Friday, May 7, 2021

Weekly Commentary: Generational Turning Point

There is an overarching issue I haven’t been able to get off my mind: Are we at the beginning of something new or in the waning days of the previous multi-decade cycle?

May 5 – Wall Street Journal (James Mackintosh): “We could be at a generational turning point for finance. Politics, economics, international relations, demography and labor are all shifting to supporting inflation. After more than 40 years of policies that gave priority to the fight against rising prices, investor- and consumer-friendly solutions are becoming less fashionable, not only in the U.S. but in much of the world. Investors are woefully unprepared for such a shift, perhaps because such historic turning points have proven remarkably hard to spot. This may be another false alarm, and it will take many years to play out, but the evidence for a general shift is strong across five fronts.”

The “five fronts” underscored in Mr. Mackintosh’s insightful piece are as follows: 1) “Central banks, led by the Federal Reserve, are now less concerned about inflation.” 2) “Politics has shifted to spend even more now, pay even less later.” 3) “Globalization is out of fashion.” 4) “Demographics worsen the situation.” 5) “Empowered labor puts upward pressure on wages and prices.”

The analysis is well-founded, as is the article’s headline: “Everything Screams Inflation.” After surging another 3.7% this week (lumber up 12%, copper 6%, corn 9%), the Bloomberg Commodities Index has already gained 20% this year. Lumber enjoys a y-t-d gain of 93% - WTI Crude 34%, Gasoline 51%, Copper 35%, Aluminum 26%, Steel Rebar 32%, Corn 51%, Soybeans 22%, Wheat 19%, Coffee 18%, Sugar 13%, Cotton 15%, Lean Hogs 59%... The focus on inflation is clearly justified. Yet Mackintosh began his article suggesting a “Generational Turning Point for finance” - rather than inflation. Let’s explore…

I mark the mid-eighties as the beginning of the current super-cycle. A major collapse in market yields (following the reversal of Paul Volcker’s tightening cycle) promoted financial innovation and the expansion of non-bank Credit expansion. Markets were turning increasingly speculative, while the economic boom was spurring increasingly destabilizing trade and Current Account Deficits. These deficits were helping feed Japan’s Bubble, fueled both by international financial flows as well as the misguided Japanese policy response seeking to use monetary stimulus to boost U.S. goods imports and rectify its ballooning trade surpluses. In the U.S., increasingly acute Monetary Disorder led to the “Black Monday” – October 19th, 1987 stock market crash.

The Greenspan Fed’s crash response launched a regime of activist central bank measures specifically directed at supporting the securities markets. U.S. stocks swiftly recovered, while loose financial conditions stealthily promoted the evolution of non-bank finance. Post-crash Bubble reflation developments cemented the “decade of greed” moniker. Michael Milken and the proliferation of junk bonds and leveraged finance. Insider trading, Ivan Boesky, the LBO boom, Charles Keating, and the Savings & Loan (S&L) fiasco. And, importantly, post-crash reflationary measures pushed Japan’s Bubble to catastrophic “Terminal Phase Excess.” After ending 1987 at 21,564, the Nikkei Index traded to an all-time high 38,916 on the final trading session in 1989.

All kinds of things went wrong in 1990 – including war and recession. Late-eighties U.S. bubbles burst in unison, including coastal real estate, junk bonds, LBOs, and the S&Ls. Japan’s Bubble began to unravel. Collapsing Bubbles left the U.S. banking system badly impaired, with multiple major failures and even concerns for the solvency of Citicorp. Already huge fiscal deficits were at risk of exploding uncontrollably, due to ballooning costs of bank and S&L recapitalizations.

“The Maestro” pushed central bank activism to a whole new level, collapsing rates and manipulating the yield curve. Banks were encouraged to borrow short (cheap) and lend long (dear), pocketing easy spread profits while rebuilding capital. Finance, financial structure and policymaking were changed forever. Importantly, Greenspan’s policies were a godsend to the fledgling leveraged speculating community that prospered on hugely profitable “carry trades” and levered derivatives strategies – and never looked back.

When the bond/derivatives Bubble burst in 1994, the rapidly expanding GSEs were elevated to quasi-central banks. The GSEs began aggressively buying debt securities during periods of market instability, creating a liquidity backstop that fundamentally altered the risk vs. reward dynamics of leveraged speculation and derivatives strategies more generally. With their implicit government debt guarantees, the GSEs enjoyed unlimited access to cheap market-based borrowings. Meanwhile, the Mexican bailout and global policy responses (including from the IMF) to a series of devastating EM Bubble collapses (SE Asian “Tigers” to Russia) reinforced the market perception that central banks, governments and inter-governmental agencies were all now fully committed to backstopping the rise of market-based “Wall Street finance”.

The 1998 LTCM bailout – and post-crisis GSE/Fed reflation measures – pushed the U.S. “tech” Bubble in 1999 to dangerous “Terminal Phase Excess.” The Fed’s post-tech Bubble reflationary measures then stoked the more expansive and systemic “mortgage finance Bubble”. And yet another post-Bubble reflation stoked this super-cycle’s “Terminal Phase” “global government finance Bubble.”

The pandemic erupted at a critical Bubble juncture. Speculative excess had already turned problematic. Financial and economic fragilities were manifesting globally, particularly in Bubble heavyweights U.S. and Chinese financial systems. In the summer of 2019, China was facing instability at its Credit system’s “periphery”, notably within the giant “small banking” sector. In the U.S., the eruption of repo market (a key source of finance for leveraged speculation) instability provoked the latest iteration of activist/inflationist monetary management – the so-called “insurance” monetary stimulus.

The Fed redeployed QE in the face of highly speculative markets (stocks near records) and unemployment at multi-decade lows. Arguably, this stimulus and resulting Bubble excess contributed to latent fragilities that erupted in near market collapse in March 2020. The Fed’s balance sheet has more than doubled (108%) in 86 weeks to $7.81 TN. A full-fledged mania erupted – stocks, cryptocurrencies, corporate Credit, SPACs, derivatives, houses, etc. Washington ran a $4.8 TN, or almost 25% of GDP, deficit in only 18 months.

Considering the unprecedented nature of recent excess, there is today every reason to contemplate a secular shift in inflation dynamics. The Fed is locked into runaway monetary inflation, while its new inflation-targeting regime specifically seeks to promote above-target inflation. Moreover, Washington had grown comfortable with massive deficits even prior to covid. Now, the Biden administration is pushing gargantuan spending programs, in what is a predictable political response to flagrant inequality and derelict infrastructure. There is also the astronomical cost of adjusting to climate change. Mr. Mackintosh’s above article highlights the major factors supporting the secular inflation thesis.

But what about finance? Central bank policies now command market trading dynamics, while government-related debt dominates system Credit expansion. There is every reason to believe state-directed lending, after reaching new extremes during the pandemic, will become only more obtrusive going forward. A compelling case can be made this new age of government directed finance and spending is now driving a new inflationary cycle.

However, I certainly don’t want to dismiss end-of-cycle dynamics. “Blow-off” dynamics, after all, are proliferating. One can start with the trajectory of the Fed’s balance sheet, along with unbounded fiscal deficit spending. There are, as well, myriad indications of “Terminal Phase” speculative excess, including numerous manias, over-leverage, ETF flows, corporate bond issuance, the Ark funds, etc. The breadth and scope of such extreme behavior portend change is in the offing.

These days, markets and about everyone anticipates that historic monetary and fiscal stimulus will continue to fuel historic asset bull markets. The existing cycle is very much intact, it is believed, with New Age central banking continuing to underpin unrestrained fiscal spending. But could both monetary and fiscal authorities have pushed things too far? Could we be nearing a major adjustment, where the respective interests of an expansive government and the markets finally diverge? Might a bout of market discipline catch Washington, along with about everybody, by complete surprise? A crazy thought.

This history of monetary inflation informs us that once it begins in earnest, it becomes extremely difficult to rein in. After expanding assets by $4.0 TN in about 18 months – and stoking historic manias in the process – any Fed retreat in the direction of “normalization” will prove highly destabilizing (a dynamic clearly not lost on Fed officials). A similar dilemma holds true for the Federal government after it’s $4.8 TN deficit spending free-for-all. Meanwhile, “melt-up” speculative market dynamics are similarly problematic. There is no reason to expect the type of historic excess we’ve been witnessing to end with a whimper.

All the key dynamics shaping finance have been pushed to such egregious “Terminal Phase” extremes. Shouldn’t we today be contemplating how such end-of-cycle dynamics might play out? A harsh market reaction to reckless Washington policymaking would appear long overdue. The flow of magma to the surface has been restricted for far too long. Could an inflation scare prove the catalyst for a market eruption?

Credit has been expanding rapidly throughout this most-protracted cycle. There has been tremendous debasement, yet for various reasons consumer price inflation remained relatively contained. Liquidity flowed into the securities and asset markets, while bond yields collapsed despite a historic increase in supply/issuance. Markets have been more than happy to accommodate huge fiscal spending and the attendant supply of government bonds. Of course it’s easy to extrapolate this wondrous dynamic far into the future.

