Friday, September 10, 2021

Weekly Commentary: Necessarily Aggressive

The Wall Street Journal ran with the headline “What if China’s Property Crackdown Goes Overboard Too?” for its Tuesday’s “Heard of the Street” article. A Bloomberg piece went with “China Property Crackdown Alarms Analysts as Economic Risks Grow.”

September 7 – Bloomberg (Sofia Horta e Costa): “Warnings that China’s campaign to cool its property market will go too far are multiplying. Economists at Nomura Holdings Inc. are calling the curbs China’s ‘Volcker Moment’ that will hurt the economy. The credit squeeze in the property sector is ‘unnecessarily aggressive’ and may weigh on industrial demand and consumption, wrote colleagues at Bank of America Corp. A prominent Chinese economist cautioned of a potential crisis should home values drop below mortgages. Stabilizing China’s housing market under the mantra of ‘housing is for living, not for speculation’ is one of the many campaigns being waged by Xi Jinping as he seeks to reduce the cost of raising a family and defuse risks in the financial system. Yet it’s also one of the toughest goals to achieve given the vital importance of the sector to the economy -- the industry accounts for more than 28% of gross domestic output.”

The Wall Street Journal article (Jacky Wong) concluded with the following: “Longtime China watchers may expect the government to dial back property curbs when they start to bite in the usual on-again, off-again fashion. The risk is that in the current fevered political and regulatory environment, the ‘on’ button might stay pressed a bit too long -- with very serious consequences for financial stability and growth.”

The U.S. mindset holds that if markets faltered on a Fed taper announcement – or, God forbid, a 25 bps rate increase – this would provide unequivocal evidence of a policy blunder. Long forgotten is the more traditional alarm when a central bank failed to move in a timely manner to tighten policy - “falling behind the curve.” Markets in the past feared the Fed being late to respond to inflation and excess. This circumstance would at some point require an aggressive policy response.

The job of the Federal Reserve is “to take away the punch bowl just as the party gets going.” This critical insight from the great central banker, William McChesney Martin, is dismissed as hopelessly archaic. These days, it’s more a central bank’s job to spike the punch at the earliest indication the party might be losing its momentum.

A view took hold that inflation had been permanently defeated – that enlightened central bankers possessed the tools and mastery to ensure inflationary pressures would remain under tight control. And with inflation well-harnessed, there was no reason to fear elevated asset prices that were in the past vulnerable to Fed-orchestrated tightening cycles. And with inflation dead and buried, the availability of open-ended QE ensured central bankers enjoyed unparalleled capacity to respond with overwhelming stimulus in the event of faltering securities and asset markets. Asset inflation and Bubbles are no longer to be feared, and they certainly don’t justify monetary tightening that might unduly jeopardize economic prosperity.

As is too often the case, conventional thinking is more wishful than wisdom. Inflation is very much alive, and it’s definitely not controlled by central banks. And, importantly, asset inflation and Bubbles pose momentous systemic risk to economic, financial and social stability.

The assumption is that a cautious Beijing will “dial back property curbs when they start to bite” – succumb just as they’ve repeatedly done in the past. There is so much at risk – to China’s maladjusted economy, the bloated financial system, and vulnerable social stability. To be sure, risks have inflated to such extremes specifically because Beijing developed a habit of flinching.

As I’ve written over the years, “Bubbles scoff at timid.” Inflationary dynamics gather momentum over time; inflationary biases become increasingly entrenched. Mr. Martin's wording “just as the party gets going” was not happenstance. There’s a steep price that will have to be paid for not quashing inflationary dynamics early. In China’s case, not only did officials fail to repress housing inflation and speculation, their propensity to back off early worked to further invigorate Bubble Dynamics. Literally tens (hundreds?) of millions of property (apartment) speculators became emboldened. Beijing would ensure their housing wealth only inflated. Housing was for living, while housing speculation became the ticket to a better life.

Beijing recognizes it has an urgent problem. Its historic apartment Bubble has created enormous economic imbalances. It poses a great threat to China’s financial system. Moreover, Bubble excess is exacerbating social inequality, with mounting risk to social stability. They are forced into being Necessarily Aggressive because previous feeble tightening attempts failed.

The pertinent question has become: how much pain are they willing to tolerate? Having fallen significantly “behind the curve,” speculative dynamics will be restrained only through the administration of pain. Speculators have to suffer. Ditto for lenders. Lessons must be learned the hard way. But at this stage, a determined tightening risks a Bubble collapse with serious systemic risk. And if Beijing again loses its nerve, it will display weakness. At this phase of the cycle, a revived bubble would have disastrous consequences.

September 9 – Bloomberg: “Regulators in Beijing have signed off on a China Evergrande Group proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve as the cash-strapped developer struggles to come to grips with more than $300 billion of liabilities. China’s Financial Stability and Development Committee, the nation’s top financial regulator, gave its blessing to Evergrande’s plan last month after the property giant missed interest and principal payments on some loans, a person familiar with the matter said…”

Evergrande’s four-year bond yields rose to 62% in Wednesday trading, before the above news of lender forbearance sparked a relief rally (yields ended the week at 52.5%). Other troubled developer bonds also reversed higher. Yet an index of Chinese high-yield bonds ended the week with yields not far off highs since March 2020.

My assumption is there’s no turning back for Beijing this go round. They intend to break speculative psychology – orchestrating a so-called “Volcker Moment.” And this is consistent with the signal sent this year from safe haven global bond markets. This is, however, necessarily a high-risk strategy, with Chinese officials keen to avoid a “Lehman Moment” – the type of panic and acute market dislocation that would unleash grave systemic instability.

So, Beijing will attempt a controlled process of Bubble deflation. We’ve already witnessed a Huarong bailout and some forbearance for Evergrande. As for the big picture, China’s strategy is similar to Fed efforts during the late-twenties: Try to tighten finance for speculative endeavors, while promoting lending for productive investment. It didn’t work for the Fed, and I don’t expect a successful outcome for Beijing.

Late in a major speculative cycle, levered speculation becomes a primary source of system Credit and liquidity. Faltering Bubbles and resulting deleveraging ensure a contraction of speculative Credit. This could be somewhat offset by Credit growth in “productive” sectors, though this is much easier in theory than in actual practice. Throwing Credit at such an acutely imbalanced economic structure at a cycle inflection point is fraught with risk. I expect the faltering Chinese real estate Bubble - and the associated unwieldy changes in financial flows through the economy - to prove highly destabilizing.

China’s August lending data was generally disappointing. At $460 billion, Aggregate Financing (system Credit) bounced back (from July’s $164bn) to beat estimates, bolstered by strong growth in government bond issuance.

Bank Lending, however, was notably weak. At $189 billion, New Loans were about 15% below estimates. This was about 5% below August 2020 and only slightly ahead of August 2019. While Consumer Loans somewhat recovered from a dismal July, at $89 billion they were down about a third from August 2020 and 12% lower than August 2019. According to Reuters, “Some major Chinese banks had stepped up lending toward the end of August and reduced a backlog in property loans after being advised by the central bank to increase loan quotas for the month.”

