Friday, May 28, 2021

Weekly Commentary: The Wisdom of Benjamin Anderson

It’s perhaps the greatest issue confronting today’s global markets. It didn’t work in the U.S. in the late-twenties. Arguably, it was an unmitigated disaster. Beijing has begun moving more aggressively to rein in speculative excess, while continuing its unrelenting furtherance of productive investment. Surging commodities prices are problematic for manufacturers along with other sectors, while stoking inflationary pressures throughout the unbalanced Chinese economy. China’s apartment Bubble has created monumental financial and economic risks, while exacerbating inequality and societal vulnerability.

Meanwhile, Chinese officials remain steadfast in their determination to prolong the economic cycle. Especially after covid recovery measures, there’s an incredible amount of “money” sloshing around China’s financial system (and globally). Unprecedented Credit growth has elevated myriad price levels, particularly throughout the asset markets. Meanwhile, Beijing has repeatedly reaffirmed its commitment to “stable” Credit and liquidity management, which at this stage of the cycle basically signifies massive ongoing Credit expansion and over-liquefied “money” markets.

In perhaps history’s most parlous historical revisionism, Ben Bernanke has professed a view that the Great Depression was the consequence of post-crash monetary policy mistakes. In short, the Fed was negligent for failing to print new money in quantities sufficient to recapitalize the banking system and reflate the general economy. Bernanke dismisses the Fed’s role in nurturing boom-time excess that over the long cycle fueled deep structural maladjustment. Moreover, Bernanke’s analytical framework disregards the momentous role speculative Credit - and associated liquidity excess and Monetary Disorder - played in fomenting both financial and economic fragilities (laid bare in the post-crash landscape).

May 26 – Bloomberg (Sofia Horta e Costa): “China’s battle to maintain order in financial markets is getting tougher as money floods into everything from commodities to housing and stocks. In May alone, the government vowed to tackle speculation in metals, revived the idea of a property tax, oversaw hikes in mortgage rates in some cities, banned the mining of cryptocurrencies and played down calls within the central bank for a stronger yuan. Authorities are zeroing in on the risks of assets overheating as they maintain a relatively loose monetary policy to support the economic recovery from the pandemic… ‘The policy trend is now focused on ensuring financial stability,’ said Alex Wolf, head of investment strategy for Asia at JPMorgan Private Bank. ‘Beijing will want to resolve bubble risks at the outset, in a targeted manner, using strong rhetoric and small adjustments to policy. That appears to be enough for now.’”

Bubble risks will not be resolved. Unprecedented Credit growth. An epic cycle extended by increasingly intrusive government intervention and monetary stimulus. Deepening economic maladjustment. Monetary Disorder. There are clear and ominous parallels to the “Roaring Twenties” – today in China, the U.S. and globally.

China is the first to move with various measures to rein in speculative excess. Notably absent to this point is a decisive shift toward higher interest-rates and broadly tighter financial conditions. I have over the years dismissed the Fed’s so-called “macro-prudential” approach in dealing with overheated assets markets. Regulatory measures meant to dampen speculative excess will fail in the face of loose money, liquidity abundance and booming securities markets. This is especially the case late in the cycle when bullish market psychology and manic behavior have become so well entrenched.

Not surprisingly, Chinese markets are not all worked up by Beijing’s pronouncements (Shanghai Composite jumped 3.3% this week!). The view holds that officials may tinker, but they wouldn’t dare push matters to the point of risking a Bubble collapse.

Key aspects of the global environment are reminiscent of the late-twenties. There was New York Fed President Benjamin Strong’s infamous “coup de whiskey” in 1927 in the face of mounting UK and global fragilities – monetary stimulus that fatefully pushed already powerful Bubbles to precarious extremes. Yet nothing in history can compare to the past 15 months.

Benjamin Anderson (1886 to 1949) was an astute economist (Columbia PhD and Harvard professor), statesman, and writer that published the acclaimed Chase Economic Bulletin (over 200 issues!) throughout the 1920s boom. The Austrian School heavily influenced his economic framework. His tour de force, “Economics and the Public Welfare: A Financial and Economic History of the United States, 1914–1946,” is must reading for those seeking a sound understanding of the forces that led to the 1929 crash and Great Depression.

I’ve attempted to extract insight pertinent to the current environment. They apply to the Fed, Beijing and contemporary central banking more broadly. Keep in mind that a momentous change in monetary management (Federal Reserve operations began in 1914) played an instrumental role in a boom that culminated with reckless speculative excess and the 1929 Bubble collapse. The key parallel to today’s cycle can be found with the creeping adoption of radical central bank activism, highlighted by zero rates and massive open-ended QE.

Benjamin Anderson: “The Federal Reserve Act would have worked well had traditional central bank policies been followed, namely, the holding of the rediscount rates above the market rates, and the use of open market operations primarily as an instrumentality for tightening the money market, not for relaxing it. The Federal Reserve System was created to finance a crisis and to finance seasonal needs for pocket cash. It was not created for the purpose of financing a boom, least of all for financing a stock market boom. But from early 1924 down to the spring of 1928 it was used to finance a boom and used to finance a stock market boom.”

Certainly it was unwise in the extreme to build upon it an unusual and illiquid kind of bank credit. It was unwise in the extreme to adopt a policy which would expand bank credit in capital uses, such as real estate mortgage loans, stock and bond collateral loans, bank investments in bonds, and the like. And yet we did these things. Had the Federal Reserve System followed orthodox central bank tradition, using no discretion at all but merely obeying the rules, we should have averted the disasters that followed.”

Where the Federal Reserve banks bought tens of millions for a few days, in connection with the first three liberty loans, they bought hundreds of millions and held them for many months in 1922, 1924, and 1927. And where the Bank of England had primarily used its open market operations for the purpose of tightening its money market in prewar days, the Federal Reserve System used them deliberately for the purpose of relaxing the money market and stimulating bank expansion in 1924 and 1927. At a time when unusual circumstances called for extra caution, they abandoned old standards and became daring innovators in the effort to play God.

“… The culminating episode of 1927, which touched the match to the powder keg and set the uncontrollable forces working which blew us up late in 1929.

Noland comment: Had the boom come to an end in 1927 the financial crash and resulting depression surely would not have been as destabilizing, deep or prolonged. Instead, the “coup de whiskey” threw gas on a raging fire, fueling catastrophic late-cycle “Terminal Phase Excess.” Tremendous systemic damage was inflicted during the ’27 to ’29 speculative mayhem. I have argued Covid’s timing could not have been more pernicious. The unparalleled fiscal and monetary response pushed already historic financial and economic Bubbles to perilous extremes – The Everything Mania. Stock prices, corporate Credit, home prices, cryptocurrencies, NFTs, collectables, etc. Leveraged speculation. Derivatives.

Anderson: “Stock prices were already high in the summer of 1927. There was an unhealthy tone. There was a growing belief that stocks, though high were going much higher there was an increasing readiness to use cheap money in stock manipulation. The situation was still manageable. The intoxication was manifest, not so much in violent behavior as in slightly heightened color and increasing loquacity. The delirium was yet to come. It was waiting for another great dose of the intoxicant.”

Our position in 1927 was thus an unwholesome and precarious one. We were busy and active, we were making money, there was little unemployment. But we were going ahead despite a fundamental disequilibrium, namely, the weakness of the farmers and the producers of raw materials in the absence of satisfactory export trade.”

Speculation in real estate and securities was growing rapidly, and a very considerable part of the supposed income of the people which was sustaining our retail and other markets was coming, not from wages and salaries, rents and royalties, interest and dividends, but from capital gains on stocks, bonds and real estate, which men were treating as ordinary income and spending in increasing degree in luxurious consumption… We could prolong it for a time by further bank expansion and by further cheap money policies, but only at the cost of creating a desperately difficult situation at a later time.

Noland comment: Bernanke and others have asserted Federal Reserve easy money policies cannot be blamed for the pre-crash speculative market melt-up. The Fed did belatedly move to raise rates. But without a determined focus on orchestrating a systemic tightening of credit, such measures proved an abject failure in restraining late-cycle excess.