But the markets’ failure to impose discipline had predictable consequences. Governments succumbed to late-cycle massive over-issuance, pushing the limits of market accommodation while also stoking general inflationary pressures. To this point, however, the Fed’s ongoing massive QE buying has masked deepening fragility. This has only emboldened deficit spending proponents, while throwing more fuel on both speculative manias and mounting pricing pressures throughout the real economy.

It all points to a major shakeout. An inflation upside surprise could come with momentous ramifications. The bond market would face major instability. Beyond debasement, there would be fear of a destabilizing de-risking/deleveraging dynamic taking hold. And market instability and illiquidity become even greater issues at the point when inflationary pressures weaken the Fed's propensity for quick QE liquidity injections. Suddenly, the marketplace would be forced to reassess the reliability of its coveted liquidity backstop.

There’s a scenario we need to contemplate: Mounting inflationary pressures spook the bond market concurrent with the Fed moving forward its plans to wind down QE and commence rate increases. Bond market instability unleashes a bout of de-risking/deleveraging, a particularly problematic development for a highly levered corporate bond complex, as well as quite speculative equities markets. In such a scenario, the Fed would be under intense pressure to employ large QE purchases to underpin marketplace liquidity. A failure to act would be highly destabilizing for the markets. At the same time, another huge bout of QE in a backdrop of heightened inflationary concerns might prove problematic for bond investors.

It is worth recalling the chaos that ensued early in the March 2020 pandemic policy response. Markets continued a panicky de-risking/deleverage even as the Fed announced major liquidity operations. It was not until the Fed ratcheted up the response to monumental liquidity injections that crash dynamics were reversed. But speculation and leverage have surely expanded significantly over the past year, raising the issue of the scope of the next QE bailout necessary to again hold Bubble collapse at bay.

I believe another massive QE bailout program is inevitable. And such a program in the face of rapidly building inflationary pressures would risk a bond market backlash. This could throw Fed monetary doctrine into disarray: does it inflate its balance sheet to provide liquidity support to the markets, or must it focus instead on reining in inflationary policy measures to stabilize unsettled bond markets? A crisis of confidence in Federal Reserve policymaking would be a distinct possibility. And such a scenario would risk ending the past three decades’ nexus between progressively activist monetary management and ever-expanding financial Bubbles.

Markets have enjoyed reliable liquidity backstops going back to the GSEs in the mid-nineties. When accounting irregularities eventually ended Fannie and Freddie's open-ended growth, the Fed’s balance sheet took over liquidity backstop operations. There are much different financial and economic worlds without a reliable Fed/central bank market liquidity backstop.

And while the assertion the Fed will always be there to backstop the markets has some merit, there are major challenges developing. Previous QE programs essentially directed liquidity into the markets. U.S. investment booms were for the most part disinflationary, with spending on new technologies, services, and digitized output creating an endless supply of “output” devoid of traditional upward pricing pressures.

Going forward, the investment boom will shift to infrastructure, along with a domestic manufacturing push. Climate change will require enormous investment in physical capital stock and associated manufacturing capacity. A strong case can be made this changing investment dynamic will play a significant role in evolving inflation dynamics. There will be tremendous demand for various commodities as well as skilled labor. Moreover, this will be a global phenomenon.

There were inflation concerns when the Fed initially employed QE in 2008. But that was in a post-Bubble backdrop replete with powerful real economy disinflationary forces. The liquidity and resulting inflationary effects remained largely contained within the securities markets. The “QE2” near doubling of the Fed’s balance sheet between 2011 and 2014 injected liquidity into a system with ongoing real economy disinflationary pressures, but with increasingly powerful inflationary Bubble Dynamics in the securities markets – at home and abroad. Market Bubbles, furthermore, fueled an investment boom throughout the expansive technology sector with minimal inflationary impacts upon the broader economy. Actually, the massive increase in supply of myriad technology gadgets, services and digitalized downloads acted as a sponge absorbing what would have traditionally been inflationary spending power.

There is already evidence the latest round of QE is fueling divergent inflationary dynamics. For one, it’s at such greater scope. Secondly, it has unfolded concurrently with unprecedented fiscal spending. Thirdly, QE was employed in an environment of already heightened real economy inflationary pressures – i.e. labor, housing, commodities, physical investment beyond new technologies, etc. And, finally, massive monetary stimulus comes following decades of inflationary dynamics that profoundly benefited securities prices and the wealthy at the expense of the working class. The inevitable social and political backlash, further energized by covid-related inequities, has spurred a flurry of wealth redistribution policy initiatives.

There is indeed every reason to contemplate the possibility of a momentous secular shift in inflation dynamics. This doesn’t necessarily mean CPI begins rising dramatically, although the likelihood of such an outcome is rising. But the strongest inflationary biases are poised to shift from the securities markets back to more traditional real economy impacts. This implies the Fed going forward will face obstacles in its “whatever it takes” open-ended QE doctrine. Rising inflation and a fragile bond market will force it to contemplate the risk of additional QE, while QE liquidity will now gravitate more toward inflationary dynamics within the real economy. This dynamic is already observable in booming commodities markets.

But back to the original question: Are we witnessing the start of something new - or the previous cycle’s end-game? There’s an understandable focus on how central banks and governments have hijacked Credit systems. To this point, this “money” has created an extraordinarily stable dynamic relative to runaway monetary inflation and debt growth.

Though bastardized by government intrusion, Credit remains dominated by market-based finance. Is this cycle of market-based Credit underpinned by activist central bank management sustainable? Or has the massive expansion of non-productive Credit, egregious monetary inflation, manic market excess and associated inflationary pressures created fragilities that place the existing financial structure at risk?

The Fed is in no hurry to find out. QE to the tune of $120 billion a month masks fragilities, while holding market adjustment at bay. And the mania rages on, while Washington luxuriates in blank checkbook overindulgence. Inflationary pressures mount. It’s worth noting the Dollar Index dropped 1.1% this week and is now only a couple percent from 2018 lows.

The future could not be murkier. Everyone is prepared for unchecked monetary and fiscal stimulus as far as the eye can see. But is existing market structure sustainable in a backdrop of unrelenting non-productive debt growth, rising inflation, waning central bank flexibility and shifting political priorities? A Bloomberg headline from Friday evening: “Reflation, Inflation, Deflation: Stocks Can Live With Everything.” I’m not convinced the financial Bubble can live without QE. Is massive monetary inflation the only thing sustaining a multi-decade market cycle?

For the Week:

The S&P500 gained 1.2% (up 12.7% y-t-d), and the Dow jumped 2.7% (up 13.6%). The Utilities fell 1.3% (up 4.7%). The Banks surged 4.3% (up 35.6%), and the Broker/Dealers gained 1.3% (up 23.6%). The Transports jumped 3.9% (up 27.5%). The S&P 400 Midcaps rose 1.7% (up 20.1%), and the small cap Russell 2000 added 0.2% (up 15.0%). The Nasdaq100 fell 1.0% (up 6.5%). The Semiconductors were little changed (up 11.3%). The Biotechs declined 1.4% (down 3.5%). With bullion rising $62, the HUI gold index surged 9.7% (up 0.7%).

Three-month Treasury bill rates ended the week at 0.005%. Two-year government yields declined two bps to 0.15% (up 2bps y-t-d). Five-year T-note yields fell seven bps to 0.78% (up 41bps). Ten-year Treasury yields dropped five bps to 1.58% (up 66bps). Long bond yields slipped two bps to 2.28% (up 63bps). Benchmark Fannie Mae MBS yields fell three bps to 1.81% (up 46bps).

Greek 10-year yields added a basis point to 0.99% (up 37bps y-t-d). Ten-year Portuguese yields rose three bps to 0.51% (up 48bps). Italian 10-year yields jumped six bps to 0.97% (up 42bps). Spain's 10-year yields added a basis point to 0.49% (up 44bps). German bund yields slipped a basis point to negative 0.22% (up 35bps). French yields increased one basis point to 0.17% (up 51bps). The French to German 10-year bond spread widened two to 39 bps. U.K. 10-year gilt yields dropped seven bps to 0.78% (up 58bps). U.K.'s FTSE equities index rose 2.3% (up 10.4% y-t-d).

Japan's Nikkei Equities Index rallied 1.9% (up 7.0% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.09% (up 7bps y-t-d). France's CAC40 jumped 1.9% (up 15.0%). The German DAX equities index gained 1.7% (up 12.3%). Spain's IBEX 35 equities index surged 2.8% (up 12.2%). Italy's FTSE MIB index rose 2.0% (up 10.7%). EM equities were mostly higher. Brazil's Bovespa index recovered 2.6% (up 2.5%), and Mexico's Bolsa rallied 2.6% (up 11.8%). South Korea's Kospi index gained 1.6% (up 11.3%). India's Sensex equities index increased 0.9% (up 3.0%). China's Shanghai Exchange declined 0.8% (down 1.6%). Turkey's Borsa Istanbul National 100 index surged 3.1% (down 2.4%). Russia's MICEX equities index jumped 3.9% (up 12.0%).

Investment-grade bond funds saw inflows of $3.851 billion, while junk bond funds posted outflows of $1.387 billion (from Lipper).