Corporate Loans jumped from July’s exceptionally weak $67 billion to $108 billion, though August was second only to July for the weakest months so far this year. September has in the past been a seasonally strong month for lending, so perhaps we’ll have a clearer view of China’s Credit dynamic next month.

At 10.3%, August’s year-over-year growth in Aggregate Financing was the weakest since December 2018. It’s worth noting the abrupt slowdown in China’s M2 monetary aggregate continued in August. At $25 billion, M2 growth was only about a quarter of the August 2020 level – with expansion over the past three months slowing to a mere $10 billion. At this point, the benefit of the doubt goes to the China Credit slowdown thesis.

September 5 – Bloomberg: “China’s Vice Premier Liu He made a strong pledge to continue supporting private businesses after a spate of regulatory crackdowns in sectors from after-school tutoring to Internet platforms rocked financial markets. ‘The principles and policies for supporting the development of the private economy have not changed,’ Liu, who is President Xi Jinping’s top economic adviser, said… ‘They don’t change now, and will not change in the future.’ China must stick to socialist market economy reforms and persist in opening up the economy, Liu said, vowing the country will protect property rights and intellectual property rights.”

Frog in the pot syndrome. The Shanghai Composite surged 3.4% this week. For how long can the semblance of Beijing having every under control hold? All eyes on China’s real estate markets.

September 8 – Yicai Global: “Sales of second-hand homes in China’s first-tier cities such as Shanghai and Shenzhen plunged last month amid ongoing policy adjustments to rein in the country’s housing market. Some 18,000 pre-owned homes sold in Shanghai last month, down 40% from a year earlier, the biggest drop so far this year… The total value of the deals fell 44% to CNY57.4 billion (USD8.9 billion). The average price was CNY3.18 million (USD492,000), a 7% drop… In Shenzhen, sales fell for the fifth straight month, plunging 82% to a 10-year low of 2,043 units…The number of deals also fell in Beijing, dropping 10.7% from July to 15,942 units. Guangzhou, another first-tier city, recorded 7,000 new home sales, the lowest in the past 15 months.”

U.S. equities markets were under some broad-based selling pressure. The VIX spiked into Friday’s close, ending the week at almost 21. Curiously, U.S. corporate Credit was bullet proof. Still dancing…

September 10 – Bloomberg (Brian Smith): “The U.S. investment-grade primary market completed its busiest week in history after an eyebrow-raising 54 high-grade companies sold debt in just four days to break the record for number of deals… Weekly volume of $77.8bn ranks fifth all time, trailing only four weeks in 2020 when issuers rushed to the capital markets in search of liquidity… Bond sales nearly doubled projections of $40bn-45bn, accounting for more than half of the $140bn expected for the entire month…”

September 10 – Bloomberg (Lisa Lee): “The leveraged finance market is bracing for a surge in new deals, fueled by booming demand for M&A financing and investors hungry to get their hands on anything offering an alternative to rock-bottom interest rates. September could see as much as $110 billion of U.S. high- yield bond and leveraged loan sales, according to bankers…, making it one of the busiest months in years. The leveraged loan market already saw 12 deals launch on Tuesday, and there’s little sign the deluge is set to slow anytime soon… The impending onslaught adds to what’s already been a historic year. U.S. junk-bond issuance of about $346 billion is on pace to surpass last year’s record $432 billion. Leveraged loan supply of around $400 billion, excluding repricings, is already the most since Bloomberg began tracking the data in 2013.”

Off the charts bond issuance. Euphoric. August job openings “JOLTS” data were reported Wednesday, with a record 10.934 million unfilled positions. August Producer Prices rose at a stronger-than-expected 8.3% annual clip (China’s up a larger-than-expected 9.5%). National home prices were reported up 18% y-o-y, the strongest annual housing inflation in the 45-year history of the data series. And the latest thinking is the Fed will pass on beginning tapering at its September 22nd meeting. Why is the Fed dragging its heels? It was reported this week that a number of Fed officials have been actively trading their stock accounts. For an institution in the process of destroying its credibility, they should be smarter than that.

For the Week:

The S&P500 dropped 1.7% (up 18.7% y-t-d), and the Dow fell 2.2% (up 13.1%). The Utilities declined 1.5% (up 8.6%). The Banks lost 1.3% (up 27.7%), and the Broker/Dealers sank 2.9% (up 24.6%). The Transports fell 2.6% (up 14.9%). The S&P 400 Midcaps dropped 2.7% (up 14.9%), and the small cap Russell 2000 slumped 2.8% (up 12.8%). The Nasdaq100 lost 1.4% (up 19.8%). The Semiconductors slipped 0.4% (up 22.2%). The Biotechs dropped 2.0% (up 2.5%). With bullion dropping $40, the HUI gold index sank 5.8% (down 18.8%).

Three-month Treasury bill rates ended the week at 0.0375%. Two-year government yields added a basis point to 0.21% (up 9bps y-t-d). Five-year T-note yields rose three bps to 0.82% (up 46bps). Ten-year Treasury yields increased two bps to 1.34% (up 43bps). Long bond yields slipped a basis point to 1.94% (up 29bps). Benchmark Fannie Mae MBS yields gained one basis point to 1.80% (up 46bps).

Greek 10-year yields dipped a basis point to 0.77% (up 15bps y-t-d). Ten-year Portuguese yields added a basis point to 0.23% (up 20bps). Italian 10-year yields declined one basis point to 0.70% (up 16bps). Spain's 10-year yields were unchanged at 0.33% (up 29bps). German bund yields rose three bps to negative 0.33% (up 24bps). French yields gained two bps to 0.00% (up 34bps). The French to German 10-year bond spread narrowed one to 33 bps. U.K. 10-year gilt yields rose four bps to 0.76% (up 56bps). U.K.'s FTSE equities index dropped 1.5% (up 8.8% y-t-d).

Japan's Nikkei Equities Index surged 4.3% (up 10.7% y-t-d). Japanese 10-year "JGB" yields increased one basis point to 0.05% (up 3bp y-t-d). France's CAC40 declined 0.4% (up 20.0%). The German DAX equities index fell 1.1% (up 13.8%). Spain's IBEX 35 equities index dropped 1.9% (up 7.7%). Italy's FTSE MIB index lost 1.5% (up 15.5%). EM equities were mixed to lower. Brazil's Bovespa index fell 2.3% (down 4.0%), and Mexico's Bolsa declined 0.6% (up 16.9%). South Korea's Kospi index dropped 2.4% (up 8.8%). India's Sensex equities index added 0.3% (up 22.1%). China's Shanghai Exchange jumped 3.4% (up 6.6%). Turkey's Borsa Istanbul National 100 index fell 2.0% (down 2.6%). Russia's MICEX equities index was little changed (up 21.7%).

Investment-grade bond funds saw inflows of $2.325 billion, and junk bond funds posted positive flows of $710 million (from Lipper).

Federal Reserve Credit last week expanded $9.8bn to $8.471 TN. Over the past 104 weeks, Fed Credit expanded $4.590 TN, or 123%. Fed Credit inflated $5.506 Trillion, or 196%, over the past 461 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $10.7bn to an almost 10-month low $3.471 TN. "Custody holdings" were up $72.3bn, or 2.1%, y-o-y.