Anderson: “The Federal Reserve authorities from early 1928 on pursued an inconclusive policy based on three partially conflicting motives: a) the desire to restrain the use of credit for stock market speculation; b) the desire not to tighten money in foreign countries and not to pull in more gold from abroad; and c) the desire not to let money grow tight in business uses at home. The conflict among these policies meant that the efforts at restraint were handicapped and inconclusive, and that the wild speculation ran on for a year and nine months after the restraining efforts began.

Here was a real restraining influence. The Federal Reserve authorities were using measures which, on the basis of their past experience, should have sufficed to stop the stock market boom and did suffice to stop the expansion of bank credit. But the boom went on. There was a new factor in the situation. The public had taken the bit in its teeth. The rise in stock market prices and the lure of stock market profits had caught the public imagination... Federal Reserve governor Roy Young: 'I am laughing at myself sitting here and trying to keep a hundred and twenty-five million people from doing what they want to do.'”

When the Federal Reserve authorities tried to withdraw funds from the money market, the market found new and strange sources from which to draw funds. So much new money had been created in the period from 1922 to early 1928 that the problem of reabsorbing it and getting it under control was a very difficult one. When a bathtub in the upper part of the house has been overflowing for five minutes, it is not difficult to turn off the water and mop up. But when the bathtub has been overflowing for several years, the walls and the spaces between ceilings and floors have become full of water, and a great deal of work is required to get the house dry. Long after the faucet is turned off, water still comes pouring in from the walls and from the ceilings. It was so in 1928 and 1929. At a price, the speculator could get all the money that he wanted.

May 24 – Bloomberg: “China stepped up its fight against soaring commodities prices, summoning top executives to a meeting that threatened severe punishment for violations ranging from excessive speculation to spreading fake news. The government will show ‘zero tolerance’ for monopoly behavior and hoarding, the National Development and Reform Commission said… The push to rein in surging metals prices rippled across markets -- with steel dropping as much as 6% and iron ore tumbling by close to the daily limit -- before prices steadied. The warning from the NDRC comes as a broad surge in commodities prices fuels fears that faster inflation could dent economic growth in China and beyond.”

The Bloomberg Commodities Index jumped 2.1% this week. Copper surged 4.4%, with Nickel rising 4.4%, Zinc 3.4%, and Aluminum 3.6%. Iron Ore added 1.2%. Tin prices ended the week at a decade high. Jumping 4.4%, Crude posted its strongest weekly gain since April.

May 28 – Bloomberg (Alfred Cang): “China’s efforts to rein in surging commodities prices are likely to be in vain as it’s lost the ability to boss the market around, according to two of Wall Street’s biggest firms. The speed of the rebound in demand in advanced economies, particularly the U.S., means China is no longer the buyer dictating pricing, Goldman Sachs… analysts led by Jeff Currie, the bank’s global head of commodities research, said... That view was echoed by his equivalent at Citigroup Inc., Ed Morse, who said… that despite China’s efforts to curb price gains, the real supply-demand balance prevails… What Beijing is doing is similar to what Washington did in the mid-2000’s, according to Goldman. ‘When commentators are unable to understand what is driving such a paradigm shift in prices, they attribute it to speculators - a common pattern throughout history, which has never solved fundamental tightness.’”

Chinese officials can be none too pleased that markets scoff at their commodity market pronouncements. Beijing’s credibility is on the line – and not just with surging commodities inflation. On multiple fronts, officials are attempting to rein in excess without resorting to a systemic tightening of financial conditions. Chinese officials are keen to impose some market discipline upon the corporate and local government debt markets – but without unleashing instability. They seek to cool housing market excess through “macro-prudential” measures, while acting cautiously to avoid bursting a historic Bubble.

They are conveying some weakness. If Beijing is serious about reining in excess – and defending their credibility – they’ll have to get a lot tougher. Markets Beware.

It’s 1929 – and policymakers – in China, the U.S. and globally - have lost control of Bubble Dynamics. At this point, timid measures will not suffice. Efforts to rein in speculative excess while promoting productive investment are destined to fail. To break deeply ingrained speculative psychology will require pain – yet policymakers rightfully fear a bout of pain could unleash a panic.

“The public had taken the bit in its teeth.” The global “bathtub” has been overflowing for too many years. “Fundamental disequilibrium.” Beijing, the Fed and the global central bank community “could prolong it for a time by further [central] bank expansion and by further cheap money policies, but only at the cost of creating a desperately difficult situation at a later time.” Benjamin Anderson’s analytical framework is as germane today as it was during the waning days of the “Roaring Twenties”.

For the Week:

The S&P500 gained 1.2% (up 11.9% y-t-d), and the Dow added 0.9% (up 12.8%). The Utilities fell 1.6% (up 3.0%). The Banks rose 1.0% (up 36.5%), and the Broker/Dealers jumped 1.9% (up 25.0%). The Transports advanced 1.8% (up 25.9%). The S&P 400 Midcaps rose 1.4% (up 18.2%), and the small cap Russell 2000 jumped 2.4% (up 14.9%). The Nasdaq100 advanced 2.0% (up 6.2%). The Semiconductors surged 4.4% (up 14.0%). The Biotechs slipped 0.4% (down 2.9%). With bullion jumping $23, the HUI gold index dipped 0.4% (up 6.4%).

Three-month Treasury bill rates ended the week at negative 0.0025%. Two-year government yields slipped a basis point to 0.14% (up 2bps y-t-d). Five-year T-note yields declined two bps to 0.80% (up 44bps). Ten-year Treasury yields fell about three bps to 1.60% (up 68bps). Long bond yields dropped four bps to 2.28% (up 64bps). Benchmark Fannie Mae MBS yields fell four bps to 1.82% (up 48bps).

Greek 10-year yields sank 14 bps to 0.83% (up 20bps y-t-d). Ten-year Portuguese yields fell nine bps to 0.47% (up 44bps). Italian 10-year yields dropped 12 bps to 0.91% (up 37bps). Spain's 10-year yields fell eight bps to 0.47% (up 43bps). German bund yields declined five bps to negative 0.18% (up 39bps). French yields dropped seven bps to 0.17% (up 51bps). The French to German 10-year bond spread narrowed two to 35 bps. U.K. 10-year gilt yields slipped three bps to 0.80% (up 60bps). U.K.'s FTSE equities index was little changed (up 8.7% y-t-d).

Japan's Nikkei Equities Index surged 2.9% (up 6.2% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.08% (up 6bps y-t-d). France's CAC40 rose 1.5% (up 16.8%). The German DAX equities index added 0.5% (up 13.1%). Spain's IBEX 35 equities index increased 0.2% (up 14.3%). Italy's FTSE MIB index gained 0.8% (up 13.2%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.5% (up 5.5%), and Mexico's Bolsa added 0.4% (up 13.5%). South Korea's Kospi index advanced 1.0% (up 11.0%). India's Sensex equities index rose 1.7% (up 7.7%). China's Shanghai Exchange surged 3.3% (up 3.7%). Turkey's Borsa Istanbul National 100 index dropped 2.1% (down 3.7%). Russia's MICEX equities index rose 1.9% (up 13.4%).

Investment-grade bond funds saw inflows slow to $911 million, while junk bond funds posted outflows of $1.369 billion (from Lipper).

Federal Reserve Credit last week rose $14.2bn to a record $7.889 TN. Over the past 89 weeks, Fed Credit expanded $4.163 TN, or 112%. Fed Credit inflated $5.078 Trillion, or 181%, over the past 446 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $4.0bn to $3.535 TN. "Custody holdings" were up $144bn, or 4.2%, y-o-y.

Total money market fund assets jumped $67.7bn to $4.609 TN. Total money funds declined $179bn y-o-y, or 3.7%.

Total Commercial Paper fell $9.5bn to $1.189 TN. CP was up $138bn, or 13.1%, year-over-year.

Freddie Mac 30-year fixed mortgage rates dropped five bps to 2.95% (down 20bps y-o-y). Fifteen-year rates declined two bps to 2.27% (down 35bps). Five-year hybrid ARM rates were unchanged at 2.59% (down 54bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 3.10% (down 60bps).