Federal Reserve Credit last week declined $17.5bn to $7.752 TN. Over the past 86 weeks, Fed Credit expanded $4.026 TN, or 108%. Fed Credit inflated $4.941 Trillion, or 176%, over the past 443 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.3bn to $3.543 TN. "Custody holdings" were up $198bn, or 5.9%, y-o-y.

Total money market fund assets fell $17.2bn to $4.512 TN. Total money funds dropped $256bn y-o-y, or 5.4%.

Total Commercial Paper declined $8.4bn to $1.206 TN. CP was up $138bn, or 12.9%, year-over-year.

Freddie Mac 30-year fixed mortgage rates slipped two bps to 2.96% (down 29bps y-o-y). Fifteen-year rates dipped one basis point to 2.30% (down 43bps). Five-year hybrid ARM rates jumped six bps to 2.70% (down 47bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 3.09% (down 57bps).

Currency Watch:

For the week, the U.S. dollar index dropped 1.1% to 90.233 (up 0.3% y-t-d). For the week on the upside, the Brazilian real increased 3.8%, the South African rand 3.1%, the Swedish krona 1.9%, the Australian dollar 1.7%, the Mexican peso 1.7%, the New Zealand dollar 1.6%, the Swiss franc 1.4%, the Norwegian krone 1.3%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.2%, the Japanese yen 0.7% and the Singapore dollar 0.5%. On the downside, the South Korean won declined 0.8%. The Chinese renminbi increased 0.65% versus the dollar this week (up 1.46% y-t-d).

Commodities Watch:

May 4 – Bloomberg (Gerson Freitas Jr. and Joe Deaux): “Commodities jumped to their highest in almost a decade as a rebound in the world’s largest economies stokes demand for metals, food and energy, while poor weather harms crops and transportation bottlenecks curb supplies. The Bloomberg Commodity Spot Index, which tracks prices for 23 raw materials, rose 0.8% Tuesday to its highest since 2011. The gauge has climbed more than 70% since reaching a four-year low in March of last year.”

May 5 – Reuters (Zandi Shabalala): “Copper hit a fresh 10-year high… as some of the world’s largest economies showed signs recovery from the COVID-19 impact, boosting expectations of increased demand.”

May 3 – Financial Times (Neil Hume, David Sheppard, Emiko Terazono and Henry Sanderson): “A broad and powerful rally in commodities markets has gathered steam in recent weeks, fuelling expectations among some traders and analysts that a ‘supercycle’ has kicked off as big global economies rev up in tandem. Strong demand from China, a boom in government spending on post-pandemic recovery programmes and bets on the ‘greening’ of the world economy have lifted the price of many important raw materials. Iron ore, the key ingredient needed to make steel, palladium, used by carmakers to limit harmful emissions, and timber all hit record highs in the past week. Key agricultural commodities including grains, oilseeds, sugar and dairy have also jumped, with corn prices above $7 a bushel for the first time in eight years.”

May 5 – Bloomberg (Isis Almeida and Fabiana Batista): “Crop prices are already at the highest levels in more than eight years, and with meat and fuel markets running hot, the rally may still have further to go. Meat producers and biofuel makers have so far seen a bull market of their own, passing on the increase in grain costs as the world emerges from the pandemic. Executives from Archer-Daniels-Midland Co. and Bunge Ltd., two of the world’s top agricultural commodities traders, say there are very few signs the rally is curbing demand. And the U.S. is approaching summer… which should only boost consumption further. Everything from corn to soybean oil has surged as top commodities buyer China scoops up U.S. supplies just as dry weather in Brazil fuels concerns about the size of crops in the South American agriculture powerhouse.”

May 5 – Bloomberg (Isis Almeida and Kim Chipman): “It’s the end of an era for open outcry commodities trading… The CME Group Inc. said… its last few remaining pits in Chicago where agricultural commodities options traders still yelled their bids will be close permanently. Futures transactions had already been fully replaced by electronic trading, while options pits had been active until March 2020, when Covid-19 measures forced them to be closed.”

The Bloomberg Commodities Index surged 3.7% (up 20.1% y-t-d). Spot Gold rallied 3.5% to $1,831 (down 3.6%). Silver surged 5.9% to $27.45 (up 4.0%). WTI crude gained $1.32 to $64.90 (up 34%). Gasoline rose 2.4% (up 51%), and Natural Gas added 0.9% (up 17%). Copper surged 6.3% (up 35%). Wheat jumped 3.7% (up 19%). Corn surged 8.8% (up 51%). Bitcoin declined $880, or 1.5%, this week to $57.141 (up 97%).

Coronavirus Watch:

May 7 – CNBC (Saheli Roy Choudhury): “India’s daily new Covid-19 cases crossed 400,000 for the third time this month as the country struggles to contain a devastating second wave. Health ministry data… showed there were 414,188 new cases over a 24-hour period, where at least 3,915 people succumbed to the disease.”

May 5 – CNN (Kevin Liptak): “The Biden administration, in a major decision…, said it would support easing patent rules on Covid-19 vaccines after intense internal debate and strong pushback from American drugmakers, potentially expanding the global supply and narrowing the vaccination gap between rich and poor nations.”

Market Mania Watch:

May 2 – Wall Street Journal (Gunjan Banerji): “Americans are all in on the stock market. Individual investors are holding more stocks than ever before as major indexes climb to fresh highs. They are also upping the ante by borrowing to magnify their bets or increasingly buying on small dips in the market. Stockholdings among U.S. households increased to 41% of their total financial assets in April, the highest level on record. That is according to JPMorgan… and Federal Reserve data going back to 1952…”

May 5 – Bloomberg (Vildana Hajric and Claire Ballentine): “Investors are piling back into some of the fringe corners of the cryptocurrency world, with the frenzy sending Dogecoin surging more than 50% again and crashing Robinhood’s trading app. Other so-called altcoins also took off, with Dash spiking 18% over a 24-hour period… and Ethereum Classic rising almost 45%. In the world of DeFi, tokens such as Force DAO and Tierion surged more than 1,000% on Tuesday, according to data. Meanwhile, Robinhood said it resolved earlier issues with crypto trading on its platform.”

May 6 – Financial Times (Philip Stafford and Joe Rennison): “Trading has boomed in cryptocurrency markets while volumes in stocks and derivatives have tumbled with an increasing number of daytraders and institutional investors setting their sights on more speculative assets. A slowdown in equities trading last month contrasted with a frenzied first quarter, during which activity jumped in ‘meme’ stocks like GameStop and AMC, turbocharging the profits of banks, brokers and market makers at the heart of global markets. Monthly data from exchanges, and public filings, indicated retail investors, who had helped fuel the surge in share trading for much of the last year, turned their attention to betting in cryptocurrency markets.”

May 5 – Reuters (Tom Wilson): “Meme-based virtual currency Dogecoin soared… to an all-time high, extending its 2021 rally to become the fourth-biggest digital coin. Dogecoin, launched as a satirical critique of 2013’s cryptocurrency frenzy, has climbed 41% in the last 24 hours to a record $0.68, according to CoinMarketCap. This year alone it has soared over 14,000%...”

May 5 – SF Gate (Tessa McLean): “When a house in Berkeley sold for more than $1 million over its list price in late March 2021, it was covered in media outlets across the Bay Area… While the Berkeley sale was particularly sensational — it sold for double its list price and received 29 offers — these individual stories are becoming more common… And that’s especially true in the East Bay. ‘People are not surprised when a home goes $1 million over,’ said Josh Dickinson, the founder of real estate agency Zip Code East Bay. ‘When my clients see a house for $1.9 million they’re almost conditioned to think it’ll go over $3 million in Piedmont or North Berkeley.’ While he acknowledges that overbidding has always been common in the Bay Area, this past year has been far more frantic, with additional bids per home and more aggressive offers.”

May 2 – Bloomberg (Yueqi Yang): “Robinhood Market Inc.’s largest source of revenue more than tripled in the first quarter as the trading app became immensely popular with young investors amid the meme-stock frenzy. Revenue from ‘payment for order flow,’ a system where market makers like Citadel Securities pay retail brokers including Robinhood for routing orders to them, reached about $331 million in the first quarter, up from $91 million a year ago…”

May 3 – Reuters (Shubham KaliaJohn Mccrank): “Robinhood Financial… struck back against comments by Warren Buffett that likened the retail brokerage to a casino that encourages millions of inexperienced day traders to place short-term stock market bets… Buffett said Robinhood has attracted, ‘maybe set out to attract,’ large numbers of people who just gamble on short-term price movements… Charlie Munger, was harsher, saying it was ‘god-awful that something like that would draw investment from civilized man and decent citizens.’ ‘If the last year has taught us anything, it is that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they are the only oracles of investing,’ Robinhood's Head of Public Policy Communications, Jacqueline Ortiz Ramsay, said…” ‘And at Robinhood, we’re not going to sit back while they disparage everyday people for taking control of their financial lives.’”