Total money market fund assets slipped $5.2bn to $4.504 TN. Total money funds increased $36bn y-o-y, or 0.8%.

Total Commercial Paper increased $0.6bn to $1.163 TN. CP was up $153bn, or 15.2%, year-over-year.

Freddie Mac 30-year fixed mortgage rates added a basis point to 2.88% (up 2bps y-o-y). Fifteen-year rates increased one basis point to 2.19% (down 18bps). Five-year hybrid ARM rates slipped a basis point to 2.42% (down 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up one basis point to 3.05% (down 6bps).

Currency Watch:

September 8 – Reuters (Gabriel Crossley and Ryan Woo): “Expectations for near-term easing cooled and the yuan strengthened Wednesday after comments by central bank officials the day before that China will maintain prudent monetary policy and that there is no shortfall in base money. China will not resort to flood-like stimulus, Pan Gongsheng, vice governor at the People's Bank of China (PBOC), told a news conference… The space for monetary policy is still relatively big, said Pan, in comments that some analysts said showed the Chinese central bank could conduct policy in a normal range.”

For the week, the U.S. Dollar Index increased 0.6% to 92.58 (up 3.0% y-t-d). For the week on the upside, the South African rand increased 0.7% and the Mexican peso 0.2%. For the week on the downside, the Australian dollar declined 1.4%, the Canadian dollar 1.3%, the Swedish krona 1.0%, the Brazilian real 1.0%, the South Korean won 1.0%, the New Zealand dollar 0.6%, the euro 0.6%, the Swiss franc 0.5%, the British pound 0.2%, the Japanese yen 0.2%, and the Norwegian krone 0.1%. The Chinese renminbi gained 0.17% versus the dollar (up 1.29% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index was little changed (up 24.4% y-t-d). Spot Gold dropped $40 to $1,788 (down 5.9%). Silver sank 3.9% to $23.74 (down 10.1%). WTI crude increased 43 cents to $69.72 (up 44%). Gasoline was unchanged (up 53%), while Natural Gas jumped 4.8% (up 95%). Copper rose 2.7% (up 27%). Wheat sank 5.2% (up 8%). Corn declined 1.2% (up 7%). Bitcoin sank $4,392 this week to $45,432 (up 56%).

Coronavirus Watch:

September 8 – Associated Press (Matthew Perrone and Dee-Ann Durbin): “The summer that was supposed to mark America’s independence from COVID-19 is instead drawing to a close with the U.S. more firmly under the tyranny of the virus, with deaths per day back up to where they were in March. The delta variant is filling hospitals, sickening alarming numbers of children and driving coronavirus deaths in some places to the highest levels of the entire pandemic. School systems that reopened their classrooms are abruptly switching back to remote learning because of outbreaks. Legal disputes, threats and violence have erupted over mask and vaccine requirements. The U.S. death toll stands at more than 650,000, with one major forecast model projecting it will top 750,000 by Dec. 1.”

September 8 – CNN (Jacqueline Howard, Amir Vera and Madeline Holcombe): “Children now represent more than a quarter -- or 26.8% -- of weekly Covid-19 cases nationwide, according to… the American Academy of Pediatrics (AAP)… Some 251,781 child cases of Covid-19 were reported in the past week (August 26-September 2). That number represents more than a quarter of the 939,470 cases total that were reported over that period.”

Market Mania Watch:

September 5 – Wall Street Journal (Sam Goldfarb): “Record low interest rates on riskier corporate bonds are prompting money managers to look far afield in a bid to boost returns. Faced with yields once reserved for the safest types of government debt, some managers of speculative-grade bond funds are piling into debt with rock-bottom credit ratings. Others are buying smaller, more obscure securities that carry higher yields because they can be hard to sell… The average speculative-grade U.S. corporate bond yield reached as low as 3.53% this summer, more than a percentage point lower than it had reached at any time before the Covid-19 pandemic… The average extra yield, or spread, that investors demand to hold low-rated bonds instead of ultrasafe Treasurys is near a record low… At the start of the year, investors could obtain 2.79 percentage points of additional spread by buying triple-C bonds rather than those rated one tier higher. By July, that was down to 1.51 percentage points—the lowest over the past 20 years other than a brief period in 2007.”

September 7 – Wall Street Journal (Ryan Dezember): “Wall Street has made a mountain of money available to house flippers, and selling move-in-ready rehabs has rarely been easier. The challenge is finding beat-up and out-of-date properties that can be renovated and resold for a profit. ‘Investors like me, we’re like ants on a sugar hill all fighting for the same projects,’ said Ed Stock, who started fixing and flipping houses… after the 2008 mortgage meltdown. ‘It’s the greatest time to be in this market; it’s just hard to find the inventory.’ …Mortgage trusts, pensions, hedge funds, private-equity firms, investment banks and insurance companies all want so-called flip loans, drawn by yields in the range of 8% to 12% at a time when one-year Treasurys pay less than 0.1%.”

September 10 – Wall Street Journal (Rachel Louise Ensign): “Michael Anderson mined bitcoin in his dorm room and left a corporate job to invest in cryptocurrency projects. When he bought his first home in San Francisco this year, he didn’t turn to a bank. Instead, he borrowed against his cryptocurrency. Crypto enthusiasts such as Mr. Anderson are tapping their holdings to buy homes, cars and, often, more crypto. They are getting these loans from upstart nonbank lenders and automated, blockchain-based platforms. Like banks, these lenders typically take deposits. Unlike banks, their deposits take the form of crypto. The crypto deposits—which earn higher-than-average interest rates—are used to fund loans to borrowers who pledge crypto as collateral. These loans take many forms. Borrowers can get dollars or other traditional currencies, or stablecoins pegged to them, depending on the lender they are working with.”

Market Instability Watch:

September 8 – Wall Street Journal (Caitlin Ostroff): “Bitcoin’s selloff eased Wednesday, offering some respite to holders of the volatile cryptocurrency after a flash crash a day earlier erased billions of dollars in its value. The largest cryptocurrency by market value fell 1.3% to settle at $46,154.44 apiece… It briefly dropped 17% over the course of a few minutes Tuesday and ended the day down about 10%.”

Inflation Watch:

September 8 – CNBC (Jeff Cox): “U.S. businesses are experiencing escalating inflation that is being aggravated by a shortage of goods and likely will be passed onto consumers in many areas, the Federal Reserve reported… In its periodic ‘Beige Book’ look at the nation’s economic picture, the central bank also reported that growth overall had ‘downshifted slightly to a moderate pace’ amid rising public health concerns during the July-through-August period that the report covers. ‘The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions,’ the report said. Rising inflation pressures are part of that picture in which a shortage of workers is being met by higher salaries. The report noted that inflation is ‘steady at an elevated pace,’ with half the Fed’s 12 districts reporting ‘strong’ pressure while thee other half said it was ‘moderate.’ However, the details of the report show that the issue is growing.’”

