katherine Doherty): “The city of Chicago took a hit last week with a large hospital system entering bankruptcy, underscoring the distress that’s building in the health-care sector. Mercy Hospital and Medical Center filed for bankruptcy on Wednesday… It has had financial problems since the 1990s. Hardship is spreading through the U.S. health-care system, with costs of treating Covid-19 patients climbing while more profitable procedures are limited. A total of 22 large health-care related companies filed for bankruptcy in 2020…”

China Watch:

February 16 – CNBC (Silvia Amaro): “China dethroned the U.S. last year to become Europe’s top trading partner for the first time… European Union exports to China grew by 2.2% last year and imports rose by 5.6%. In comparison, exports to the U.S. dropped by 8.2% and imports fell by 13.2%. The latest figures… showed that China now has an even bigger role in how European economies perform.”

February 18 – Reuters (Stella Qiu, Sophie Yu, Brenda Goh): “China’s air passenger traffic fell 45.16% year-on-year over Lunar New Year, the aviation regulator said…, though signs of a quick recovery are emerging due to the country’s success in curbing domestic transmission of the COVID-19 virus.”

Global Bubble Watch:

February 17 – Bloomberg (Sydney Maki): “The world has never been more indebted after a year of battling Covid-19. And there’s even more borrowing ahead. Governments, companies and households raised $24 trillion last year to offset the pandemic’s economic toll, bringing the global debt total to an all-time high of $281 trillion by the end of 2020, or more than 355% of global GDP, according to the Institute of International Finance. They may have little choice but to keep borrowing in 2021, said… director of sustainability research Emre Tiftik and economist Khadija Mahmood.”

February 17 – Reuters (Patturaja Murugaboopathy): “Global companies are raising vast amounts of money through convertible bonds this year, as soaring stock markets lift demand for these bonds which give investors the option to change into equity shares at a later date. Refinitiv data showed that companies have issued $19.7 billion worth of convertible bonds in the first seven weeks of 2021, the biggest in three years for comparable periods. U.S. companies borrowed $8.6 billion in convertible bonds during this time, while Chinese firms issued $7.2 billion…”

February 15 – Financial Times (Benjamin Parkin and Mercedes Ruehl): “Authorities in Asia are clamping down on digital lenders, stepping up to rein in a sector that has charged ahead with little oversight in credit-hungry large economies such as India and Indonesia. Apps and websites offering easy loans have proliferated in India and south-east Asia, where hundreds of millions of people are unable to access the formal credit system. In India, 190m people did not have bank accounts as of 2017, according to the World Bank, along with 95m in Indonesia. But officials have struggled to control the fast-growing sector. While many apps are licensed, thousands operate illegally.”

Social, Political and Environmental Instability Watch:

February 17 – Bloomberg (Ari Natter and Jennifer A. Dlouhy): “Federal regulators warned Texas that its power plants couldn’t be counted on to reliably churn out electricity in bitterly cold conditions a decade ago, when the last deep freeze plunged 4 million people into the dark. They recommended that utilities use more insulation, heat pipes and take other steps to winterize plants -- strategies commonly observed in cooler climates but not in normally balmy Texas. ‘Where did those recommendations go, and how were they implemented?’ said Jeff Dennis, managing director of Advanced Energy Economy… ‘Those are going to be some pretty key questions.’”

February 17 – Reuters (Go Nakamura and Brad Brooks): “Texas officials warned of ‘disasters within the disaster’ of historic cold weather that left millions without heat for a third day on Wednesday, telling residents to prepare for energy to not return until the weekend. Residents in over 100 counties in Texas have been told to boil their drinking water as treatment plants continue to suffer from energy blackouts, officials said. Upward of 12 million people in the state -- the country’s second largest with a population of roughly 29 million -- have either have no drinking water on tap in their homes or have drinking water available only intermittently.”

February 18 – Associated Press (Matthew Daly and Ellen Knickmeyer): “Deadly weather will be hitting the U.S. more often, and America had better get better at dealing with it, experts said Wednesday as Texas and other states battled winter storms that blew past the worst-case planning of utilities, governments and millions of shivering citizens. This week’s storms… fit a pattern of worsening extremes under climate change and demonstrate anew that local, state and federal officials have failed to do nearly enough to prepare for greater and more dangerous weather.”