Currency Watch:

May 25 – Financial Times (Thomas Hale): “China’s currency hit its strongest level against the dollar in three years, posing a challenge for Beijing as it seeks to balance demand for the country’s exports with surging commodity prices. The onshore-traded renminbi gained 0.2% to reach Rmb6.4052 per greenback on Tuesday, its highest point since June 2018.”

For the week, the U.S. Dollar Index was about unchanged at 90.03 (up 0.1% y-t-d). For the week on the upside, the Brazilian real increased 2.7%, the South African rand 1.4%, the New Zealand dollar 1.1%, the South Korean won 1.0%, the Singapore dollar 0.7%, the British pound 0.3%, the Norwegian krone 0.3%, the Swedish krona 0.2%, the Mexican peso 0.1%, and the euro 0.1%. On the downside, the Japanese yen declined 0.8%, the Australian dollar 0.3%, the Swiss franc 0.2%, and the Canadian dollar 0.1%. The Chinese renminbi gained 1.03% versus the dollar this week (up 2.49% y-t-d).

Commodities Watch:

May 25 – Reuters (Min Zhang, Hallie Gu, Muyu Xu and Shivani Singh): “China will strengthen price controls on iron ore, copper, corn and other major commodities in its 14th five-year plan for 2021 to 2025 to address abnormal fluctuations in prices, the state planner said… The country will also step up monitoring and analysis of commodity prices such as crude oil, natural gas and soybean, the National Development and Reform Commission (NDRC) said… ‘(Local governments) should study and judge the import impact in depth, promptly make suggestions... (on matters) such as reserves, import and export, fiscal and taxation, and financial adjustment measures…’”

The Bloomberg Commodities Index rallied 2.1% (up 18.9% y-t-d). Spot Gold gained 1.2% to $1,904 (up 0.3%). Silver rose 1.3% to $27.94 (up 5.8%). WTI crude surged $2.74 to $66.32 (up 37%). Gasoline jumped 3.5% (up 52%), and Natural Gas rose 2.8% (up 18%). Copper surged 4.4% (up 33%). Wheat fell 1.6% (up 4%). Corn slipped 0.4% (up 36%). Bitcoin dropped $2,328, or 6.2%, this week to $34,986 (up 20%).

Coronavirus Watch:

May 24 – Associated Press (Sheikh Saaliq): “India crossed another grim milestone Monday with more than 300,000 people lost to the coronavirus, while a devastating surge of infections appeared to be easing in big cities but was swamping the poorer countryside.”

May 21 – Reuters: “The death toll from COVID-19 in Latin America and the Caribbean passed 1 million people…, with the pandemic worsening in the part of the world with the highest per capita death rate. From the dusty highlands of Bolivia to the Brazilian metropolis of São Paulo, the pandemic has swamped underfunded healthcare systems after spreading fast across nations where many people survive hand-to-mouth and have been unable to enter lockdown.”

Market Mania Watch:

May 24 – Bloomberg (Mark Gilbert): “One reassuring aspect of the rollercoaster ride that saw Bitcoin lose half its value in less than two months is the immunity of the real financial world to contagion from crypto tokens, which I increasingly think of as UnfunnyNotMoney. But there is a danger that speculators, particularly if they’re young and inexperienced, have a ‘once bitten, twice shy’ reaction to losses that could harm their propensity to allocate cash to long-term savings. The gamification of finance is a worrying trend, and it’s not just restricted to buying and HODLing digital currencies. The FOMO/YOLO crowd has also embraced equities, as we saw earlier this year with the rise and fall (and rise again) of GameStop Corp. and other Robinhood Markets Inc. favorites that caught the attention of Redditors.”

May 24 – CNBC (Yun Li): “Bitcoin is still in a stretch of double-digit intraday moves after briefly halving its value last week, and Wall Street strategists say this crazy run won’t be over anytime soon. It’s been a rude awakening for bitcoin investors who thought they could handle the crypto volatility. The world’s largest digital currency suffered a 30% one-day drop last Wednesday, falling to about $30,000 apiece. Just in mid-April, bitcoin hit a record high of $64,829. The turbulence was dramatic even by crypto’s standards.”

May 27 – Bloomberg (Elena Popina): “As investors turn the page on the first 100 sessions of 2021, they enter the next chapter staring at the same developments that kept them dizzy earlier in the year. The retail crowd is making the stock market front-page news again as Express Inc. jumps by a quarter in one session and AMC Entertainment Holdings, another poster child of Reddit mania, sees the volume of its traded options tie for an all-time high. Ford Motor Co. posted the best day since June amid an options frenzy, while a meme-stock basket jumped by the most since March.”

May 23 – Wall Street Journal (Heather Somerville): “Startup chief executives are turning a cold shoulder to SPACs. Skeptical CEOs say they are turning down offers from special-purpose acquisition companies… So-called blank-check companies, which go public with no assets and then merge with private companies, exploded in popularity last year as a mechanism for startups to raise a lot of money with more speed and fewer regulatory hurdles than a traditional initial public offering.”

May 24 – CNBC (Stephanie Landsman): “Nobel prize-winning economist Robert Shiller is worried a bubble is forming in some of the market’s hottest trades. He’s notably concerned about housing, stocks and cryptocurrencies, where he sees a ‘Wild West’ mentality among investors… ‘In real terms, the home prices have never been so high. My data goes back over 100 years, so this is something,’ said Shiller… ‘I don’t think that the whole thing is explained by central bank policy. There is something about the sociology of markets that’s happening.’”

May 23 – Reuters: “Cryptocurrency miners, including HashCow and BTC.TOP, have halted all or part of their China operations after Beijing intensified a crackdown on bitcoin mining and trading, hammering digital currencies amid heightened global regulatory scrutiny. A State Council committee led by Vice Premier Liu He announced the crackdown late on Friday as part of efforts to fend off financial risks. It was the first time China's cabinet has targeted virtual currency mining, a sizable business in the world's second-biggest economy that some estimates say accounts for as much as 70% of the global crypto supply.”

May 27 – Financial Times (Joe Rennison and Aziza Kasumov): “Investors have been jolted by a slide in the price of convertible bonds issued at the top of the market this year, as fears of higher inflation have pushed interest rates upwards and dented the debt’s value. Marquee tech groups like Twitter, Peloton and Airbnb took advantage of hot demand to issue convertible bonds just before sentiment shifted… The drops sustained by these convertible bonds illustrate how Wall Street investors are grappling with both the risk of higher price growth and mounting concerns that the tech trade that has generated outsized returns since the market trough in March 2020 has run out of steam.”

Market Instability Watch:

May 25 – Financial Times (Mohamed El-Erian): “I vividly remember a meeting in late 2007 with the head of a major US bank. The executive drew an inverted U in response to me asking where financial markets stood. When told that we were near the top, I immediately asked about the bank’s risk positioning. ‘Max risk on’ was the rather surprising answer. Surely, it was prudent to reduce risk ahead of an expected turning point? No, I was told. The bank needed ‘unambiguous evidence’ that the markets were turning before altering its strategy. After all, it is hard to time inflection points, competitors also had lots of risk on, the bank feared short-term underperformance and the authorities were not ringing any alarm bells. In the event, the bank had to be rescued in the 2008 financial crisis.”

May 25 – CNBC (Kate Rooney and Maggie Fitzgerald): “Bitcoin’s aggressive moves are being driven by much more than the next China crackdown or Elon Musk headline. Traders taking excessive risk in the unregulated cryptocurrency market being forced to sell when prices go down were in large part responsible for last week’s 30% drop in prices and outages for major exchanges, according to analysts. A burgeoning bitcoin lending market is also adding to the volatility… When traders use margin, they essentially borrow from their brokerage firm to take a bigger position in bitcoin. If prices go down, they have to pay the brokerage firm back in what’s known as a ‘margin call.’ As part of that, there’s often a set price that triggers selling in order to make sure traders can pay the exchange back. Brian Kelly, CEO of BKCM, pointed to firms in Asia such as BitMEX allowing 100-to-1 leverage for cryptocurrency trades.”