September 10 – Bloomberg (Olivia Rockeman): “Prices paid to U.S. producers increased in August by more than forecast as persistent supply chain disruptions squeeze production costs higher. The producer price index for final demand increased 0.7% from the prior month and 8.3% from a year ago, a fresh series high… Excluding the volatile food and energy components, the so-called core PPI advanced 0.6%, and was up 6.7% from August of last year… A variety of challenges across the production pipeline -- from materials shortages and shipping bottlenecks to rising labor expenses -- have driven up costs for producers. Many companies have passed along those additional costs onto consumers…”

September 8 – Bloomberg: “China’s factory-gate inflation accelerated to a 13-year high, adding to the pressure on global consumer prices which have been pushed up by a commodities boom, soaring shipping costs and an uneven economic recovery from the pandemic. Producer prices in China rose 9.5% in August from a year earlier…, mainly driven by higher commodity prices. U.S. data due next week is forecast to show consumer prices rose by more than 5% for a third straight month in August as businesses raised prices for goods and services, even as the Federal Reserve claims the cost pressure will be temporary.”

September 8 – Wall Street Journal (Christopher M. Matthews): “Nearly four-fifths of U.S. oil and gas production in the Gulf of Mexico remains offline, more than 10 days after Hurricane Ida tore through Louisiana, as companies struggle to restart offshore platforms. Ida… is turning out to be the most damaging storm for offshore production in more than 15 years. It crippled key onshore infrastructure, which has contributed to keeping about 12% of U.S. oil production idle. Its storm surge and maximum winds of 150 miles an hour also damaged some offshore operations, including underwater pipelines that have leaked oil into the Gulf.”

September 9 – CNBC (Patti Domm): “Natural gas prices have doubled this year and are expected to continue to rise, resulting in larger winter heating bills for some consumers and higher costs for electric utilities. Natural gas is plentiful in the United States and has been cheap for years, so the jump in prices this year is eye popping. It has also lifted the shares of companies that specialize in natural gas production, like EQT, Range Resources, Cabot Oil and Gas and Antero Resources.”

September 9 – Bloomberg (Brendan Murray): “The world’s third-largest container carrier said it’s capping spot rates for ocean freight for the next five months, yielding to pressure from some customers and regulators concerned that global trade disruptions have pushed the cost of shipping too high…. The cost of shipping a 40-foot container from Shanghai to Los Angeles reached $11,569 in the past week, nearly eight times higher than pre-pandemic levels…”

September 8 – Bloomberg (Mark Burton): “Aluminum surged to the highest since 2008 as political turmoil in Guinea added to worries about tightening supply at a time when demand is booming. The metal rallied as much as 1.8% in London, and is now up about 90% from lows struck in April last year… On Sunday, a military unit seized power in Guinea, destabilizing the African nation that’s a key source of bauxite used to make aluminum.”

September 7 – Bloomberg (Elizabeth Elkin): “Fertilizer prices are soaring after the world’s largest nitrogen facility had to declare a force majeure. CF Industries Holdings Inc. said… it can’t fill orders from its Donaldsonville, Louisiana, nitrogen complex, which was closed ahead of Hurricane Ida… That’s stoking fears of production losses at a time when supplies are already tight. Fertilizer prices are already high, and that’s adding to increasing costs for farmers, who are paying more for everything from land and seeds to equipment.”

Biden Administration Watch:

September 7 – NBC (Sahil Kapur): “The Democratic-controlled Congress is preparing to address a packed to-do list this month with tangible and self-imposed deadlines that carry high stakes for President Joe Biden. The government will have to be funded by Sept. 30 to prevent a shutdown. The debt limit will have to be extended this fall to prevent a global economic collapse. Flood insurance and surface transportation measures expire at the end of the month. Meanwhile, House Speaker Nancy Pelosi, D-Calif., has set a Sept. 27 deadline to vote on the $550 billion infrastructure bill. Progressives have said they will vote down the bill if the $3.5 trillion budget measure to expand the safety net isn't ready by then, putting pressure on party leaders to write it quickly.”

September 10 – Wall Street Journal (Richard Rubin): “Senate Democrats offered proposals Friday for tighter tax rules on partnerships and an excise tax on stock buybacks, as lawmakers look to plug gaps in their fast-moving, $3.5 trillion healthcare, education and climate legislation. Finance Committee Chairman Ron Wyden of Oregon detailed possible changes to partnership taxation that could raise more than $172 billion over a decade. Sen. Sherrod Brown (D., Ohio), along with Mr. Wyden, is releasing a bill that would impose a 2% excise tax on publicly traded companies’ stock buybacks. The latest plans come as Democrats debate among themselves exactly how much in taxes they want to raise—and who should pay more.”

September 8 – CNBC (Thomas Franck): “Treasury Secretary Janet Yellen… warned House Speaker Nancy Pelosi that the mere specter of a U.S. default can have drastic consequences for U.S. financial markets and urged Democratic leadership to raise or suspend the debt ceiling as soon as possible. Yellen reiterated that lawmakers have until some point in October before the department exhausts its extended efforts to prevent what would be a historic default. ‘A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,’ Yellen told Pelosi… in a letter…”

September 8 – Reuters (Susan Cornwell and Richard Cowan): “Democrats will not include a provision to raise the federal government’s borrowing limit in a $3.5 trillion ‘reconciliation’ spending measure they hope to pass this autumn, U.S. House Speaker Nancy Pelosi said Wednesday.”

Federal Reserve Watch:

September 9 – New York Times (Jeanna Smialek): “Federal Reserve officials traded stocks and other securities in 2020, a year in which the central bank took emergency steps to prop up financial markets and prevent their collapse — raising questions about whether the Fed’s ethics standards have become too lax as its role has vastly expanded. The trades appeared to be legal and in compliance with Fed rules. Million-dollar stock transactions from the Dallas Fed president, Robert S. Kaplan, have drawn particular attention, but none took place when the central bank was most actively backstopping financial markets in late March and April. However, the mere possibility that Fed officials might be able to financially benefit from information they learn through their positions has prompted criticism… ‘What we have now is an ethics system built on a very narrow conception of what a central bank is and should be,’ said Peter Conti-Brown, a Fed historian at the University of Pennsylvania.”

September 7 – Wall Street Journal (Michael S. Derby): “Federal Reserve Bank of Dallas President Robert Kaplan made multiple million-dollar-plus stock trades in 2020…, in contrast with other regional Fed leaders who reported more modest financial holdings and smaller transactions. Eleven of the 12 regional Fed banks have provided disclosures of their leaders’ 2020 financial profiles since Friday… According to the disclosure form provided by the Dallas Fed, Mr. Kaplan had a total of 27 individual stock, fund or alternative asset holdings each valued at over $1 million. Mr. Kaplan’s stockholdings included Apple Inc., Inc., Boeing Co., Alphabet Inc., Facebook Inc. and Marathon Petroleum Corp.”

September 7 – Financial Times (Colby Smith): “The Federal Reserve should press ahead with a plan to dial down its massive pandemic stimulus programme despite an abrupt slowdown in US jobs growth last month, according to a top central bank official. James Bullard, president of the St Louis Fed, dismissed concerns the labour market recovery was faltering…, and reiterated his call for the central bank to begin scaling back or “tapering” its massive $120bn-a-month bond-buying programme soon. ‘There is plenty of demand for workers and there are more job openings than there are unemployed workers,’ Bullard said… ‘If we can get the workers matched up and bring the pandemic under better control, it certainly looks like we’ll have a very strong labour market going into next year.’ He added: ‘The big picture is that the taper will get going this year and will end sometime by the first half of next year.’”