May 3 – Bloomberg (Crystal Kim): “The marriage between SPACs and clean-tech vehicle startups is on the rocks as regulators push for detail on the one thing most of them lack: a solid business. Stocks of electric-mobility firms like Nikola Corp., Lordstown Motors Corp. and Romeo Power Inc. that went public by merging with special-purpose acquisition companies are down at least 69% from dizzying peaks, as investors question whether their visions for a greener future are divorced from reality. For months, the SEC has raised concern that investors aren’t fully informed of risks embedded in SPACs, also known as ‘blank-check’ companies.”

Market Instability Watch:

May 6 – Financial Times (Gary Silverman and James Politi): “The US Federal Reserve has warned that existing measures of hedge fund leverage ‘may not be capturing important risks’, pointing to the collapse of Archegos Capital as an example of hidden vulnerabilities in the global financial system. The US central bank’s semi-annual report on financial stability found that some asset valuations are ‘elevated relative to historical norms’ and ‘may be vulnerable to significant declines should risk appetite fall’. But the Fed also acknowledged that regulators lack the tools to monitor the risk taking of traders like Bill Hwang, who placed large leveraged bets on stocks through his Archegos family office.”

May 6 – Reuters (Dan Burns): “A bruising bond market sell-off earlier this year appears to remain high on the minds of Federal Reserve officials, who in a report… singled out the event as illustrative of continuing liquidity issues in the $21 trillion U.S. Treasury market. The Feb. 25 drubbing followed a historically poor auction of 7-year Treasury notes and sent yields surging as market liquidity evaporated in minutes… The event, coming less than a year after the Fed had to inject $2 trillion into the bond market in the space of about five weeks to keep it from a complete melt down, ‘highlighted the importance of continued focus on Treasury market resilience,’ the Fed said in its semi-annual Financial Stability Report.”

May 6 – Bloomberg (Sridhar Natarajan, Donal Griffin and Bei Hu): “The dust hadn’t yet settled on Archegos Capital Management’s implosion, when hedge funds started shifting their bets toward banks that avoided getting hurt, hoping to keep leveraging up just like before. Good luck with that. For weeks behind the scenes, Wall Street’s giants have been autopsying failures at rivals including Credit Suisse Group AG and Nomura Holdings Inc., identifying risks that they plan to address by more thoroughly vetting hedge funds or imposing more onerous terms on their trades... No one wants to be the next to tell shareholders and regulators how they failed to heed the lessons of Archegos… While specific measures will vary by bank and client…, the talks and tensions point to greater pressure on clients to reveal their biggest wagers, stricter margin limits on those positions, more frequent collateral adjustments and more rigorous audits.”

Inflation Watch:

April 30 – Bloomberg (Eddie Spence and Megan Durisin): “The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life. From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years. The rally threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers. It’s also lit the fuse on the massive reflation trade that’s gripped markets this year and pushed up inflation expectations.”

May 5 – Bloomberg (Vivien Lou Chen): “As seemingly every policy maker and market prognosticator jumps into the inflation fray, those who are putting their money where their mouths are have pushed one gauge of expected price pressures to an almost 13-year high. The five-year breakeven rate, a proxy for the annual inflation rate bond traders expect over the span, breached 2.7% Wednesday, the highest since July 2008. The move occurred as a key gauge of prices paid by service providers climbed for a third straight month, also to the highest in more than a decade, stoking further debate on the inflationary pressures building across the economy.”

May 1 – Financial Times (Judith Evans and Emiko Terazono): “Some of the world’s biggest consumer goods makers are pushing up prices for branded goods, from nappies to veggie burgers, testing their ability to pass on higher input costs to households. Nestlé, Procter & Gamble and Unilever are among the global groups to have set out plans for price rises in their latest market updates following commodity price jumps and a spike in transport and packaging costs. ‘We are seeing some of the highest commodity price inflation that we’ve seen in a decade,’ Graeme Pitkethly, chief financial officer at Unilever, told reporters…”

May 5 – Bloomberg (Alexandre Tanzi): “Rents are soaring in many U.S. cities as the economy rebounds, squeezing the budgets of tenants who also face increased risk of eviction after courts overturned a pandemic-era ban. There’s no single indicator that captures a complex national picture, as Covid-19 drove major shifts in where people live and work. Still, data point to tight markets in much of the country. The median monthly charge on a vacant rental jumped by $185 in March from a year earlier, according to the U.S. Census Bureau. A national index compiled by shows that rents rose 1.9% in April alone, the most in data going back to 2017.”

May 7 – Bloomberg (Patrick Clark): “Record occupancy rates are emboldening single-family landlords to hike rents aggressively, testing the limits of booming demand for suburban rentals. American Homes 4 Rent, which owns 54,000 houses, increased rents 11% on vacant properties in April… Invitation Homes Inc., the largest landlord in the industry, boosted rents by similar amount, an executive said… Housing costs are jumping across the U.S…”

May 5 – Bloomberg (Michelle Jamrisko): “Signs of inflation are picking up, with a mounting number of consumer-facing companies warning in recent days that supply shortages and logistical logjams may force them to raise prices. Tight inventories of materials as varied as semiconductors, steel, lumber and cotton are showing up in survey data, with manufacturers in Europe and the U.S. this week flagging record backlogs and higher input prices as they scramble to replenish stockpiles and keep up with accelerating consumer demand. As commodities become increasingly expensive, whether faster inflation proves transitory -- or not -- is the biggest question for policy makers and markets.”

May 5 – Bloomberg (Ian King, Adrian Leung and Demetrios Pogkas): “Shortages of semiconductors are battering automakers and tech giants, raising alarm bells from Washington to Brussels to Beijing. The crunch has raised a fundamental question for policymakers, customers and investors: Why can’t we just make more chips? There is both a simple answer and a complicated one. The simple version is that making chips is incredibly difficult—and getting tougher. ‘It’s not rocket science—it’s much more difficult,’ goes one of the industry’s inside jokes. The more complicated answer is that it takes years to build semiconductor fabrication facilities and billions of dollars—and even then the economics are so brutal that you can lose out if your manufacturing expertise is a fraction behind the competition. Former Intel Corp. boss Craig Barrett called his company’s microprocessors the most complicated devices ever made by man.”

May 6 – Wall Street Journal (Heather Haddon and Jacob Bunge): “Chicken wings are flying off the shelves. After a year promoting takeout wings and crispy chicken sandwiches, restaurants including KFC, Wingstop Inc. and Buffalo Wild Wings Inc. say they are paying steep prices for scarce poultry. Some are running out of or limiting sales of tenders, filets and wings, cutting into some of their most reliable sales. Independent eateries and bars have gone weeks without wings, owners say. Chicken breast prices have more than doubled since the beginning of the year, and wing prices have hit records…”

May 5 – Bloomberg (Annie Lee): “A surge in steel consumption as the world emerges from its pandemic-induced slump is set to drive iron ore to an unprecedented high as the biggest miners struggle to keep up with the frenzied pace of demand. Expectations are building that benchmark prices can get to $200 a ton -- topping the record $194 hit more than a decade ago -- as Chinese steelmakers ramp up production in defiance of government attempts to rein in output to control the industry’s carbon emissions. That’s tightening an iron ore market that hadn’t fully recovered from a supply shock more than two years ago.”

May 3 – Bloomberg (Jordan Yadoo): “JPMorgan and IHS Markit Economics release purchasing managers’ index for Global manufacturing in April. Index rises to 55.8 from 55 in March. Output Prices rise to 59.7 vs 59.3 in March - highest reading in data series going back to Oct. 2009.”

May 3 – Bloomberg (Brendan Murray): “Container shipping rates are heading higher again, driven to new heights by unrelenting consumer demand and company restocking from Europe to the U.S. that are exhausting the world economy’s capacity to move goods across oceans. After peaking in late 2020 and not budging much through the first quarter, the rate for a 40-foot container to Los Angeles from Shanghai hit $4,403 last week, the highest in Drewry World Container Index data going back to 2011.”

May 3 – Bloomberg (Lu Wang): “Markets have been obsessed -- and sometimes roiled -- for months over whether higher inflation is coming. The latest batch of quarterly reports suggests it’s already here and helping corporate America. Faced with rising prices for everything from lumber to oil to labor and computer chips, chief executive officers have cut costs and boosted prices for their products… Executives mentioned ‘inflation’ more than any time since 2011 during earnings conference calls last month, according to Bank of America.”

May 3 – CNBC (Yun Li): “Warren Buffett is seeing inflation among Berkshire Hathaway’s collection of businesses as the economic recovery from the Covid pandemic kicks into high gear. ‘We are seeing very substantial inflation,’ the Berkshire chairman and CEO said… ‘It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.’ ‘We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up,’ the legendary investor added.”

Biden Administration Watch:

May 5 – New York Times (Jim Tankersley and Annie Karni): “President Biden delivered a clear and punchy message to America’s highest earners… I’m going to raise your taxes, but your vacation homes are safe… Mr. Biden defended with gusto his plans to increase taxes on high earners and the wealthy. He railed against high-earning chief executives and promised that his plans were ‘about making the average multimillionaire pay just a fair share.’ ‘We’re not going to deprive any of these executives of their second or third home, travel privately by jet,’ Mr. Biden said… ‘It’s not going to affect their standard of living at all. Not a little tiny bit. But I can affect the standard of living that people I grew up with.’”