May 25 – Wall Street Journal (Mike Bird): “Bitcoin has recovered some of its losses after Chinese Vice Premier Liu He’s pledge to crack down on mining and trading on Friday. But investors should be cautious with all crypto as far as China is concerned. The government has its own reasons for smothering the sector, and a track record that suggests it will follow through effectively. The first and most obvious reason is the stated one: to limit the risk of financial excesses becoming a broader social issue. In some areas, particularly real estate, the Chinese government has struggled to seriously control expanding leverage and risk. But crypto advocates shouldn’t confuse that for laxity generally.”

May 26 – Bloomberg (Eric Lam): “Bitcoin’s explosive moves are stoking the volatility of U.S. stock futures in haywire trading days, according to Singapore’s DBS Group Holdings Ltd. In a study that concludes the world’s biggest token is no longer a fringe asset class, DBS’s Chief Economist Taimur Baig and Macro Strategist Chang Wei Liang wrote that S&P 500 contracts tend to register bigger swings after Bitcoin spiked up or down by 10% in the span of an hour.”

May 25 – Bloomberg (Benjamin Purvis and Alexandra Harris): “The glut of dollars in money markets is now so large that a key facility for parking cash at the Federal Reserve is at levels previously seen only during volatile quarter-end periods. Some 54 separate counterparties stashed a total of $394.9 billion with the central bank via the reverse repurchase agreement facility on Monday. That’s more than the 53 bidders who used the mechanism on the final day of March 2020 -- at the height of the pandemic panic -- and the overall volume is the highest since the end of June 2017, when it hit $398.9 billion.”

May 25 – Financial Times (John Plender): “Billionaire US fund manager Stanley Druckenmiller delivered an apocalyptic warning earlier this month that the dollar could cease to be the predominant global reserve currency within 15 years. ‘I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances,’ the chief executive of Duquesne Family Office declared. He is not alone in expressing concerns about excess US demand, a more inflationary environment and accompanying dollar weakness. Such worries have been a contributory factor in the jittery equity markets of the past two weeks. The dollar has survived at least four decades-worth of predictions of its demise. Yet Druckenmiller’s views on currencies should not be cavalierly dismissed.”

Inflation Watch:

May 25 – Wall Street Journal (Peter Grant): “The soaring lumber costs that have slowed construction of single-family homes are starting to pinch apartment-building developers too. While many multifamily buildings are made of steel, glass and concrete, wood is also a major component, especially in low- and mid-rise buildings. Wood is also used extensively for floors, cabinets and other fixtures. As a result, multifamily developers like Greystar Real Estate Partners LLC and Trammell Crow Residential indicated they are experiencing the same sticker shock that is hitting home builders. Even many homeowners are feeling it when they visit their local hardware stores to buy lumber. Prices are near record territory and more than three times what they were at this time last year… Material costs included in new multifamily construction are up 25% to 30% over the past year, according to CoStar. That increase—not just in prices for lumber but for other commodities like fuel, copper and steel—was the largest since at least 1988, CoStar said.”

May 21 – Bloomberg (Anne Riley Moffat): “Inflation is landing in America’s refrigerators -- and it’s hitting meat-eaters most of all. About one in three U.S. adults say they’re spending more on groceries than they were at the start of 2021, according to a Morning Consult survey of 2,200 U.S. adults… Red meat was the ingredient cited most often for its higher prices, with chicken right behind. Food inflation has been inching up for months, driven by soaring commodity costs, costlier transportation and challenges securing labor. Rising demand for meat, from home cooks as well as from the booming fast-food industry, has buoyed prices, too.”

May 22 – CNBC (Patti Domm): “Workers are getting higher wages, but at some point that could bite into companies’ profits. As the economy reopens, costs are climbing for everything from packaging and raw materials to shipping. In addition to these expenses, companies are also paying more to get workers to come in the door…. McDonald’s said last week that it was boosting wages for the 36,500 hourly workers at company-owned stores by 10%, and Chipotle announced it will raise wages to an average of $15 an hour by the end of June. Bank of America said it would raise minimum wages for its hourly workers to $25 an hour, from the current $20, by 2025.”

May 24 – Wall Street Journal (Telis Demos): “Investors hunting for signs of inflation pressure should keep an eye on something they might not usually think about: the cost of insuring a car or home. Last year insurers were often lowering premiums for auto customers who were driving a lot less and therefore getting into fewer accidents. Now… consumers’ motor-vehicle insurance costs are again rising. The recent U.S. consumer-price index update had that component up 6.1% in April from a year earlier… The question for insurers is whether premium increases will be big enough. Part of the cost of covering a claim to repair or replace a car or home is under pressure.”

May 25 – CNBC (Diana Olick): “If you think buying a house has become too expensive, try renting a home or apartment. Fast-rising home prices have investors seeing dollar signs, and renters digging deeper into their wallets. Rents for apartments rose 1.3% in April, according to RealPage, which is the fastest pace for a single month in about a decade. And the jump comes right at the beginning of prime leasing season, as the majority of household moves occur between April and September.”

May 24 – Bloomberg (Dan Murtaugh and Brian Eckhouse): “A key selling point that made solar energy the fastest-growing power source in the world—rapidly decreasing costs—has hit a speed bump. Solar module prices have risen 18% since the start of the year after falling by 90% over the previous decade. The reversal, fueled by a quadrupling in the cost of the key raw material polysilicon, threatens to delay projects and slow uptake of solar power just as several major governments are finally throwing their weight behind it in an effort to slow climate change. ‘The disruption to solar hasn’t been this bad in more than a decade,’ said Jenny Chase, lead solar analyst with… BloombergNEF. ‘Developers and governments are going to have to stop expecting solar to get much cheaper quickly.’”

Biden Administration Watch:

May 27 – Financial Times (Lauren Fedor): “Joe Biden is facing growing pressure from both flanks of the Democratic party as the US president negotiates his $2.3tn infrastructure package, between moderates who want him to strike a deal with Republicans and progressives who are urging him to walk away from the negotiating table. The tug of war among Democrats on Capitol Hill could prove problematic for Biden because he may soon have to make a decision that satisfies one side of his political base, but disappoints the other on a core element of his economic agenda. Biden had initially proposed an ambitious $2.3tn infrastructure package funded largely by an increase in the corporate tax rate — then last week, after several rounds of negotiations with Republicans, he lowered his target to $1.7tn.”

May 24 – Bloomberg (David R. Baker and Keith Laing): “Three times this year, major pieces of U.S. infrastructure have failed: first the Texas power grid, then the East Coast’s main gasoline pipeline, then a freeway bridge over the Mississippi River. The crises disrupted businesses and lives, cost billions and left more than 150 Texans dead. President Joe Biden’s $1.7 trillion infrastructure package wouldn’t necessarily have prevented any of those failures. It wouldn’t have stopped the hackers who shut down the Colonial Pipeline for days, closing gas stations across the Southeast. While the hack may push the federal government to enforce pipelines’ cybersecurity, the administration bill is silent on that issue.”

May 27 – Bloomberg: “U.S. Trade Representative Katherine Tai and China’s Vice Premier Liu He had a ‘candid’ first conversation as the two sides try to resolve some of their differences on trade. The trade chiefs spoke… and ‘conducted candid, pragmatic and constructive exchanges in an attitude of equality and mutual respect.’ In a separate statement, the USTR said ‘Ambassador Tai discussed the guiding principles of the Biden-Harris administration’s worker-centered trade policy and her ongoing review of the U.S.-China trade relationship, while also raising issues of concern.’”

May 26 – Reuters (Nandita Bose and Trevor Hunnicutt): “The Biden administration is monitoring rising U.S. home prices, which it is concerned are increasingly making housing unaffordable, a White House spokeswoman said… ‘The increase in housing prices we’ve seen does raise concerns for us about housing affordability and access to the housing market,’ White House press secretary Jen Psaki told reporters. ‘We recognize there is a need for new housing supply, particularly on the affordable end of the market.’”