September 8 – Bloomberg (Craig Torres, Catarina Saraiva and Steve Matthews): “One of the Federal Reserve’s largest internal critics of the risks in U.S. real estate was an active investor in the sector last year, financial disclosures show. Boston Fed President Eric Rosengren listed stakes in four separate real estate investment trusts and disclosed multiple purchases and sales in those and other securities, the documents show. Boston Fed spokeswoman Lucy Warsh confirmed that Rosengren’s trades were not conducted via a blind trust but ‘his investment decisions are consistent with the system’s strong ethics rules and time frames.’”

September 9 – Reuters (Aakriti Bhalla): “Federal Reserve Bank of Atlanta President Raphael Bostic believes the Fed will pull back on its asset-buying campaign this year though he does not expect a decision in this month’s central bank meeting... ‘As strong as the data was coming in the early part of the summer, I was really very much leaning into advocating for an earlier start than what many may have expected’ on the bond buying taper… ‘The weaker data that we’ve seen more recently suggests to me that maybe there’s a chance for some play on this, but I still think that sometime this year is going to be appropriate (to slow the asset buying).’”

September 8 – Reuters (Howard Schneider): “For U.S. President Joe Biden to be true to his agenda he should not renominate Jerome Powell as Federal Reserve chair, Nobel prize-winning economist and longtime Democratic adviser Joseph Stiglitz said… ‘People have given Powell a lot of kudos because he has supported the economy through the pandemic...On one hand I agree with that,’ Stiglitz… ‘On the other hand that is a bare minimum for qualification. Almost anybody reasonable would have done something similar,’ Stiglitz said of the near-zero interest rates and monthly bondbuying Powell has maintained since March of 2020. Rather, Biden should look at Powell's looser approach to financial regulation, his reluctance to build climate-related issues into the Fed's bank oversight, and check his "gut" on whether Powell would be as committed to full employment if inflation remains stronger than expected.”

U.S. Bubble Watch:

September 8 – Bloomberg (Reade Pickert): “U.S. job openings rose to a fresh record high in July, illustrating the lingering staffing shortages that are making it challenging for businesses to meet demand. The number of available positions rose to 10.9 million during the month from an upwardly revised 10.2 million in June, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed... Economists… had called for openings to remain little changed at 10 million. After shedding millions of workers from payrolls last year, the rapid snapback in economic activity has left many businesses severely short-staffed. ‘Help Wanted’ signs can be seen in the windows of businesses across the U.S., and many restaurants have limited their hours of operation.”

September 9 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for jobless benefits fell to the lowest level in nearly 18 months last week, offering more evidence that job growth was being hindered by labor shortages rather than cooling demand for workers… Initial claims for state unemployment benefits dropped 35,000 to a seasonally adjusted 310,000 for the week ended Sept. 4, the lowest level since mid-March 2020. Economists… had forecast 335,000 applications…”

September 4 – Wall Street Journal (Allison Pohle): “School districts across the country are grappling with a shortage of school bus drivers after some drivers resigned over worries about being exposed to young unvaccinated children and others quit over requirements that they get a Covid-19 vaccine. The shortage, in every region of the country, has left some students without district-provided transportation, and others with long commutes to and from school… School districts and bus-contractor companies are offering signing bonuses, pay increases and even full-time benefits in hopes of attracting more applicants.”

September 6 – Associated Press (Ben Finley and Tom Krisher): “When negotiations failed to produce a new contract at a Volvo plant in Virginia this spring, its 2,900 workers went on strike. The company soon dangled what looked like a tempting offer — at least to the United Auto Workers local leaders who recommended it to their members: Pay raises. Signing bonuses. Lower-priced health care. Yet the workers overwhelmingly rejected the proposal. And then a second one, too. Finally, they approved a third offer that provided even higher raises, plus lump-sum bonuses. For the union, it was a breakthrough that wouldn’t likely have happened as recently as last year. That was before the pandemic spawned a worker shortage that’s left some of America’s long-beleaguered union members feeling more confident this Labor Day than they have in years.”

September 7 – Bloomberg (Alexandre Tanzi): “U.S. home prices increased 18% in July compared to a year earlier, according to a CoreLogic Inc. report… The jump is the largest 12-month gain in the index since the series began 45 years ago. On a month-over-month basis, home prices increased by 1.8% in July from June. ‘Home price appreciation continues to escalate as millennials entering their prime home buying years, renters looking to escape skyrocketing rents and deep pocketed investors drive demand,’ said Frank Martell, president and CEO of CoreLogic…”

September 7 – Wall Street Journal (Peter Rudegeair and David Benoit): “Takeovers are taking over. Companies world-wide embarked on an unprecedented deal spree this year, emerging from the depths of the pandemic looking to bulk up and address the vulnerabilities it exposed. Simultaneously, buyout firms and blank-check companies have been deploying hundreds of billions of dollars at a feverish pace. In the first eight months of 2021, companies have announced mergers and acquisitions worth more than $1.8 trillion in the U.S. and more than $3.6 trillion globally, according to… Dealogic. Both figures are the highest at this point in a year since at least 1995, when Dealogic started keeping records. Deals are on track to surpass their record set in 2015.”

September 5 – Wall Street Journal (Paul Berger): “Leaders of some of the busiest U.S. ports expect congestion snarling maritime gateways to continue deep into next year, as the crush of goods from manufacturers and retailers looking to replenish depleted inventories pushes past shipping’s usual seasonal lulls. Ports are already swamped by record numbers of containers reaching U.S. shores during this year’s peak shipping season, and the number of vessels waiting for berth space at Southern California’s gateways is growing as logjams stretch into warehouses and distribution networks across the country.”

September 9 – Reuters (Anna Irrera): “A third of U.S. consumers who used ‘buy now, pay later’ services have fallen behind on one or more payments, and 72% of those said their credit score declined, a new study published by… Credit Karma showed. The study… surveyed 1,044 adult consumers in the United States last month to measure their interest in buy now pay later (BNPL) and found 44% had used these services before.”

September 6 – Bloomberg (Simon Kennedy): “Goldman Sachs… economists revised down their forecast for growth in the U.S. economy this year, pointing to a ‘harder path’ ahead for the American consumer than previously anticipated. Overall expansion in 2021 is now seen at 5.7%, economist Ronnie Walker wrote… That compares with an expectation of 6% published at the end of August. Walker said the weaker growth will follow through into more of a pickup in 2022. Goldman raised its forecast for that year to 4.6%, up from 4.5% previously.”

September 8 – CNBC (Robert Frank): “A Los Angeles megamansion once expected to list for $500 million has gone into receivership after the owner defaulted on more than $165 million in loans and debt… The 105,000-square-foot Bel Air estate, known as ‘The One,’ was placed into receivership by the Los Angeles County Superior Court and is expected to be relisted at a lower price in the coming months… The receivership marks a stunning reversal for ‘The One’ and its flashy developer, Nile Niami, who often touted the property as his ‘life mission’ and ‘the biggest, most expensive home in the urban world.’ Expected to hit the market in 2017 with a price tag of $500 million, ‘The One’ has been dogged by repeated delays, funding problems and changing strategies.”