February 16 – Bloomberg (Brian K Sullivan and Naureen S Malik): “The energy crisis crippling power grids across the U.S. showed no sign of abating on Tuesday morning as blackouts left almost 5 million customers without electricity during unprecedented cold weather. To prevent the collapse of their networks, suppliers from North Dakota to Texas are having to institute rolling power cuts for the second consecutive day to limit demand.”

February 17 – Bloomberg (Javier Blas and Sheela Tobben): “Total U.S. oil production has plunged by close to 40% -- the most ever -- as an unprecedented cold blast freezes well operations across the central U.S… Crude output has now fallen by more than 4 million barrels a day nationwide…”

February 16 – Bloomberg (Isis Almeida and Kim Chipman): “The deep freeze that has left almost five million Americans without power is snarling shipments of goods from corn to soybeans, shutting meat plants and curbing ethanol production. Traders say it’s increasingly hard to move grain to ports in the Pacific Northwest, and ice warnings are restricting navigation on the Illinois River. Energy costs soared, prompting some ethanol and soybean processing plants to slow down, said the traders, who asked not to be identified because the information is private. Cargill Inc. is curbing energy use while Archer-Daniels-Midland Co. slowed production at several locations due to gas shortages. Tyson Foods Inc. was among meat producers forced to shut plants in Texas.”

February 16 – Wall Street Journal (Jacob Bunge): “Bitter cold and power outages have created a crisis for some Texan farms and ranches, leaving livestock dead from exposure and raising fears that herds could run short of food and water. Forced shutdowns of plants that process milk and make animal feed are disrupting the state’s agricultural supply chains, industry executives said. Some farmers are being forced to dump tankers of milk on fields because it can’t be processed, and state agriculture officials feared livestock may have to be euthanized if they cannot be watered and fed. ‘No feed, no water, and no heat doesn’t make for a good situation,’ said Sid Miller, Texas agriculture commissioner.”

February 17 – Financial Times (Tim Bradshaw and Edward White): “The Arctic weather sweeping through Texas is threatening to exacerbate a global shortage in semiconductors, after several manufacturing plants near Austin were forced to shut down. Austin’s local energy provider has asked all large-scale manufacturers to reduce or shutter operations during the storm in order to give priority to residential and healthcare customers… One of the region’s largest semiconductor producers, Samsung Electronics, said it had halted operations at its multibillion-dollar fabrication plant in Austin on Tuesday, with no clear timeline for resuming production.”

February 18 – Bloomberg (Joe Carroll, Javier Blas and Jennifer A. Dlouhy): “Texas is restricting the flow of natural gas across state lines in an extraordinary move that some are calling a violation of the U.S. Constitution’s commerce clause. Texas Governor Greg Abbott… told a media briefing that he was banning gas from leaving the state through Feb. 21 to ensure in-state power generators had ample supplies. But a copy of Abbott’s order seen by Bloomberg showed he’s requiring Texas gas be offered for sale in-state before being shipped elsewhere. Under the Constitution’s so-called commerce clause, state governments are prohibited from interfering in interstate trade. Abbott said a disaster declaration he issued on Feb. 12 gave him latitude to impose such restrictions.”

February 16 – Bloomberg (Mark Chediak): “To get a sense of the magnitude of the power crisis hitting Texas, take a look at how it compares to the blackouts that roiled California last summer during a searing heat wave. The California grid was short about 1 to 2 gigawatts for two evenings, while Texas has been short about 15 to 25 gigawatts for two straight days, according to Andy DeVries, a power analyst at CreditSights… ‘It’s not even off the charts, it’s a different ball game,’ DeVries said. ‘This is like a fundamental historic failure here. It’s mind boggling.’”

Central Bank Watch:

February 16 – Bloomberg (Toru Fujioka and Sumio Ito): “A three-decade high for Japan’s soaring stocks is adding to pressure on the Bank of Japan to tweak its buying of exchange-traded funds, according to the former head of its financial markets department. ‘Shares could be rising on a bubble and the BOJ could be helping inflate that bubble,’ Hiromi Yamaoka said…, the same day the Nikkei 225 Stock Average topped 30,000 for the first time since 1990. ‘The bank will be held responsible if it continues to buy ETFs without making any changes.’ The former official in charge of the BOJ’s asset-buying operations made the remarks ahead of a policy review into the effectiveness and flexibility of the central bank’s easing program, including its ETF purchases.”