May 26 – Reuters (Katanga Johnson): “The U.S. Securities and Exchange Commission (SEC) is considering new rules to protect investors amid a surge in the use of special purpose acquisition companies (SPACS) as capital-raising vehicles, its new chair will tell lawmakers… Gary Gensler, in… testimony to the financial services and general government subcommittee of the U.S. House Appropriations panel…, said that overseeing SPACS has also placed demands on the resources at the watchdog, which has seen a 4% decline in its staff overall since 2016.”

May 24 – Reuters (David Shepardson): “U.S. Commerce Secretary Gina Raimondo said… a proposed $52 billion boost in U.S. government funding for semiconductor production and research could result in seven to 10 new U.S. factories. Raimondo said… she anticipated the government funding would generate ‘$150 billion-plus’ in investment in chip production and research - including contributions from state and federal governments and private-sector firms.”

May 25 – Reuters (Pete Schroeder): “The Democratic head of the U.S. Senate Banking Committee, Sherrod Brown, is prioritizing legislation that would set a national cap on how much lenders can charge in interest…, as he ramps up pressure on abusive lending practices. Brown hopes to build on his victory this month in repealing a rule introduced under former President Donald Trump's administration that consumer advocates said allowed payday and other high-interest lenders to circumvent state interest rate caps. ‘The next step is going to be putting a national cap on interest rates," Brown…said… ‘This is a continued fight.’”

Federal Reserve Watch:

May 26 – Bloomberg (Rich Miller): “A key Federal Reserve policy maker said… it will be important for the central bank to begin discussing in coming months plans to reduce its massive bond purchases if the economy continues to power ahead coming out of the pandemic. ‘If my expectations about economic growth, employment, and inflation over the coming months are borne out,’ Fed Vice Chairman for Supervision Randal Quarles said, ‘it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings.’”

May 26 – Financial Times (James Politi and Colby Smith): “A senior Federal Reserve official has called for a debate about tapering the central bank’s asset purchases if the US recovery keeps gathering steam, the latest sign the Fed is edging towards reducing its support for the economy. Randal Quarles, a Fed vice-chair…, said he believed that even after ‘discounting temporary factors’, the increase in US inflation since December would ‘prove sufficient’ to merit a drawdown in asset purchases later in 2021. However, the labour market is still lagging, he said…”

May 25 – Bloomberg (Brian Chappatta): “At the highest level, it looks as if the Federal Reserve hasn’t done much of anything for several months… However, a significant shift appears to be brewing beneath the surface at the central bank that could drastically reshape a part of critical market plumbing, potentially preventing bouts of illiquidity in the $21.5 trillion Treasury market and altering balance-sheet calculations at the largest U.S. banks. Minutes of the Federal Open Market Committee’s April meeting… indicated that a ‘substantial majority’ of officials see the benefits outweighing the costs of installing what’s known as a ‘standing repo facility,’ which would effectively make permanent the emergency measures that the central bank rolled out during periods of turmoil in the funding markets in September 2019 and the onset of the Covid-19 pandemic in March 2020.”

May 27 – CNBC (Jeff Cox): “The Federal Reserve seems to be having an identity crisis. Not that long ago, the U.S. central bank was seen solely as a watchdog of the nation’s financial system as well as the entity charged with using its various policy levers to control inflation and keep unemployment low. Nowadays, well, things have changed. In recent months, the Fed has extended its responsibilities as a bank regulator to the fight against climate change. Where once the Fed used its power over interest rates to control inflation and keep borrowing costs low, it now is taking on the role of making sure job gains are spread equally among income, racial and gender groups. If this doesn’t sound like your parents’ Fed, or even legendary former Chairman Paul Volcker’s, you’re not alone.”

May 24 – Reuters (Howard Schneider): “Kansas City Federal Reserve President Esther George… cautioned against a ‘rigid’ approach to monetary policy in a post-pandemic era that may involve different inflation and employment dynamics than ones seen in the last few years and worked into the Fed’s current policy framework… While the bulk of Fed officials suspects those price pressures stem from temporary problems that will ease in coming months, ‘I am not inclined to dismiss today’s pricing signals or to be overly reliant on historical relationships and dynamics in judging the outlook for inflation,’ George said…”

May 24 – Yahoo Finance (Brian Cheung): “Federal Reserve Bank of St. Louis President James Bullard said… the central bank is not yet ready to pull back on its aggressive monetary stimulus, but could be ready soon. ‘We’re not quite there yet, I think we will get there in the months ahead,’ Bullard told Yahoo Finance… ‘I think there will come a time when we can talk more about changing the parameters of monetary policy, I don’t think we should do it when we’re still in the pandemic,’ Bullard said.”

May 25 – Reuters: “The recent rise in U.S. inflation is unlikely to lead to the kind of undesirably high inflation that some notable economists have warned about, Federal Reserve Bank of Chicago President Charles Evans said…, reiterating his support for the Fed's super-easy policy. ‘I have not seen anything yet to persuade me to change my full support of our accommodative stance for monetary policy or our forward guidance about the path for policy,’ Evans said… Government spending has lifted inflation expectations recently, he noted, in what he called a ‘welcome’ development. ‘Once the burst of post-pandemic relative price level adjustments is behind us and with the impetus from fiscal support receding, the path to unacceptably high and persistent inflation in 2022 and beyond likely relies on an accelerationist story line,’ Evans said. ‘I think this risk is low.’”

May 25 – Bloomberg (Matthew Boesler and Craig Torres): “With only months left on their current terms, Federal Reserve vice chairs Randal Quarles and Richard Clarida were reminded… their time in office may be drawing short. Quarles’s tenure as the Fed’s top banking supervisor expires Oct. 13 while Clarida’s term ends Jan. 31, a few weeks before Chair Jerome Powell’s own tenure at the helm is up… Senator Elizabeth Warren, during a tart exchange over banking oversight, pointed out to Quarles that his term as vice chair for supervision was up in five months. ‘Our financial system will be safer when you are gone,’ she told a hearing before the Senate Banking Committee. ‘I urge President Biden to fill your role with someone who’ll actually keep our financial system safe.’”

U.S. Bubble Watch:

May 27 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits dropped more than expected last week as layoffs subsided, with companies desperate for workers to meet surging demand unleashed by a rapidly reopening economy… Initial claims for state unemployment benefits fell 38,000 to a seasonally adjusted 406,000 for the week ended May 22… That was the lowest since mid-March 2020 and marked the fourth straight weekly decline in applications.”

May 25 – CNBC (Diana Olick): “Home prices in March were 13.2% higher in March, compared with March 2020, according to the S&P CoreLogic Case-Shiller National Home Price Index. That’s up from the 12% annual gain in February, and it marks the 10th straight month of accelerating home prices. The March gain is the largest since December 2005 and is one of the largest in the index’s 30-year history… High demand is butting up against near record-low supply, resulting in bidding wars for the vast majority of listings. The 10-city composite rose 12.8% year over year, up from 11.7% in the previous month. The 20-city composite increased 13.3%, up from 12% in February.”

May 25 – Wall Street Journal (Nicole Friedman): “Prices for new and previously owned U.S. homes are surging, as strong demand continues to overwhelm the housing supply. The S&P CoreLogic Case-Shiller National Home Price Index… rose 13.2% in the year that ended in March, up from a 12% annual rate the prior month. March marked the highest annual rate of price growth since December 2005. Also…, the Commerce Department said the median price of a new home sold in April was $372,400, up 20.1% from a year earlier, the strongest annual gain since 1988. The median sales price for existing homes rose 19.1% in April to $341,600…”

May 26 – Bloomberg (Prashant Gopal): “Luxury-home builder Toll Brothers Inc. is riding the U.S. housing frenzy to record heights. Forget worries about soaring lumber costs. Price increases are covering them, and then some. After a quarter in which it beat its own forecasts on every metric, Toll boosted its guidance and projected profit margins that will expand this year and improve further in 2022... The stock has gained almost 50% this year. The higher profit forecasts come despite labor, land and materials costs that are escalating ever higher, challenging builders across the country at a time when demand for their homes has never been greater. To compensate, Toll and some competitors are pushing prices as far as they can go, testing what buyers are willing to pay.”