Fixed Income Bubble Watch:

September 9 – Bloomberg (Jack Pitcher): “Corporate America’s unprecedented issuance spree showed no signs of slowing Thursday amid what bankers and borrowers say are ideal conditions for high-grade companies to tap the bond market for financing… While the week after Labor Day is normally one of the busiest of the year in debt capital markets, the past three sessions have been among the most active ever. Another 14 blue chip companies sold $15.65 billion of bonds Thursday, after 38 firms priced more than $60 billion over the previous two sessions.”

China Watch:

September 5 – Bloomberg (Tom Mitchell): “A prominent leftist commentator in China has denounced ‘big capitalists’ and entertainment industry ‘sissy-boy stars’. Leading public figures are disappearing from view. Others are racing to declare their fealty — and pledge billions of dollars — to the policy priorities of an all-powerful supreme leader who has life-tenure. A sudden frenzy of political activity over the past two weeks has many people wondering if China is entering a new political era, one that embraces elements of Maoist political campaigns as the Communist party continues to take a more domineering role under President Xi Jinping. Some even suggest that this could be the early signs of a new social upheaval reminiscent of the Great Proletarian Cultural Revolution, a cataclysm precipitated by Mao Zedong in 1966 that resulted in the deaths of at least 1m people and stopped the country in its tracks for the better part of a decade. ‘A monumental change is taking place in China. The economic, financial, cultural and political spheres are undergoing a profound revolution,’ Li Guangman, the pen name of a prominent leftist commentator, wrote in a commentary that captured the zeitgeist. ‘It marks a return [of power] from Capitalist cliques to the people . . . It is a return to the revolutionary spirit, to heroism, to courage and righteousness.’”

September 8 – Associated Press (Joe McDonals): “An avalanche of changes launched by China’s ruling Communist Party has jolted everyone from tech billionaires to school kids. Behind them: President Xi Jinping’s vision of making a more powerful, prosperous country by reviving revolutionary ideals, with more economic equality and tighter party control over society and entrepreneurs. Since taking power in 2012, Xi has called for the party to return to its ‘original mission’ as China’s economic, social and cultural leader and carry out the ‘rejuvenation of the great Chinese nation.’ The party has spent the decade since then silencing dissent and tightening political control. Now, after 40 years of growth that transformed China into the world’s factory but left a gulf between a wealthy elite and the poor majority, the party is promising to spread prosperity more evenly and is pressing private companies to pay for social welfare and back Beijing’s ambition to become a global technology competitor.”

September 6 – New York Times (Jeanny Yu): “Four decades ago, Deng Xiaoping declared that China would ‘let some people get rich first’ in its race for growth. Now, Xi Jinping has put China’s tycoons on notice that it is time for them to share more wealth with the rest of the country. Mr. Xi says the Communist Party will pursue ‘common prosperity,’ pressing businesses and entrepreneurs to help narrow the stubborn wealth gap that could hold back the country’s rise and erode public confidence in the leadership. Supporters say China’s next phase of growth demands the shift. ‘A powerful China should also be a fair and just China,’ Yao Yang, a professor of economics at Peking University… said... ‘China is one of the worst countries in terms of redistribution, despite being a socialist country. Public spending is overly concentrated in cities, elite schools and so on.’”

September 8 – Bloomberg (Rebecca Choong Wilkins): “China Evergrande Group’s dollar bonds are falling to fresh lows, after a report that the firm plans to suspend loan interest payments and Fitch moved to cut its credit rating. The developer’s dollar bond due 2025 fell 1.5 cents on the dollar to 24.2 cents, after REDD reported Wednesday that Evergrande plans to suspend interest payments on loans from two banks due Sept. 21. and asked a lender to wait for instructions about an extension plan. Fitch Ratings had earlier slashed Evergrande’s credit rating deeper into junk, to CC from CCC+. ‘The downgrade reflects our view that a default of some kind appears probable,’ Fitch analysts wrote…”

September 7 – Financial Times (Thomas Hale): “Trading in China Evergrande bonds was suspended for the second time in days on Tuesday and rating agency Moody’s downgraded the property developer for a third time since June, sending jitters through the country’s real estate debt market… The volatility came as a rapidly unfolding liquidity crisis at the world’s most indebted property developer added to fears over the wider Chinese sector’s battle to deleverage. The bonds of Guangzhou R&F, another Chinese property developer, edged lower… to about 60% of their face value, following falls of more than 20% a day earlier…. Fantasia Group, a third property company facing refinancing concerns, said… it had made several purchases of its own bonds… Its bonds sank to 78 cents on the dollar. Refinancing worries across the sector have grown following a sustained sell-off in the debt and equity of Evergrande, which last week warned about the risk of default.”

September 5 – Bloomberg (Rebecca Choong Wilkins): “Concern that the liquidity crisis at China Evergrande Group will worsen is hammering China’s dollar junk bonds and potentially raising the cost of borrowing for real estate companies. Yields on the notes, which are dominated by property firms, rose to 12.9% on Friday, a Bloomberg index shows. That’s the highest since March last year when concern over the coronavirus pandemic roiled markets.”

September 10 – Bloomberg: “Disgruntled China Evergrande Group customers staged a protest in Guangzhou demanding that the cash-strapped developer restart stalled construction work and urging the local government to intervene. More than 100 homebuyers in white T-shirts emblazoned with the phrase ‘Resume construction, Evergrande’ lined up before the housing bureau of the city’s Nansha district… They said building of units they purchased in Evergrande Peninsula, a project of almost 5,000 apartments, has been halted since May. The tension signals that the struggles of the world’s most indebted developer may be igniting social unrest -- an outcome that China’s government will be keen to avoid.”

September 7 – Bloomberg: “Chinese consumers cut back on buying cars and apartments in August as stronger regulation of the property market and a broad Covid outbreak in the country further undercut the economy’s already slowing recovery. Property sales in the four first-tier cities declined 16% in August from a year ago… Total automobile sales including to companies likely dropped about 22% over the same period, the biggest decline since last March when the nation was still in lockdown to control the initial Covid cases… ‘A rapid slowdown in property sector activities could lead to a significant spillover effect on both upstream industrial demand and consumption,’ Bank of America economists wrote in a report this week. They estimate that more than 28% of China’s gross domestic product is related to the property sector…”

September 7 – Reuters (Colin Qian, Stella Qiu and Ryan Woo): “China's exports unexpectedly grew at a faster pace in August thanks to solid global demand, helping take some of the pressure off the world's second-biggest economy as it navigates its way through headwinds from several fronts… Shipments from the world's biggest exporter in August rose 25.6% year-on-year, picking up speed from a 19.3.% gain in July… Imports increased 33.1% year-on-year in August…”