April 30 – Associated Press (Paul Wiseman): “From John Kennedy to Ronald Reagan to Donald Trump, American presidents have taken aim at corporate America’s tax-avoidance schemes before — and mostly missed. Now, President Joe Biden is training the government’s sights again on the loopholes, shelters and international havens that have long allowed multinational companies to dodge taxes in ways that ordinary households cannot. The idea is twofold: First, to help pay for Biden’s trillions in proposed spending — for everything from roads and bridges and green energy to internet access, job training, preschool and sick leave. And second, to shift more of the federal tax load onto companies and narrow America’s vast income inequality.”

May 3 – CNBC (Christina Wilkie): “President Joe Biden and Republican Senate Minority Leader Mitch McConnell toughened their positions Monday over the tax increases for millionaires and corporations that Biden has proposed to fund his sweeping infrastructure and education plans. ‘We’re open to doing a roughly $600 billion package which deals with what all of us agree is ‘infrastructure,’’ McConnell said… ‘And to talk about how to pay for that in any way other than reopening the 2017 tax reform bill.’”

May 6 – Reuters (Trevor Hunnicutt): “U.S. President Joe Biden said a corporate tax rate between 25% and 28% could help pay for badly needed infrastructure, suggesting he could accept a lower rate than what he has proposed in his search for Republican support for the funding. ‘The way I can pay for this, is making sure that the largest companies don't pay zero, and reducing the (2017 corporate) tax cut to between 25 and 28%’, Biden said…”

May 4 – Wall Street Journal (Kate Davidson): “Treasury Secretary Janet Yellen said… she is neither predicting nor recommending that the Federal Reserve raise interest rates as a result of President Biden’s spending plans, walking back her comments earlier in the day that rates might need to rise to keep the economy from overheating. ‘I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,’ Ms. Yellen…said… Ms. Yellen suggested earlier Tuesday that the central bank might have to raise rates to keep the economy from overheating, if the Biden administration’s roughly $4 trillion spending plans are enacted… ‘It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,’ she said…”

May 5 – Financial Times (Eric Platt and Gary Silverman): “Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that ‘healthy competition’ could be at risk. In testimony released ahead of his appearance before the House financial services committee…, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume. ‘One firm, Citadel Securities, has publicly stated that it executes about 47% of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,’ Gensler said.”

May 5 – Bloomberg (Ben Bain): “Robinhood Markets and Citadel Securities had starring roles in the GameStop Corp. trading frenzy that rocked financial markets this year. Now, they have among the most to lose as U.S. regulators’ threaten a clean up. In his most revealing comments so far about how Washington might respond to the meme-stock mania, Securities and Exchange Commission Chairman Gary Gensler shined a spotlight on online brokerages and market makers that dominate the business of executing retail investors’ equity orders… And Gensler raised concerns that a deluge of equity transactions are being routed through Citadel Securities and a few other massive players, which he said threatens ‘healthy competition.’”

May 5 – Wall Street Journal (Dave Michaels and Alexander Osipovich): “Wall Street’s top regulator will study potential new rules related to two recent episodes of stock-market turbulence—the GameStop Corp. frenzy among small investors and the implosion of Archegos Capital Management. In testimony prepared for the House Financial Services Committee, Securities and Exchange Commission Chairman Gary Gensler says applications that ‘gamify’ trading—by using appealing visual graphics to reward a user’s decision to trade—might encourage frequent trading that results in worse outcomes for investors.”

May 5 – Reuters (David Lawder and Andrea Shalal): “U.S. Trade Representative Katherine Tai said… she expects to engage ‘in the near term’ with Chinese officials to assess their implementation of the ‘Phase 1’ trade deal between the two countries, with the outcome to influence the fate of Washington’s punitive tariffs on Beijing.”

Federal Reserve Watch:

May 6 – Bloomberg (Craig Torres and Rich Miller): “A rising appetite for risk across a variety of asset markets is stretching valuations and creating vulnerabilities in the U.S. financial system, the Federal Reserve said in its semi-annual financial stability report. ‘Vulnerabilities associated with elevated risk appetite are rising,’ Fed Governor Lael Brainard, the head of the Board’s financial stability committee, said… ‘The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.’ In this environment, prices may be vulnerable to ‘significant declines’ should risk appetite fall, the Fed report noted.”

May 6 – Bloomberg (Rich Miller): “Federal Reserve Chairman Jerome Powell has called the risks emanating from ‘frothy’ stock prices and other potential financial imbalances ‘manageable.’ Some current and former central bankers are not so sure. They worry that the Fed’s rock-bottom interest rates and massive bond buying might lead to asset price bubbles, and excessive risk-taking and leverage that could come back to haunt the economy. ‘We’re now at a point where I’m observing excesses and imbalances in financial markets,’ Dallas Federal Reserve Bank President Robert Kaplan said… ‘I’m very attentive to that, and that’s why I do think at the earliest opportunity I think it will be appropriate for us to start talking about adjusting those purchases.’”

May 3 – Financial Times (Mohamed El-Erian): “According to an old saw, the difference between lawyers and many other professions is that the former can argue with 100% conviction even when the foundation for their view is uncertain or low. The US Federal Reserve these days seems to be acting more like a lawyer than an economist. Once again, it has set aside accumulating evidence about the strong economic recovery, dismissed financial stability concerns, and reiterated that the rise in inflation would be transitory. By contrast, many economists are either unsure, or outright worried about inflation being persistent. Indications of market froth are multiplying in an ‘everything rally.’ More companies are warning about rising input costs, with some signalling that this will be passed on to prices. The contrast between the Fed stance and all this is why policy risk has climbed up the ranks to be one of the major challenges that investors will be navigating this year.”

May 5 – CNBC (Jeff Cox): “Federal Reserve Vice Chairman Richard Clarida told CNBC… he thinks the central bank should keep its ultra-loose policy in place even as the U.S. economy storms back from its pandemic-era tumble… Clarida said he expects the economy to grow close to 7% for the full year, which would be the fastest pace since 1984. He added that the jobs picture continues to improve, but still needs to progress considerably before the Fed will feel comfortable pulling back on all of the help it has provided since Covid-19 ended the longest expansion in U.S. history. ‘We’re still a long way from our goals, and in our new framework, we want to see actual progress and not just forecast progress,’ Clarida said.”

May 5 – Reuters (Aakriti Bhalla): “The Federal Reserve’s bond buying does not appear to be creating imbalances in the financial sector, New York Fed Bank President John Williams said. The Fed's monthly purchases of $120 billion in Treasury and mortgage bonds are working as designed to help the economy recover from the coronavirus pandemic's impact, Williams told the Wall Street Journal…’I don’t take for granted, even with the good news we’re seeing, that we’re going to get that full and robust recovery that we really want without really strong monetary policy support,’ Williams told the Journal. The positive impact of the bond buying in lowering long-term borrowing costs could become more important, Williams said, adding ‘I think the effects will even be greater in the sense of supporting strong growth over the next few years’.”

May 7 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Minneapolis President Neel Kashkari said he has ‘zero sympathy’ for critics on Wall Street, who slam the central bank’s aggressive support of the U.S. economy while millions of Americans remain out of work. ‘For my friends on Wall Street, and I have a lot of them, I hear from them all the time complaining about the Fed’s policies that are mucking up their trading strategies,’ the former Goldman Sachs Group Inc. and Pacific Investment Management Co. executive told… Bloomberg…. ‘I have zero sympathy -- because there are still 8 to 10 million Americans who want to work, who ought to be working.’”

May 5 – Reuters (Jonnelle Marte): “It is too soon to talk about tapering the Federal Reserve’s asset purchases and policymakers will send clear signals to the market when the time comes, Boston Federal Reserve Bank President Eric Rosengren said… ‘We need to have a substantial improvement for us to begin tapering,’ Rosengren said… ‘It’s quite possible that we’ll see those conditions as we get to the latter half of the year but right now what we have is one really strong employment report, one quarterly strong GDP report and so I think it’s premature right now to focus on the tapering.’”

May 5 – Bloomberg (Matthew Boesler, Catarina Saraiva and Craig Torres): “U.S. inflation is unlikely to get out of control despite the unprecedented government spending that’s been authorized in response to the coronavirus pandemic, Federal Reserve officials said. ‘I think the risk of this scenario is remote,’ Chicago Fed President Charles Evans said… Fed Governor Michelle Bowman, speaking elsewhere…, offered similar comments, suggesting the risk of inflation running persistently above the central bank’s 2% target ‘still seems small’ despite an improving outlook for U.S. economic growth.”

May 1 – Associated Press (Christopher Rugaber): “With employers hiring, consumers spending and companies raising some prices, Federal Reserve Chair Jerome Powell is embarking on a high-stakes gamble. Powell’s bet is that the Fed can keep rates ultra-low even as the U.S. economic recovery kicks into high gear — and that it won’t have to quickly raise rates to stop runaway inflation. It’s just the kind of gamble that in the past led some of Powell’s predecessors to miscalculate and inadvertently derail the economy. Powell and the rest of the Fed’s policymaking committee plan to keep rates near zero until nearly everyone who wants a job has one, even after inflation has crept above their 2% annual target level.”