May 28 – Bloomberg (Olivia Rockeman): “U.S. personal spending rose at a steady, yet moderate pace in April after a stimulus-fueled binge a month earlier. The reading is consistent with sustained growth in the biggest part of the economy and partly reflects faster inflation. Purchases of goods and services increased 0.5% following an upwardly revised 4.7% jump in March that was the biggest since June… The personal consumption expenditures core price gauge, which excludes food and fuel, increased 0.7%, exceeding expectations and the biggest monthly advance since October 2001.”

May 25 – Associated Press (Matt Ott): “Consumer confidence ticked down slightly in May but remains nearly as high as it’s been since the pandemic began. The Conference Board reported… its consumer confidence index fell to 117.2 from April’s 117.5 reading, the highest level since February of 2020… The present situation index, based on consumers assessment of current business and labor market conditions, rose to 144.3 from 131.9. Although the percentage of consumers surveyed claiming that business conditions are ‘good’ fell slightly from 19.4% to 18.7%, those claiming conditions are ‘bad’ declined more, from 24.5% in April to 21.8% in May.”

May 27 – Bloomberg (Reade Pickert and Olivia Rockeman): “Orders placed with U.S. factories for business equipment rose in April by the most in eight months, marking yet another robust month of capital investment fueled by a broader reopening of the economy. Core capital goods orders… increased 2.3% after a 1.6% gain a month earlier…”

May 21 – Bloomberg (Chris Middleton): “IHS Markit Economics… U.S. preliminary services purchasing managers’ index for May… Index rises to 70.1 from 64.7 in April; year ago 37.5. Highest reading series began. Tenth consecutive month of expansion. Prices charged rises to 65.6 vs 62.2 in April. Highest reading since series began. Twelfth consecutive month of expansion. Input prices rise vs prior month. Highest reading since series began.”

May 27 – Reuters (Joe White): “U.S. consumers borrowed more for longer in the first quarter of 2021 so they could drive more expensive trucks and sport utility vehicles, according to a new Experian study… The average amount financed to buy a new vehicle rose to $35,392 in the first quarter from $33,833 a year earlier. The share of new vehicle loans longer than 72 months rose to just over 35% of the total from just under 32% a year earlier.”

May 24 – New York Times (Cade Metz): “It was seven years ago when Waymo discovered that spring blossoms made its self-driving cars get twitchy on the brakes. So did soap bubbles. And road flares. New tests, in years of tests, revealed more and more distractions for the driverless cars. Their road skills improved, but matching the competence of human drivers was elusive. The cluttered roads of America, it turned out, were a daunting place for a robot. The wizards of Silicon Valley said people would be commuting to work in self-driving cars by now. Instead, there have been court fights, injuries and deaths, and tens of billions of dollars spent on a frustratingly fickle technology that some researchers say is still years from becoming the industry’s next big thing. Now the pursuit of autonomous cars is undergoing a reset. Companies like Uber and Lyft, worried about blowing through their cash in pursuit of autonomous technology, have tapped out.”

May 25 – Reuters: “U.S. companies borrowed $9.8 billion for capital investments in April, up 19% from a year earlier, benefiting from an economic recovery triggered by mass COVID-19 vaccinations and easing restrictions, the Equipment Leasing and Finance Association (ELFA) said. Borrowing in April rose 5% from the previous month, as companies across several sectors lined up for loans, leases and lines of credit.”

Fixed Income Watch:

May 28 – Bloomberg (Alex Wittenberg): “U.S. high-grade bond spreads fell to a 14-year low Friday as investors temper their inflation projections and grow bullish on a reopening economy. The risk premium on investment-grade debt tightened one basis point to close at 84 bps over Treasuries, a level last seen in 2007…”

May 24 – Bloomberg (Caleb Mutua): “Credit ratings of U.S. high-yield bond issuers are being increased at a record rate as the economy rebounds from the pandemic… Junk debt upgrades so far this quarter reached the highest level relative to downgrades since Bloomberg started compiling the data in 2011, thanks partly to cheap funding costs enabling companies to borrow more than $1 trillion last year to help repair balance sheets. In the latest sign of recovery, there have been 504 junk upgrades compared to 314 downgrades year-to-date…”

May 24 – Wall Street Journal (Sebastian Pellejero): “Sales of securities backed by bundles of risky corporate loans are hitting records, lifted by a recovering economy and demand from yield-starved investors. Issuance of new collateralized loan obligations, which buy up loans to companies with junk credit ratings and package them into securities, totaled over $59 billion as of May 20, according to… S&P Global Market Intelligence’s’ LCD. That is the highest ever figure for that period in data going back to 2005.”

China Watch:

May 25 – Bloomberg: “China’s strong economic momentum eased slightly in May, as surging raw material prices squeezed profits, businesses turned more cautious and property and car sales underperformed. That’s the outlook of an aggregate index combining eight early indicators tracked by Bloomberg, which slipped from April but remained in expansionary territory… Confidence among small and medium-sized enterprises, or SMEs, eased in May from the highest level since the Covid-19 outbreak in the previous month, according to a survey of more than 500 companies by Standard Chartered Plc. The index measuring current performance weakened in the month, while a drop in the ‘expectations’ sub-index points to concerns on future demand and profit margins. ‘Surging raw-material prices appears to have become the key challenge for SMEs,’ according to Standard Chartered’s economists Lan Shen and Ding Shuang.”

May 23 – Bloomberg: “One pillar of this year’s blistering commodities rally -- Chinese demand -- may be teetering. Beijing aced its economic recovery from the pandemic largely via an expansion in credit and a state-aided construction boom that sucked in raw materials from across the planet. Already the world’s biggest consumer, China spent $150 billion on crude oil, iron ore and copper ore alone in the first four months of 2021. Resurgent demand and rising prices mean that’s $36 billion more than the same period last year. With global commodities rising to record highs, Chinese government officials are trying to temper prices and reduce some of the speculative froth that’s driven markets. Wary of inflating asset bubbles, the People’s Bank of China has also been restricting the flow of money to the economy since last year, albeit gradually to avoid derailing growth.”

May 24 – Bloomberg (Yvonne Yue Li): “China’s commodity markets may be hearing mixed messages from the government. Just hours after China’s state economic planning agency stepped up its fight against soaring commodity prices, threatening ‘speculators and hoarders’ with severe punishment for violations, Premier Li Keqiang urged further strengthening of commodities imports, storage and transportation. The seemingly discordant directives underscore the tightrope the government is walking as it tries to fend off inflation and maintain economic growth. The country faces a delicate balance between ensuring supplies of materials to fuel expansion on the one hand, and on the other protecting consumers from the feedback-loop impact from soaring prices. The commodities boom is stoking fears that inflation could dent economic growth in China and beyond.”

May 27 – Financial Times (Thomas Hale): “Soaring commodity prices are putting pressure on businesses in China, even as the country’s wider industrial sector rebounds from the early effects of the coronavirus pandemic… The National Bureau of Statistics… showed a 57% rise in profits at large industrial companies in April compared with a year earlier, with the sector benefiting from the comparison with a low base in 2020 owing to the pandemic. Profits grew 92% in March. The data highlighted an ‘uneven’ improvement in corporate performance in China, the NBS said, despite the economy’s broad recovery over the past year.”

May 25 – Bloomberg: “The apparent lack of central government support for China Huarong Asset Management Co. is deepening concern about the level of backing for state-owned enterprises at the provincial level. SOEs based in Henan, a landlocked province reliant on agriculture, and Shanxi, an important coal-producing region, are struggling to sell bonds despite efforts by local governments to shore up investor confidence. Issuance of new debt by nonfinancial SOEs in Henan has plunged 67% in 2021 from a year earlier, while sales in Shanxi have tumbled 75%... Chinese authorities are sending a clear signal that poorly run SOEs and local government financing vehicles won’t be automatically bailed out as President Xi Jinping seeks to reduce moral hazard in the country’s financial markets. While this strategy will make investors more discerning as well as enforce better fiscal discipline in the bloated state sector, it risks penalizing firms in poorer provinces by limiting their ability to raise funds and repay debt.”