September 7 – Reuters (Stella Qiu and Ryan Woo): “China’s macro leverage ratio, which measures the economy’s overall indebtedness, stood at 274.9% at end-June, down 4.5 percentage points from the end of last year, China Finance said… The drop was due to the receding impact of the COVID-19 epidemic on the Chinese economy and a decline in overall debt growth, China Finance, a financial magazine managed by the central bank, said…”

September 9 – Bloomberg: “Chinese regulators summoned gaming companies including Tencent Holdings Ltd. and Netease Inc. to discuss further oversight of the industry and the need to deemphasize profits, prompting a steep share selloff… The Publicity Department of the Communist Party of China’s Central Committee, the National Press and Publication Administration and two other agencies called the meeting to convey plans to step up supervision and start checks on illegal behavior…”

September 10 – Bloomberg: “China should regulate the use of artificial intelligence to curb risks posed by the growing use of the technology, a senior government official said… Protecting national security as well as users’ interests and privacy should remain paramount as the adoption of AI rises, said Zhao Zeliang, deputy director of Cyberspace Administration of China, the internet industry overseer. ‘Like other things, AI can bring negative affects too,’ he said… Regulating the AI industry ‘is as important as developing it.’”

September 6 – Bloomberg (Jeanny Yu): “Quantitative trading is growing rapidly in China’s stock market and the authorities should develop a regulatory regime that ‘best suits’ the country, according to a commentary carried by the state-run Securities Times. Trading volume in the A-share market has been soaring this year, with quantitative trading becoming a force that “can’t be overlooked,” according to the article. Chinese regulators need to step up research into the strategy and provide more relevant data for investors, it added.”

Central Banker Watch:

September 9 – Financial Times (Martin Arnold): “European Central Bank president Christine Lagarde said ‘the lady isn’t tapering’, reassuring bond investors even as the ECB said it would buy fewer bonds in a sign of confidence in the eurozone’s economic recovery. After a two-day meeting of its governing council, the ECB said… it had decided to move to ‘a moderately lower pace’ in its €1.85tn pandemic emergency purchase programme (PEPP) from the €80bn-a-month level it has run at since March. European government bonds rallied in price after the ECB said it would only slowly remove its crisis-era support from the bloc’s economy. The decision to slow the PEPP, the ECB’s flagship policy response to the pandemic, follows a strong rebound in eurozone growth and inflation, as rising coronavirus vaccinations have helped to end lockdowns and boosted business and household activity… Most analysts agreed the ECB’s decision is different to other central banks’ unwinding of monetary support because the ECB is not planning to end its bond-buying yet and is only ‘recalibrating’ its pace.”

September 8 – Reuters (Balazs Koranyi): “The European Central Bank could tighten policy sooner than many expect as inflationary pressures could prove to be persistent, ECB policymaker Robert Holzmann said… The ECB… has kept policy ultra-easy since the start of the coronavirus pandemic, and it promised an even longer period of accommodation when it unveiled a new strategy in July. But inflationary pressure have built quicker over the summer months than many predicted. ‘There is the possibility that we may be able to normalize monetary policy sooner than most financial market experts expect,’ Holzmann, Austria's central bank chief, said.”

September 7 – Bloomberg (Toru Fujioka and Emi Urabe): “The Bank of Japan should set a more achievable inflation target to avoid getting stuck with endless stimulus, according to a former deputy governor. ‘It’s about time the BOJ set a realistic price goal rather than rigidly targeting 2%,’ said Hirohide Yamaguchi, who left the bank in 2013… ‘We can’t see the prospect of inflation reaching it, even after more than eight years.’ Yamaguchi, the right-hand man under Kuroda’s predecessor Masaaki Shirakawa, said the central bank can instead accept a lower inflation goal and and could start winding down stimulus even if the yen strengthened thanks to improved resilience among firms, he said.”

Global Bubble Watch:

September 5 – Financial Times (James Fontanella-Khan): “A frantic summer of dealmaking has put 2021 on track to break records, with almost $4tn of deals already agreed since the start of the year, as companies rush to exploit cheap financing and bumper profits. There were $500bn of transactions globally in the usually quiet month of August, up from $289bn in the same month last year, and $275bn in 2019. The surge has been fuelled by a mix of low borrowing costs, trillions of dollars in the coffers of private equity groups, and the return of animal spirits to corporate boardrooms. The summer boom has helped push global mergers and acquisitions to a record $3.9tn year to date, according to… Refinitiv, more than double the amount from the same period last year, and up from $2.6tn in 2019.”

September 3 – Financial Times (Max Seddon in Moscow and Jonathan Wheatley): “Russia’s central bank says a new financial crisis on the scale of the 2008 collapse could happen in less than 18 months if global inflation is not kept in check. A surge in public and private sector debt levels during the recovery from the pandemic could cause the global economy to ‘deteriorate drastically and rapidly’ if the US Federal Reserve has to jack up interest rates to quell inflation, the Bank of Russia warned in its annual monetary policy forecast… ‘Risk premiums will increase significantly, the most indebted countries will struggle to service their debt, and a significant financial crisis will begin in the global economy in the first quarter of 2023 — one comparable to the 2008-2009 crisis, with a long period of uncertainty and a protracted recovery,’ the central bank said.”

September 5 – Associated Press (Tom Krisher): “Back in the spring, a shortage of computer chips that had sent auto prices soaring appeared, finally, to be easing. Some relief for consumers seemed to be in sight. That hope has now dimmed… And that means, analysts say, that record-high consumer prices for vehicles — new and used, as well as rental cars — will extend into next year and might not fall back toward earth until 2023. The global parts shortage involves not just computer chips. Automakers are starting to see shortages of wiring harnesses, plastics and glass, too. And beyond autos, vital components for goods ranging from farm equipment and industrial machinery to sportswear and kitchen accessories are also bottled up at ports around the world as demand outpaces supply in the face of a resurgent virus.”

September 6 – Financial Times (Harry Dempsey): “One of the world’s largest port and terminal operators has warned the global shipping and supply chain crisis that is leaving shelves empty on the high street can be resolved only by a slowdown in consumer demand. Morten Engelstoft, chief executive of Maersk-owned APM Terminals, said a ‘vicious circle’ had been created by surging demand putting strain on container groups, suppliers and logistics companies as they struggled to deliver goods. ‘We need to work out how we break this vicious circle,’ said the boss of APM…”

EM Watch:

September 8 – Reuters (Anthony Boadle and Gram Slattery): “The chief justice of Brazil's Supreme Court said… President Jair Bolsonaro was undermining the top court by encouraging people to disobey its rulings after the far-right leader said he would not accept decisions by one of its justices. ‘The Supreme Court will not tolerate threats to the authority of its decisions,’ Chief Justice Luiz Fux said…, in response to comments by Bolsonaro to supporters demonstrating in major cities... The president had called the rallies to protest his perceived enemies in Congress and the top court. Bolsonaro told backers he would not obey Justice Alexandre de Moraes, who is leading investigations into accusations that Bolsonaro and his allies attacked democratic institutions by promoting misleading information on social media.”