U.S. Bubble Watch:

May 7 – CNBC (Jeff Cox): “Hiring was a huge letdown in April, with nonfarm payrolls increasing by a much less than expected 266,000 and the unemployment rate rose to 6.1% amid an escalating shortage of available workers. Dow Jones estimates had been for 1 million new jobs and an unemployment rate of 5.8%... There was more bad news: March’s originally estimated total of 916,000 was revised down to 770,000… ‘It certainly takes the pressure off the Fed and takes an imminent rate increase off the table,’ said JJ Kinahan, chief market strategist at TD Ameritrade. ‘We’re not going to see inflation in wages, and we don’t have as many people employed as we thought, so we have to keep the party going.’”

May 5 – Bloomberg (Reade Pickert): “U.S. service providers expanded in April at the second-fastest pace in data back to 1997, cooling slightly from the prior month as business activity and order growth pulled back from record highs. The Institute for Supply Management’s services index unexpectedly fell to 62.7 last month from a record 63.7 in March… A gauge of prices paid by service providers climbed for a third straight month. At 76.8, it’s the highest level since July 2008… The report, which covers the industries that make up almost 90% of the economy, follows data out earlier this week that showed supply chain challenges and materials shortages limited further momentum in the manufacturing sector.”

May 4 – Bloomberg (Eric Martin): “The U.S. trade deficit widened to a new record in March as the value of imports surged to a fresh high. The gap in trade of goods and services expanded to $74.4 billion in March from a revised $70.5 billion in February…”

May 3 – Reuters (Lucia Mutikani): “U.S. manufacturing activity grew at a slower pace in April, restrained by shortages of inputs as rising vaccinations against COVID-19 and massive fiscal stimulus unleashed pent-up demand. The survey from the Institute for Supply Management (ISM)… showed record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products across industries… The ISM noted that ‘companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus impacts limiting availability of parts and materials.’ It cautioned that worker absenteeism, short-term shutdowns due to part shortages and difficulties in filling open positions could limit manufacturing's growth potential. ‘Manufacturing is struggling to keep up with roaring demand,’ said Will Compernolle, a senior economist at FHN Financial…”

May 5 – Yahoo Finance (Brian Cheung): “Bank of America Securities’ global research team said it expects a good chunk of unemployed Americans to return to work this year. But BofA warned that over 2 million workers could take longer to come back to the labor market — if they return at all… Among those out of the labor force: those unable to get a job because their skills are mismatched to the hiring needs of employers… Also out of the labor force: an estimated 1.2 million people who retired and another 140,000 who died from COVID-19 itself.”

April 30 – CNBC (Diana Olick): “As the housing market gets leaner, potential buyers are turning in record numbers to new construction, but several factors are making those homes pricier than ever before. First is a major shift in the market’s composition due to the record shortage of existing homes available. About 1 in 4 homes for sale are now newly built, the highest share ever… But it is not just competition fueling prices for new homes. The cost of what goes into the home is adding to it as material and land prices surge. Lumber prices seem to set a new record almost daily, now up 67% this year and up 340% from a year ago… The surge in lumber prices in the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB.”

May 7 – Yahoo Finance (Amanda Fung): “Homebuying sentiment hit a 10-year low in April as the housing market continues to heat up into the busy spring season… The Fannie Mae Home Purchase Sentiment Index (HPSI) fell 2.7 points to 79 last month from a month earlier. One part of the six-component index — buying conditions — turned negative for the first time in the survey's history… Real estate veteran Barbara Corcoran recently told Yahoo Finance that homebuyers are ‘panicked, depressed for good reason’ and are ‘forced to spend a lot more on the house than they would.’ Her thoughts were echoed… by Jeff Taylor, Mphasis Digital Risk co-founder…: ‘We have seen bidding wars at every price point.’”

May 2 – Wall Street Journal (Thomas Gryta and Theo Francis): “Consumers are splurging on cars and furniture—and facing extended waits for delivery. Restaurants and gyms are reopening—and struggling to find workers. Factories and home builders are trying to ramp up—but are short on semiconductors or raw materials. Federal Reserve officials and most economists largely play down supply and cost problems as transitory, saying they aren’t widespread enough to threaten corporate profits or the broader U.S. economy for long, especially amid strong sales. But problems are acute for some individual businesses and even entire industries.”

April 30 – Bloomberg (Alister Bull): “President Joe Biden’s $4 trillion plans to overhaul the role of government in American lives is aimed at the right targets but risks inflation in an economy that’s recovering fast from the pandemic, said former U.S. Treasury Secretary Lawrence Summers. ‘I am concerned that progressives have a tendency to overreach,’ Summers said… ‘You need to be progressive but you also need to get the arithmetic right, and I am worried that this program could overheat the economy.’”

May 2 – Yahoo Finance (Brian Cheung): “Billionaire investor Warren Buffett said… near-zero interest rates have completely changed the financial landscape, warning that the consequences of easy money policies remain an unanswered question… ‘It causes stocks to go up, it causes business to flourish, it causes an electorate to be happy, and we'll see if it causes anything else,’ Buffett said…”

April 30 – Wall Street Journal (Theo Francis): “Elon Musk, already one of the world’s richest people, can add another $32.4 billion worth of Tesla Inc. shares to his piggy bank. The technology entrepreneur is now vested in stock options valued at that amount after the electric-car maker hit roughly half of the targets laid out by the board in his landmark 2018 compensation package…”

May 2 – Financial Times (Michael Mackenzie): “The number of US mutual funds is shrinking at the fastest pace in at least two decades, reflecting cost pressures and consolidation across the investment industry and strong competition from exchange traded funds… After peaking at 9,616 in 2018, the number of outstanding US mutual funds has fallen towards 9,000, the lowest level since 2013…”

Fixed Income Watch:

May 3 – Wall Street Journal (Kate Davidson): “The U.S. plans to borrow nearly $1.3 trillion over the next two quarters as federal spending picks up following the Covid-19 relief package enacted in March, the Treasury Department said… That would bring total borrowing for the fiscal year ending Sept. 30 to $2.3 trillion, compared with $4 trillion in the last fiscal year… The Treasury estimated the government would borrow $463 billion during the current quarter, nearly five times as much as the $95 billion it estimated previously, before Congress passed the $1.9 trillion relief bill.”

May 3 – Financial Times (Joe Rennison): “The additional premium investors are paid for buying the debt of the worst-rated companies in the US has fallen to its lowest level in seven years, raising warnings that the brightening outlook for the American economy is leading to excessive risk taking. The premium, or ‘spread’, above benchmark government bond yields on triple C-rated US corporate bonds, which sit on the precipice of defaulting, has fallen to just above 6.4 percentage points... The spread has been lower on only two occasions: in 2014, just before a collapse in oil prices roiled the debt of energy companies, and in the run-up to the 2008 financial crisis.”

May 6 – Bloomberg (Ruth McGavin and Sarah Husband): “European sub-investment grade companies are on track to borrow record amounts this year as they dash to secure more attractive debt terms after borrowing costs plunged…. With eight months of 2021 to go, companies have so far raised high-yield bonds and leveraged term loans worth 96 billion euros ($115bn) in Europe… That’s more than half the total raised in 2017, the most active year for borrowing since the great financial crisis.”

China Watch:

May 6 – Reuters (Stella Qiu and Kevin Yao): “China’s exports growth unexpectedly picked up in April, official data showed on Friday, as the world’s second-largest economy extended its recovery… Exports in dollar terms surged 32.3% from a year earlier to $263.92 billion…, beating analysts’ forecast of 24.1% and the 30.6% growth reported in March.”

May 1 – Reuters: “Chinese new home prices rose again in April, fuelled by hot demand in smaller coastal cities as housing market strength in major centres tapered off due to tighter restrictions, a private survey showed… New home prices in 100 cities rose 0.23% in April from a month earlier… The month saw authorities in a dozen of cities intensifying their campaign to drive speculators out of the property market, taking more targeted steps like capping sales prices set by developers and preventing some real estate agencies from setting excessively high second-hand home prices.”

May 5 – Bloomberg (Rebecca Choong Wilkins and Bloomberg Automation): “Some Chinese real estate firms’ dollar bonds are set for record drops Wednesday amid concerns about the financial health of Sichuan Languang and other smaller developers.”

May 4 – Bloomberg: “Concerns over Sichuan Languang Development Co.’s financial health are rising as its dollar debt sinks further into distressed territory, heightening refinancing risks for a company whose stake sale plans have rattled investors. The… builder, which has outstanding dollar bonds of about $1 billion and roughly $2 billion of onshore yuan notes, has said it is considering selling stakes in some of its property projects… That’s after it used proceeds from selling its stake in a former unit to repay a dollar bond due this week. Its dollar notes have hit record lows in recent days. One due in January has dropped to 75 cents on the dollar from 90 cents last week, while another issue that matures in June 2022 has plunged to 66 cents.”

May 3 – Bloomberg (Rebecca Choong Wilkins): “China Huarong Asset Management Co. broke its silence over the embattled company’s financial position, with a company executive telling media the firm is prepared to make its bond payments and state backing remains intact. Recent rating downgrades by international agencies ‘have no factual basis’ and are ‘too pessimistic,’ Xu Yongli, Huarong’s vice president and board secretary, said… There are no signs of change in the government’s support for the firm and there is no evidence indicating a change to its shareholding structure, he said, according to the report.”