May 24 – Bloomberg (Sofia Horta e Costa): “China’s repo market shows just how risky China Huarong Asset Management Co.’s bonds are perceived to be within the mainland, despite being majority-owned by the finance ministry. Borrowers putting up a Huarong Securities 2023 bond for collateral now get just 40% of the note’s face value as cash, down from 91% at the start of April… The decline in effective value illustrates the stunning loss of confidence in a company that’s crucial to China’s banking system. Given the size of Huarong’s outstanding yuan bonds -- $18.5 billion worth -- and its former quasi-sovereign status, the company’s notes are likely to have been widely used as collateral for repurchase agreements.”

May 23 – Bloomberg: “Even by the standards of a record-breaking global credit binge, China’s corporate bond tab stands out: $1.3 trillion of domestic debt payable in the next 12 months. That’s 30% more than what U.S. companies owe, 63% more than in all of Europe and enough money to buy Tesla Inc. twice over. What’s more, it’s all coming due at a time when Chinese borrowers are defaulting on onshore debt at an unprecedented pace. The combination has investors bracing for another turbulent stretch for the world’s second-largest credit market. It’s also underscoring the challenge for Chinese authorities as they work toward two conflicting goals: reducing moral hazard by allowing more defaults, and turning the domestic bond market into a more reliable source of long-term funding.”

May 27 – Bloomberg: “China Evergrande Group, the country’s most indebted developer, slid in the credit and stock market Thursday after a local media report that regulators were looking into dealings with a banking unit that owns its bonds. The China Banking and Insurance Regulatory Commission is examining more than 100 billion yuan ($15.7bn) of transactions between the developer and Shengjing Bank Co., according to Caixin… Shengjing holds large amounts of bonds issued by Evergrande, WeNews said. Evergrande is the bank’s biggest shareholder.”

May 25 – Bloomberg (Ina Zhou): “A developer with office and hotel projects in the U.S. became the latest Chinese real estate firm to default after mainland authorities tightened policies to curb property prices. Oceanwide Holdings International Development III Co. repaid just 52% of a $280 million dollar bond which matured May 23… The firm plans to repay the remaining principal and interest within three months. The filing also said parent Oceanwide Holdings Co., which is the bond’s guarantor, faces ‘a temporary cash flow issue’ due to impacts from the pandemic as well as real estate and financial regulations.”

May 26 – Reuters: “China's banking regulator has asked lenders to stop selling investment products linked to commodities futures to mom-and-pop buyers, three people with knowledge of the matter told Reuters, to curb investment losses amid volatile commodity prices. It has also asked lenders to completely unwind their existing books for these products, which they manufacture and sell to individual investors, said the sources, who are involved in and have been briefed on the decision.”

May 25 – Bloomberg: “China’s escalating push to rein in cryptocurrency mining was triggered in part by concern that the practice has stoked a surge in illicit coal extraction, endangering lives and undermining Xi Jinping’s ambitious environmental goals. Authorities decided to act after concluding the spike in electricity consumption from server farms underpinning Bitcoin and other tokens was a key factor behind rising demand for coal in certain parts of China…”

Global Bubble Watch:

May 25 – Bloomberg (Jeff Black): “Central bankers around the world are mulling the future of their massive bond-buying programs in a post-pandemic world, knowing that with big balance sheets come big expectations. The Group of Seven developed economies piled on about $7 trillion in debt last year… Central banks ended up owning much of that new debt… The size of the Fed balance sheet in coming years will largely be determined by Federal Open Market Committee decisions regarding asset purchases and reinvestment policies… Yet the report projects that the balance sheet could rise by 2023 to $9 trillion, equivalent to 39% of gross domestic product.”

May 24 – Financial Times (Chris Giles and James Politi): “The Group of Seven top advanced economies are close to an accord on the corporate taxation of multinationals, paving the way for a global deal later in the year to create new rules for the imposition of levies on the world’s largest companies. A G7 pact could be sealed as early as Friday after progress was made among top officials in recent days — and would be a powerful force and prerequisite for a deal in the formal negotiations taking place at the OECD in Paris and directed by the wider G20. An OECD agreement would probably lead to the largest shake-up in international corporate taxation for a century, severely curtailing the ability of companies to shift profits to low tax jurisdictions and ensuring that US digital giants paid more tax in the countries where they made sales.”

May 22 – Wall Street Journal (Scott Patterson and Amrith Ramkumar): “Some of the world’s biggest companies and deepest-pocketed investors are lining up trillions of dollars to finance a shift away from fossil fuels. Assets in investment funds focused partly on the environment reached almost $2 trillion globally in the first quarter, more than tripling in three years. Investors are putting $3 billion a day into these funds. More than $5 billion worth of bonds and loans designed to fund green initiatives are now issued every day. The two biggest U.S. banks pledged $4 trillion in climate-oriented financing over the next decade. ‘We’ve reached the tipping point and beyond,’ said James Chapman, chief financial officer at Dominion Energy Inc., one of the country’s biggest utilities.”

May 26 – Financial Times (Song Jung-a): “Many of South Korea’s 200 crypto exchanges face an ‘existential crisis’ as they struggle to meet conditions for regulatory approval, in a shake-up for one of the world’s biggest cryptocurrency markets. To win a business licence as a legal trading platform, Korean exchanges are required to partner with local banks to open real-name bank accounts for customers. But banks are concerned that this could leave them liable for any money laundering in digital currencies. Now, a deadline of September 24 from the Financial Services Commission is looming, and only a handful of exchanges are expected to meet the requirements…”

May 25 – Wall Street Journal (Alistair MacDonald): “Despite a commodity boom that is boosting profits, miners aren’t throwing cash at new projects, raising concerns about future shortages of some metals. So-called technology metals, such as cobalt, copper and lithium, are set for particularly large deficits, analysts say, amid rising demand from makers of batteries, electric cars and wind turbines. Supply constraints threaten to slow countries’ plans to reduce emissions and make them more expensive, they say.”

May 24 – Financial Times (Robert Smith, Kaye Wiggins and Silvia Sciorilli Borrelli): “An Italian bank has collapsed because of exposure to Greensill Capital and GFG Alliance, as the shockwaves from the failure of the UK finance company claimed another casualty. Milan-based Aigis Banca, a specialist lender to small and medium-sized businesses, was ordered into liquidation by the Bank of Italy over the weekend, with larger peer Banca Ifis buying its assets and liabilities for the symbolic price of €1.”

May 26 – Reuters (Samuel Shen and Alun John): “A crackdown by Beijing is rapidly accelerating a shift in focus by makers of machines that ‘mine’ cryptocurrencies like bitcoin from China to North America and Central Asia as Chinese clients face an uncertain future. China’s central government vowed to clamp down on bitcoin mining and trading…, causing some miners to halt all or part of their operations in a country that accounts for more than half of the world’s crypto supply. The makers of the equipment miners use, many of them Chinese, say they are now looking elsewhere for growth.”

Central Banker Watch:

May 26 – Bloomberg (Enda Curran and Stephen Spratt): “New Zealand followed in the footsteps of Canada to flag a potential interest-rate increase next year as central banks begin to tip toe away from their emergency monetary settings. Markets seized on the tightening narrative Wednesday, jolting New Zealand bond yields and its currency higher… New Zealand’s outlook was much more hawkish than expected and may yet signal a global shift, according to Sharon Zollner, chief economist at ANZ Bank New Zealand... ‘We can’t rule out that the tail may wag the dog, influencing global market expectations of whether other central banks may also take a more hawkish turn,’ she said.”

May 25 – Bloomberg (Matthew Brockett and Tracy Withers): “New Zealand’s central bank projected that its official cash rate may start to rise in the second half of next year, joining Canada in flagging a potential withdrawal of stimulus as economies recover from the pandemic. The kiwi dollar and bond yields surged. The Reserve Bank… published OCR forecasts for the first time in more than a year that show the rate beginning to rise in mid-2022… It held the benchmark rate at 0.25% and kept the bond-purchase program at NZ$100 billion ($73bn).”