September 8 – Bloomberg (Peter Millard and Simone Iglesias): “Brazil President Jair Bolsonaro rallied thousands of supporters in Tuesday’s pro-government marches that stand to shore up his political base and at the same time fail to win back moderates who propelled him to the nation’s top job. Speaking before massive crowds in Brasilia and Sao Paulo, Bolsonaro prioritized harsh criticism of the Supreme Court and electoral authorities. Still, problems including high unemployment and surging food and electricity prices are weighing on his re-election prospects. The president’s approval has sunk to about 25%, and he is struggling for a reset ahead of the 2022 elections.”

Europe Watch:

September 9 – Financial Times (Sam Fleming): “A group of hawkish EU finance ministers is preparing to take a tough line in talks over post-pandemic changes to the EU’s budget rules, insisting any reforms must not jeopardise fiscal sustainability or water down debt reduction targets. A paper supported by finance ministers from eight countries — including Austria, the Netherlands, Denmark and the Czech Republic — declared a willingness to discuss ‘improvements’ to the EU’s Stability and Growth Pact. But they warned that member states must recommit to ‘sound public finances’ and cutting public debt, which ballooned during the Covid-19 crisis.”

September 7 – Bloomberg (Carolynn Look): “Investor confidence in the German economy declined for a fourth month in September after global supply disruptions worsened and infection rates surged, threatening to disrupt Europe’s strong recovery. The ZEW institute’s gauge of expectations fell to 26.5 from 40.4 the previous month, the lowest in 1 1/2 years. The outlook for the euro zone also deteriorated, after the economy grew faster than initially reported in the second quarter.”

Japan Watch:

September 10 – Reuters (Tetsushi Kajimoto): “Japan must not make its public finances a target of experiment for lax financial management such as through ‘modern monetary theory’, Finance Minister Taro Aso said… Aso made the comment at a regular news conference, when asked about a proposal by Sanae Takaichi, a contender in the ruling party’s leadership race, for shelving a primary budget-balancing target until 2% inflation is met.”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 6 – Wall Street Journal (Douglas Belkin): “Men are abandoning higher education in such numbers that they now trail female college students by record levels. At the close of the 2020-21 academic year, women made up 59.5% of college students, an all-time high, and men 40.5%, according to enrollment data from the National Student Clearinghouse, a nonprofit research group. U.S. colleges and universities had 1.5 million fewer students compared with five years ago, and men accounted for 71% of the decline.”

September 9 – Wall Street Journal (Talal Ansari): “The U.S. had its hottest summer on record, narrowly beating out highs set during the Dust Bowl in 1936. The average temperature for the Lower 48 states from June to August was 74 degrees Fahrenheit—or 2.6 degrees above average, the National Oceanic and Atmospheric Administration said... That average is just 0.01 degree Fahrenheit above the previous record, set in the summer of 1936. NOAA said a record 18.4% of the contiguous U.S. experienced its warmest temperatures. Five states—California, Nevada, Utah, Oregon and Idaho—reported their hottest summers…”

Leveraged Speculation Watch:

September 7 – Reuters (Samuel Shen and Andrew Galbraith): “Chinese hedge fund managers parried criticism of their trading techniques and market impact on Tuesday, a day after the country's top securities regulator said the rapidly growing number of ‘quants’ was a challenge to stock exchanges. Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), said… bourses should be paying attention to a surge in quantitative trading on the mainland. Quants… employ fast computers that use mathematical and statistical analyses to trade. In mature markets, such quantitative and high-frequency trading had led to better liquidity, but also spawned herd behaviours, greater volatility and unfairness, Yi said.”

September 10 – Bloomberg (James Hirai): “The message from the European Central Bank is that it’s in no rush to scale back stimulus, giving the region’s bond market a license to rally. The yield premium on 10-year Italian bonds over German equivalents -- a key gauge of risk appetite -- narrowed by the most since May after President Christine Lagarde… said the ECB would delay a decision over when to end its pandemic bond-buying program, or PEPP, to December… That’s encouraging traders to pile into carry trades -- a strategy that involves buying higher-yielding bonds to collect the coupon payments -- safe in the knowledge that the outlook is unlikely to change for the coming months.”

September 6 – Bloomberg (Russell Ward): “George Soros criticized BlackRock Inc.’s China push as a risk to clients’ money and U.S. security interests, in the billionaire financier and philanthropist’s latest broadside against investment in the world’s second-largest economy. ‘Pouring billions of dollars into China now is a tragic mistake,’ Soros wrote… in the Wall Street Journal. ‘It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies.’”

Geopolitical Watch:

September 10 – Reuters (Michael Martina, David Brunnstrom and Gabriel Crossley): “U.S. President Joe Biden and Chinese leader Xi Jinping spoke for 90 minutes…, in their first talks in seven months, discussing the need to ensure that competition between the world's two largest economies does not veer into conflict. The U.S. side said the ‘proof will be in the pudding’ as to whether the stalemate can be broken with ties between the superpowers languishing at their lowest point in decades… The White House said Biden and Xi had ‘a broad, strategic discussion,’ including areas where interests and values converge and diverge. The conversation focused on economic issues, climate change and COIVD-19…”

September 5 – Reuters: “Taiwan’s air force scrambled on Sunday against renewed Chinese military activity, with its Defense Ministry reporting that 19 aircraft including nuclear-capable bombers had flown into Taiwan's air defense identification zone (ADIZ)… The latest Chinese mission involved 10 J-16 and four Su-30 fighters, as well as four H-6 bombers, which can carry nuclear weapons, and an anti-submarine aircraft, Taiwan's Defense Ministry said. Taiwanese combat aircraft were dispatched to warn away the Chinese aircraft, while missile systems were deployed to monitor them, the ministry said.”

September 7 – Wall Street Journal (Peter Landers): “Japan needs to consider building a missile-strike capability against potential foes, including China and North Korea, said one of the two top candidates to become the nation’s next leader, former Foreign Minister Fumio Kishida. In an interview…, Mr. Kishida struck a hard-line tone on China, calling Taiwan the front line in the struggle by democracies to resist authoritarianism’s advance. He said Tokyo and Washington needed to run joint simulations of how they would respond together in a crisis scenario involving Taiwan…”

September 7 – Bloomberg (Jonathan Tirone): “Iran’s new government continued to dramatically increase production of highly-enriched uranium while failing to resume full cooperation with international monitors, signaling a new round of escalation awaits officials when they convene this month to discuss the country’s atomic program. International Atomic Energy Agency inspectors reported Tuesday that the Islamic Republic increased its stockpile of uranium enriched close to the levels needed for weapons and was expanding its production capacity. It also continued to restrict monitoring of facilities and an investigation into allegedly undeclared activities.”

Friday Evening Links

[Yahoo/Bloomberg] Stocks Decline Amid Mixed Messages on Recovery: Markets Wrap

[Reuters] Oil rallies to $73 on tight U.S. supplies, Biden-Xi call

[Yahoo/Bloomberg] Fed Seen on Track for 2021 Taper Start Even as Covid-19 Swirls

[Reuters] Strained supply chains keep U.S. producer prices hot

[Yahoo/Bloomberg] Aluminum Industry Frets That Supply Snarls ‘Have Just Begun’

[Yahoo/Bloomberg] U.S. Stock Sales Roar Back With $20 Billion Blockbuster Week