May 5 – Bloomberg (Tom Hancock): “The future of Huarong Asset Management Co., a troubled Chinese financial conglomerate, may be determined by a man who believes that allowing more state-owned companies to default is just what the country needs: Vice Premier Liu He… With a range of scenarios still possible -- including a state-backed cash injection or a lengthy restructuring that involves losses for bondholders -- analysts, economists, and investors see President Xi Jinping’s economy czar as playing a critical role. ‘In the end, Liu He will be the person to make the final decision,’ says Chen Long, an economist at… Plenum. ‘He doesn’t want to bail out everybody, he doesn’t like moral hazard. And on the other hand, he doesn’t want to trigger a financial crisis.’”

Global Bubble Watch:

May 5 – Bloomberg (Megan Durisin): “The world faced its worst hunger problem in at least five years in 2020 on the back of the coronavirus crisis, and the outlook remains grim again this year. Some 155 million people across 55 countries… suffered from issues ranging from a food crisis to famine, according to a report with data from more than a dozen agencies. That’s up 20 million from 2019, with economic shocks overtaking extreme weather as the No. 2 cause. The worsening situation highlights how the pandemic has exacerbated food inequalities around the world, on top of extreme weather and political conflicts that are stifling access to key staples.”

May 2 – Bloomberg (Vildana Hajric): “The global semiconductor shortage roiling a wide range of industries likely won’t be resolved for a few more years, according to Intel Corp.’s new Chief Executive Officer Pat Gelsinger. The company is reworking some of its factories to increase production and address the chip shortage in the auto industry, he said… It may take at least several months for the strain on supply to even begin easing, he added. ‘We have a couple of years until we catch up to this surging demand across every aspect of the business,’ Gelsinger said.”

May 1 – Bloomberg (Christoph Rauwald): “German Finance Minister Olaf Scholz said a global deal on minimum corporate taxes is possible within months, citing signals of support by President Joe Biden’s administration. ‘I’m convinced we’ll finish up a global minimum tax on corporate profits this summer,’ Scholz, the Social Democratic Party’s candidate for chancellor in Germany’s September election, told Funke Media... ‘The American administration is on board with it now.’ The Biden administration has proposed that the U.S. apply a 21% global minimum rate, leading to speculation that it would push for a high rate in international talks…”

May 3 – Financial Times (David Keohane, Claire Bushey and Joe Miller): “The global chip shortage is set to ignite a power struggle between chip manufacturers and their customers about how the industry’s supply chain works and who pays the costs of carrying inventory… The chief executive of one of Europe’s biggest chipmakers said that customers would have to accept that their ‘dream is over’. Jean-Marc Chéry, chief executive of STMicroelectronics, said that his customers, whether carmakers or car part suppliers, will need to hold more inventory or agree to more non-cancellable contracts to make supply more predictable and reduce the risk of shortages.”

May 3 – Wall Street Journal (Sean McLain): “Toyota Motor Corp. is stockpiling up to four months of some parts. Volkswagen AG is building six factories so it can get its own batteries. And, in shades of Henry Ford, Tesla Inc. is trying to lock up access to raw materials. The hyperefficient auto supply chain symbolized by the words ‘just in time’ is undergoing its biggest transformation in more than half a century… After sudden swings in demand, freak weather and a series of accidents, they are reassessing their basic assumption that they could always get the parts they needed when they needed them. ‘The just-in-time model is designed for supply-chain efficiencies and economies of scale,’ said Ashwani Gupta, Nissan Motor Co.’s chief operating officer. ‘The repercussions of an unprecedented crisis like Covid highlight the fragility of our supply-chain model.’”

May 3 – Bloomberg (Harry Brumpton): “From hospitals to pubs, Australian companies are rushing into public markets to raise funds via first-time share sales at the fastest pace in 14 years. Australian companies have priced nearly $2.3 billion of initial public offerings so far in 2021, the most year-to-date since the $3.6 billion raised in 2007…”

Central Banker Watch:

May 6 – Bloomberg (David Goodman): “The Bank of England slowed its emergency bond-buying and signaled it’s on course to end that crisis support later this year as a strong rebound takes hold across the economy with the removal of pandemic restrictions. Officials… said the U.K. should recover its pre-coronavirus level of output one quarter earlier than previously forecast, as the country’s rapid vaccination drive clears the way for a full reopening by June. The rebound’s strength convinced outgoing Chief Economist Andy Haldane to cast a sole minority vote to cut the target for bond purchases.”

May 6 – Bloomberg (Maria Eloisa Capurro and Aline Oyamada): “The Brazilian real advanced after the central bank lifted its benchmark rate by 75 bps and promised another hike of the same size next month in a renewed push to bring inflation back to target.”

May 7 – Bloomberg (Jana Randow and Aaron Eglitis): “The European Central Bank could decide to scale back its emergency bond-buying program as early as next month if the euro-area economy doesn’t deteriorate, according to Governing Council member Martins Kazaks. Kazaks, who also heads Latvia’s central bank, said the ECB’s pledge to keep financing conditions favorable remains key to determining how much support the 19-nation bloc needs to recover… ‘If financial conditions remain favorable, in June we can decide to buy less,’ Kazaks said… ‘Flexibility is at the very core of PEPP.’”

May 4 – Bloomberg (Matthew Brockett): “New Zealand’s central bank said it’s prepared to further tighten mortgage lending restrictions if needed to rein in the country’s red-hot housing market. The Reserve Bank would use loan-to-value ratios or new tools currently under consideration to restrict the amount of money banks can lend for house purchases, the RBNZ said…”

May 6 – Reuters (Balazs Koranyi, Francesco Canepa, Frank Siebelt): “The European Central Bank will take a closer look at bank loans to lightly regulated investment funds and specialised lenders after the spectacular collapses of Archegos Capital Management and Greensill, top ECB supervisor Andrea Enria told Reuters. Regulators have long worried about the rise of so-called shadow banking, or lending by entities outside the traditional banking sector that are not subject to the same scrutiny as the mainstream banks they often borrow from. The area has come under sharper scrutiny following the demise this year of supply-chain lender Greensill and Archegos…”

Europe Watch:

May 4 – Bloomberg: “A major investment deal reached in December between the European Union and China — after seven years of painful negotiations — may end up being the high-water mark for ties that are quickly deteriorating again. Since then, the EU’s executive branch and Germany have each formulated legislation that would make life harder for Chinese entities to invest, while joining the U.S. in swapping tit-for-tat sanctions with Beijing. Italy’s government has turned from an enthusiastic backer of President Xi Jinping’s Belt and Road Initiative to blocking planned acquisitions by Chinese companies. And in France, China’s ambassador didn’t even show up when summoned in March, citing ‘agenda reasons.’ Taken together, the moves signal a hardening of the European stance on Beijing. And the biggest shift could be yet to come, with polls showing the German Greens party on course for a significant role in government after September’s election…”

May 3 – Bloomberg (Carolynn Look): “Euro-area manufacturers are battling unprecedented delays in securing raw materials and parts, leading to a record build-up of uncompleted orders and rising prices as the economy starts to recover. Factories surveyed by IHS Markit cited a ‘mismatch of supply and demand’ along with transport difficulties -- especially sea freight -- as the main reasons for delays. A gauge of manufacturing activity rose to 62.9 in April, the highest reading in the survey’s 24-year history… Companies reported higher costs for chemicals, metals and plastics and ran down their inventories to cope.”

EM Watch:

May 3 – Reuters (Jamie McGeever): “Growth in Brazil’s manufacturing sector decelerated in April to its slowest rate since June last year, a survey of purchasing managers’ activity showed on Monday, and prices charged to customers rose towards their recent historic highs.”

May 7 – Reuters (Dave Graham): “Mexican annual inflation picked up faster than expected in April to its highest level in more than three years, moving well above the central bank’s target level… Inflation jumped to 6.08% in April from 4.67% in March…”

May 5 – Bloomberg (Patrick Gillespie and Maya Averbuch): “The Covid-19 pandemic has sent a wave of poverty racing across Latin America, deepening declines that began over the past decade and consigning millions to lives of deprivation. The world’s most unequal region saw 22 million people… join the ranks of the poor from 2019 to 2020, unable to meet basic needs. In all, about one-third of Latin America’s roughly 600 million residents live in poverty or what the United Nations defines as extreme poverty: subsisting on less than $1.90 a day. Short of vaccines and hospital beds, Latin America has been uniquely hard-hit due to the intensity of the pandemic and the steepness of its recession, the worst in two centuries.”

May 5 – Financial Times (Gideon Long): “At least 24 people have been killed and hundreds injured in a week of brutal clashes between protesters and police in Colombia. What started out as peaceful demonstrations against tax rises have quickly gotten out of hand, fuelled by widespread anger with the rightwing government of Iván Duque.”

Japan Watch:

May 7 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Yoshihide Suga extended a state of emergency that covers Tokyo and expanded it to two more regions hit by rising virus cases, in an attempt to stem infections ahead of the capital’s hosting of the Olympics in less than three months.”