May 23 – Bloomberg (Craig Stirling): “With the world barely through the worst of an unprecedented crisis, central bankers are already wondering if the next one is around the corner. From Washington to Frankfurt, what began months ago as a murmur of concern has morphed into a chorus as officials ask if a risk-taking binge across multiple asset markets might presage a destabilizing rout that could derail the global recovery. Just last week, the European Central Bank and the Bank of Canada cited mounting threats, cognizant of the retrenchment that ensued during the 2008 financial crisis. Meanwhile Bitcoin’s dramatic swings after a warning about cryptocurrencies from the People’s Bank of China showcased how sensitive some markets have become.”

Europe Watch:

May 25 – Dow Jones (Maria Martinez): “The Ifo business-climate index came in at 99.2 points in May compared with a revised reading of 96.6 points in April… The expectations component rose to 102.9 points from a revised 99.2 points in April, Ifo said. ‘The German economy is picking up speed,’ Ifo said. Companies also assessed their current business situation with more optimism than the previous month, with this component rising to 95.7 points in May from 94.2 points in April.”

May 24 – Bloomberg (Laura Benitez and Irene García Pérez): “It’s the latest sign of leveraged mania hitting bondholders: Companies across Europe are piling on debt at the fastest pace in at least four years to enrich their private-equity owners. The controversial practice known as dividend recaps is growing as investors gorge on every credit risk, handing a windfall to buyout pros… Private equity firms have always borrowed to buy companies. But they’re layering on extra debt to write themselves dividend checks at a time when central banks have driven borrowing costs to all-time lows… ‘If people want to put capital to work they’re just buying anything with a bit of yield, regardless of what proceeds are for,’ said Mark Benbow… manager at Aegon Asset Management. ‘Perhaps the market is just too complacent or perhaps believes the central bankers will always be there as a backstop. Whatever the reason, these deals are getting done very easily.’”

May 27 – Bloomberg (Alexander Weber): “While fiscal support to the economy shouldn’t be unwound prematurely, the pandemic also shouldn’t be used as a pretext to throw fiscal rules overboard, European Central Bank Governing Council member Jens Weidmann says… Weidmann… says he doesn’t share the harsh criticism of Germany’s debt brake. That doesn’t mean that any adaptations of fiscal rules should be opposed, but high public debt still needs to be guarded against. Expects tensions between monetary and fiscal policy to re-emerge after the current crisis.”

EM Watch:

May 25 – Dow Jones (Jeffrey T. Lewis): “Brazil's 12-month inflation rate accelerated in the month through mid-May as prices for medicine and electricity increased. Consumer prices rose 0.44% in the period from April 16 through May 15 and rose 7.27% from a year earlier… The mid-May numbers left the 12-month figure far above the Central Bank of Brazil's 3.75% target for 2021, and outside the bank's tolerance range of 1.5 percentage points in either direction.”

May 25 – Bloomberg (Sydney Maki): “Belize is on course for its second default in less than a year after missing an interest payment, triggering a downgrade by S&P Global Ratings. The Central American nation was cut to SD, or ‘selective default,’ from CC by S&P on Monday after failing to make a $6.5 million interest payment on its $526.5 million so-called superbond due in 2034. It marks the country’s fifth restructuring or default event in the past 14 years.”

Leveraged Speculation Watch:

May 26 – Wall Street Journal (Margot Patrick, Emily Glazer and Juliet Chung): “Federal prosecutors in New York have requested information about Archegos Capital Management from banks across Wall Street, according to people familiar… Banks that lent to Archegos, including Credit Suisse Group AG, UBS Group AG, Goldman Sachs Group Inc. and Morgan Stanley, have been contacted for information… It couldn't be determined Wednesday what the precise focus of the inquiry was.”

May 28 – Bloomberg (Marion Halftermeyer and Nishant Kumar): “Credit Suisse Group AG is temporarily barring clients from withdrawing all their cash from a fund that invests with Renaissance Technologies after the strategy tanked and investors rushed to exit. The bank has invoked a so-called hold back clause, after assets in the CS Renaissance Alternative Access Fund slumped to about $250 million this month… While investors will receive 95% of their redemption requests after two months, the remaining 5% is expected to be paid out in January, after the fund’s year-end audit…”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 26 – Reuters (Scott DiSavino): “Extreme heat this summer could create energy shortfalls in California, Texas, New England and the U.S. West and Central regions, the organization responsible for North American electric reliability warned… California is most at risk of power shortages this summer as the state increasingly relies on intermittent energy sources like wind and solar, and as climate change causes more extreme heat events, drought and wildfires across the U.S. West.”

Geopolitical Watch:

May 27 – Bloomberg (Peter Martin): “The U.S. is entering a period of intense competition with China as the government running the world’s second-biggest economy becomes ever more tightly controlled by President Xi Jinping, the White House’s top official for Asia said. ‘The period that was broadly described as engagement has come to an end,’ Kurt Campbell, the U.S. coordinator for Indo-Pacific affairs on the National Security Council, said… U.S. policy toward China will now operate under a ‘new set of strategic parameters,’ Campbell said, adding that ‘the dominant paradigm is going to be competition.’ Chinese policies under Xi are in large part responsible for the shift in U.S. policy, Campbell said, citing military clashes on China’s border with India, an ‘economic campaign’ against Australia and the rise of ‘wolf warrior’ diplomacy.”

May 23 – Wall Street Journal (Michael R. Gordon, Warren P. Strobel and Drew Hinshaw): “Three researchers from China’s Wuhan Institute of Virology became sick enough in November 2019 that they sought hospital care, according to a previously undisclosed U.S. intelligence report that could add weight to growing calls for a fuller probe of whether the Covid-19 virus may have escaped from the laboratory. The details of the reporting go beyond a State Department fact sheet, issued during the final days of the Trump administration, which said that several researchers at the lab, a center for the study of coronaviruses and other pathogens, became sick in autumn 2019 ‘with symptoms consistent with both Covid-19 and common seasonal illness.’”

May 23 – Financial Times (Thomas Hale): “China’s leading diplomat will travel to Russia… for security talks, the latest sign of deepening ties between Beijing and Moscow. Yang Jiechi, who leads China’s central committee for foreign affairs, will be in Russia until Wednesday for a strategic and security consultation… The announcement was made as both countries place greater emphasis on bilateral relations in a period where US dominance of geopolitics has receded and the Covid-19 pandemic has stoked global upheaval… Putin said… ties between the neighbours, had reached ‘the best level in history’, reiterating comments from Sergei Lavrov, Russia’s foreign minister, in March. China and Russia have ‘firmly supported each other’ in the face of the pandemic, Xi said, and spoke of a ‘comprehensive strategic partnership of co-ordination for a new era’.”

May 25 – Wall Street Journal (Thomas Grove): “Last year, on one of the northernmost air bases in the world, Russia’s military laid the final stretch of reinforced concrete on a runway to make it long enough to handle modern jet fighters and strategic bombers. The finishing touches to Nagurskoye Airbase, located on a largely ice-locked archipelago in the Arctic Ocean, are turning a once-abandoned staging point for Soviet aircraft into one of Russia’s most advanced military outposts. It is one in a string of new and refurbished bases meant to service the Kremlin’s ambitions in the resource-rich Arctic. Those bases were combined to form a new military district in January under the command of the Northern Fleet, Russia’s foremost Arctic naval force.”

May 25 – Associated Press (Yuras Karmanau and Raf Casert): “Belarus’ isolation deepened… as commercial jets avoided its airspace, the European Union worked up new sanctions, and officials expressed concern for the welfare of an opposition journalist who was arrested after being pulled off a plane that was diverted to Minsk in what the West called a state-sponsored hijacking. The dramatic developments put a spotlight on Belarusian President Alexander Lukashenko’s iron-fisted rule and suppression of dissent… ‘Additional sanctions? Will this be sufficient? I absolutely can’t say today,’ said French President Emmanuel Macron. But, he added: ‘The unacceptable character of what happened … justifies them.’”