EM Watch:

February 14 – Reuters (Kanishka Singh): “Argentina's Vice President Cristina Fern├índez de Kirchner and her allies want to delay a $44 billion debt deal with the International Monetary Fund until the COVID-19 pandemic has eased…”

Europe Watch:

February 14 – Financial Times (Miles Johnson): “A short oath delivered at the presidential palace in Rome… completed Mario Draghi’s transformation from central bank chief to front-line politician. Draghi has already shown he will bring the same calibrated discretion to his new role as Italy’s prime minister that he wielded when he was president of the European Central Bank. The births of recent Italian governments have typically involved backroom briefings, leaks and frenzied lobbying for top ministerial portfolios. This time, however, Draghi deliberately kept the leaders of the main political parties in the dark until the last minute on who among their ranks would make his new national unity government.”

February 16 – Reuters (John O’Donnell): “Unpaid debt from pandemic-stricken borrowers has ravaged profits at Europe’s big banks and kick-started a debate among politicians about whether they may ultimately need state help… Were it not for government support, they estimated roughly a quarter of EU firms could have been in trouble at the end of last year and cautioned that banks’ provisions for such losses did not reflect the ‘underlying deterioration’. Roughly 587 billion euros ($712bn) of loans were under moratoria and 289 billion euros of credit had been given on the back of public guarantees…”

February 13 – Reuters (Joan Faus and Luis Felipe Castilleja): “Separatist parties won enough seats… in Catalonia’s regional parliament to strengthen their majority, although a strong showing for the local branch of Spain’s ruling Socialists pointed to a dialogue, rather than breakup, with Madrid.”

Japan Watch:

February 14 – Bloomberg (Yuko Takeo and Toru Fujioka): “Japan’s economy clocked another quarter of double-digit growth and finished the pandemic year in better shape than initially expected, signaling potential for a more sure-footed recovery once a damaging state of emergency ends. Gross domestic product grew an annualized 12.7% from the prior quarter in the three months through December…”

Leveraged Speculation Watch:

February 16 – Bloomberg (Laura Davison): “Three House Democrats are pushing legislation that would repeal the carried-interest tax break used by fund managers to reduce the levies they owe to the Internal Revenue Service. The bill would close the carried-interest tax break and require many hedge-fund and private-equity managers to pay higher ordinary income-tax rates, rather than the lower rates on capital gains... ‘The ability of private-equity and hedge-fund financiers to use the loophole impacts income inequality, as this tiny subset of executives make up some of the wealthiest citizens in the world,’ the lawmakers said…”

Geopolitical Watch:

February 19 – Reuters (Ben Blanchard): “Taiwan’s air force scrambled… after eight Chinese fighter aircraft flew into the southwestern part of its air defence zone in another display of stepped-up military activity around the democratic island. Beijing… says it is responding to what it calls ‘collusion’ between Taipei and Washington, Taiwan’s main international backer and weapons supplier. The Taiwanese Defence Ministry said four Chinese J-16s and four JH-7s as well as an electronic warfare aircraft flew near the Taiwan-controlled Pratas Islands in the top part of the South China Sea.”

February 16 – Reuters (Jeff Mason): “China will pay a price for its human rights abuses, U.S. President Joe Biden warned…, responding to queries… on the Asian nation’s handling of Muslim minorities in its far western region of Xinjiang. Chinese President Xi Jinping has drawn global criticism for holding the minority Uighurs in internment camps and other human rights abuses. ‘Well, there will be repercussions for China and he knows that,’ Biden said of Xi…”

February 16 – Reuters (Matthew Tostevin and Robert Birsel): “Hundreds of thousands of people marched in Myanmar on Wednesday, rejecting the army’s assertion that the public supported its overthrow of elected leader Aung San Suu Kyi and saying they would not be cowed in their bid to end military rule.”

Friday Evening Links

[Yahoo/Bloomberg] U.S. Stocks Edge Lower While Bonds Extend Losses: Markets Wrap

[Reuters] Treasuries - Longer-term yields soar, 30-year TIPS yield turns positive 

[Reuters] Wall Street little changed as cyclicals shine, big tech falls

[Reuters] At Biden's G7 debut, leaders look beyond COVID to trade and China

[Reuters] Fed's Rosengren says large fiscal package appropriate, hopes for full employment within two years

[Yahoo/Bloomberg] Fracking Activity Falls to Record Low on Freeze: Energy Update

[Yahoo/Bloomberg] Munis Retreat From Record Highs in Worst Week Since April