Leveraged Speculation Watch:

May 5 – Wall Street Journal (Juliet Chung, Gregory Zuckerman and Julie Steinberg): “Banks across Wall Street are looking to tighten the lending terms of some of their hedge-fund clients on the heels of Archegos Capital Management’s collapse. Firms including Credit Suisse Group AG , Morgan Stanley and UBS Group AG are reviewing their businesses that offer financing to hedge funds and family offices for potential vulnerabilities to safeguard against another Archegos-style event, said bankers and hedge-fund managers… Its March collapse triggered one of the biggest sudden trading losses in Wall Street history. Archegos took huge bets on a few stocks using a mix of cash and swaps with money borrowed from banks. It was unable to meet margin calls as some of its biggest positions started reversing, and the fallout from its collapse is still unfolding.”

May 3 – Bloomberg (Marion Halftermeyer): “Credit Suisse Group AG’s business with Archegos Capital Management enabled the family office to undertake highly-leveraged stock bets with only minimal collateral posted… Credit Suisse lent the family office of Bill Hwang funds allowing bets with leverage of up to ten times, and only asked for collateral worth 10% of the sums borrowed, according to a person familiar… The leverage offered by the Swiss bank was in some cases double what other brokers gave Hwang, helping to push the loss to some $5.5 billion after the fund imploded in March.”

May 5 – Bloomberg (Marion Halftermeyer and Francine Lacqua): “UBS Group AG’s Chairman Axel Weber apologized for the loss the Swiss bank posted on its exposure to the collapse of Archegos… while also blaming a lack of regulation and transparency regarding family offices operating in financial markets… Weber said the ‘usual suspects’ of concentration risk and high leverage were present in the Archegos situation and though banks have a lot of information when it comes to some parts of the markets, others such as family offices were deeply lacking in transparency and regulation.”

May 3 – Financial Times (Owen Walker and Stephen Morris): “Credit Suisse made just SFr16m of revenue last year from Archegos Capital, the family office whose sudden collapse in March caused the Swiss bank $5.4bn in losses… The paltry fees Credit Suisse received from Archegos, whose implosion was one of the most devastating in recent history, raises further questions about the risks the lender was prepared to shoulder in pursuit of relationships with ultra-wealthy clients.”

May 7 – Bloomberg (Laura Benitez and Tasos Vossos): “Hedge funds have accumulated the biggest short position on junk bonds since 2008 in another sign that investors are lining up to bet against frothy debt markets. About $55 billion of global high-yield bonds has been sold short, according to data from IHS Markit Ltd. That’s up from $35 billion at the start of the year.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 5 – CNBC (Rich Mendez): “U.S. birth and fertility rates in 2020 dropped to another record low as births fell for the sixth consecutive year to the lowest levels since 1979, according to… the Centers for Disease Control and Prevention’s National Center for Health Statistics. The number of births in the U.S. declined last year by 4% from 2019, double the average annual rate of decline of 2% since 2014… Total fertility rates and general fertility rates also declined by 4% since 2019, reaching record lows. The U.S. birth rate is so low, the nation is ‘below replacement levels,’ meaning more people die every day than are being born, the CDC said.”

April 27 – Bloomberg (Alex Tanzi): “U.S. college enrollment dropped to the lowest level in almost two decades last year, as the pandemic shut down schools and persuaded students to put their academic plans on hold rather than pay large sums to attend online-only classes. As of October, 62.7% of high school graduates in the class of 2020 were enrolled in colleges or universities, the smallest share since 2001 and down from 66.2% in 2019, the U.S. Bureau of Labor Statistics reported…”

May 4 – Associated Press (Seth Borenstein): “America’s new normal temperature is a degree hotter than it was just two decades ago. Scientists have long talked about climate change — hotter temperatures, changes in rain and snowfall and more extreme weather — being the ‘new normal.’ Data… by the National Oceanic and Atmospheric Administration put hard figures on the cliche. The new United States normal is not just hotter, but wetter in the eastern and central parts of the nation and considerably drier in the West than just a decade earlier.”

Geopolitical Watch:

May 5 – Reuters (Elizabeth Piper, William James, and Guy Faulconbridge): “The Group of Seven scolded both China and Russia…, casting the Kremlin as malicious and Beijing as a bully, but beyond words there were few concrete steps aside from expressing support for Taiwan and Ukraine. Founded in 1975 as a forum for the West’s richest nations to discuss crises such as the OPEC oil embargo, the G7 this week addressed what it perceives as the biggest current threats: China, Russia and the coronavirus pandemic. G7 foreign ministers, in a 12,400-word communique, said Russia was trying to undermine democracies and threatening Ukraine while China was guilty of human rights abuses and of using its economic clout to bully others.”

May 5 – Bloomberg (Alberto Nardelli and Kitty Donaldson): “Foreign ministers from the Group of Seven nations singled out China’s treatment of its Uyghur minority and expressed concern over Russia’s large military build-up on Ukraine’s borders, according to a draft communique. ‘We continue to be deeply concerned about human rights violations and abuses in Xinjiang and in Tibet, especially the targeting of Uyghurs, members of other ethnic and religious minority groups, and the existence of a large-scale network of ‘political re-education’ camps, and reports of forced labour systems and forced sterilisation,’ the ministers will say… While the language used on the Asian superpower echoes former G-7 statements, the long list of concerns and the specific mention of Taiwan will irritate the Chinese government: ‘We support Taiwan’s meaningful participation in World Health Organisation forums and the World Health Assembly.’”

May 6 – Reuters (David Kirton): “China condemned… a joint statement by G7 foreign ministers that expressed support for Chinese-claimed Taiwan and cast Beijing as a bully, saying it was a gross interference in China’s internal affairs. G7 foreign ministers said in a communique after a London summit that China was guilty of human rights abuses and of using ‘coercive economic policies’, which the G7 would use collective efforts to stop. In an unusual step, the G7 also said they supported Taiwan's participation in World Health Organization forums and the World Health Assembly - and expressed concern about ‘any unilateral actions that could escalate tensions’ in the Taiwan Strait.”

May 2 – Bloomberg (Nick Wadhams): “Secretary of State Antony Blinken said the U.S. will defend the ‘rules-based’ global order as he prepares for meetings in the U.K. and Ukraine, part of an effort to keep U.S. allies united against China and show support for a crucial ally in the face of Russian aggression. ‘Our purpose is not to contain China, to hold it back, to keep it down,’ Blinken said… ‘It is to uphold this rules-based order that China is posing a challenge to. Anyone who poses a challenge to that order, we’re going to stand up and defend it.’”

May 3 – Reuters (David Shepardson): “U.S. Secretary of State Antony Blinken said… China had recently acted ‘more aggressively abroad’ and was behaving ‘increasingly in adversarial ways.’ Asked by CBS News' ‘60 Minutes’ if Washington was heading toward a military confrontation with Beijing, Blinken said: ‘It's profoundly against the interests of both China and the United States to, to get to that point, or even to head in that direction.’ He added: ‘What we've witnessed over the last several years is China acting more repressively at home and more aggressively abroad. That is a fact.’”

May 2 – Associated Press (Hyung-Jin Kim): “North Korea… warned that the United States will face ‘a very grave situation’ and alleged that President Joe Biden ‘made a big blunder’ in his recent speech by calling the North a security threat. Last week, Biden, in his first address to Congress, called North Korea and Iran’s nuclear programs ‘serious threats’ to American and world security and said he’ll work with allies to address those problems through diplomacy and stern deterrence.”

May 5 – Bloomberg: “China announced that it was suspending a ministerial economic dialogue with Australia, in a largely symbolic move showing Beijing’s growing frustration with Canberra. China will indefinitely halt all activities under the China-Australia Strategic Economic Dialogue, the National Development and Reform Commission said… While the two sides have held three rounds of talks under the mechanism since 2014, it hasn’t convened since September 2017.”

May 2 – Bloomberg (Andreo Calonzo): “The Philippines has protested China’s ‘dangerous maneuver’ against its Coast Guard that patrolled and trained last month near a South China Sea shoal, with Manila’s top diplomat issuing expletive-laden remarks towards Beijing. The Chinese Coast Guard shadowed, blocked and issued radio challenges on Manila’s crew near Scarborough Shoal… China’s claim over the shoal that’s 124 nautical miles from the Philippines ‘is without basis’ and Beijing has ‘no law enforcement rights in these areas,’ it said.”

Friday Evening Links

[Reuters] S&P hits record, Nasdaq jumps 1% as weak jobs data eases Fed tapering worries

[Yahoo/Bloomberg] Gold Posts Its Best Week Since November After U.S. Hiring Slows

[Reuters] Investors back off view that Fed could raise rates in late 2022

[Yahoo/Bloomberg] Weak U.S. Jobs Data Expose Deep Partisan Divide on Benefits

[Yahoo/Bloomberg] US consumer borrowing posts another strong showing in March

[Yahoo/Bloomberg] Reflation, Inflation, Deflation: Stocks Can Live With Everything

[CNBC] A joke cryptocurrency has risen more than 26,000% in the last six months, outpacing nearly every other investment