Friday, September 17, 2021

Weekly Commentary: Evergrande Moment

Evergrande owes over $300 billion – to banks and non-bank financial institutions, domestic and international bond holders, suppliers and apartment buyers. It has bank borrowings of $90 billion, including from Agricultural Bank of China, China Minsheng Banking Corp and China CITIC Bank Corp (reports have 128 banks with exposure). Thousands of suppliers are on the hook for $100 billion.

It appears an Evergrande debt restructuring is inevitable. From a few decades of close observation, these types of situations generally prove worse than even the more bearish analysts fear. Assume ugly and messy. The presumption all along – by bankers, investors and apartment purchasers – was that Beijing would never allow the collapse of such a huge player. This fundamental market perception is in serious jeopardy.

Evergrande is the most indebted of a highly levered Chinese developer sector (top three in revenues). It “owns more than 1,300 projects in more than 280 cities.” Evergrande employs 200,000 – and “indirectly helps sustain more than 3.8 million jobs each year.”

From CNN (Michelle Toh): “Outside housing, the group has invested in electric vehicles, sports and theme parks. It even owns a food and beverage business, selling bottled water, groceries, dairy products and other goods across China. In 2010, the company bought a soccer team, which is now known as Guangzhou Evergrande. That team has since built what is believed to be the world's biggest soccer school, at a cost of $185 million to Evergrande. Guangzhou Evergrande continues to reach for new records: It's currently working on creating the world's biggest soccer stadium, assuming that construction is completed next year as expected. The $1.7 billion site is shaped as a giant lotus flower, and will eventually be able to seat 100,000 spectators.”

Evergrande epitomizes China’s historic Credit Bubble. It has borrowed and spent lavishly, in what history will surely view as a company that operated at the epicenter of an extraordinary Bubble of asset inflation, speculation and reckless debt-financed mal-investment.

Estimates have Evergrande bond holders receiving 25 cents on the dollar in a restructuring. It borrowed $20 billion in the booming off-shore dollar bond marketplace. As a focal point of the global Bubble in leveraged speculation, China’s offshore debt market has ballooned during this protracted cycle. From the FT (Hudson Lockett and Thomas Hale): “Chinese issuers face their largest-ever wave of dollar bond maturities this year at $118bn, according to Refinitiv. But even that is dwarfed by the Rmb7.8tn ($1.2tn) of onshore debt maturing in 2021. The latter figure could have big repercussions for offshore bondholders, especially if the restructuring of onshore debt is prioritised.”

“Money” has flooded into China this year, in yet another example of the incredible “Terminal Phase” dynamic, where speculative finance inundates a system even in the face of acute Bubble fragility. Unwieldy speculative flows only exacerbate systemic vulnerabilities. Trouble for Evergrande, the developers and China's high-yield debt marks a momentous inflection point for Chinese and global leveraged speculation.

From CNN (Michelle Toh): “Goldman Sachs analysts say the company’s structure has also made it ‘difficult to ascertain a more precise picture of [its] recovery.’ In a note this week, they pointed to ‘the complexity of Evergrande Group, and the lack of sufficient information on the company’s assets and liabilities.’”

When a Bubble is inflating - asset prices rising and finance flowing freely - the “complexity” of corporate structure and lack of transparency matter little. Then suddenly, when speculative financial flows reverse, Bubbles falter and finance tightens, attention shifts to risks embedded within tangled financial arrangements.

Why worry about Chinese debt if Beijing is there to underpin the marketplace (not to speak of the entire financial system and economy)? Besides, one can always hedge risks as necessary. Quite simply, the risk vs. reward calculus for speculating in high-yield Chinese debt could not have appeared more attractive (especially in a yield-starved world!). But these bullish perceptions are now being blow apart.

Understandably, Beijing is reluctant to become entangled in this financial quagmire. And who today is willing to write default protection on Evergrande-related obligations? Who would want to sell flood insurance with torrents of rain coming down? Bloomberg (Laura Benitez): “Evergrande Bondholders Find No Takers in Efforts to Hedge Risk: ‘Absolutely no bank is willing to provide a hedge, at least not in size,’ Jochen Felsenheimer, a managing director at XAIA Investment in Munich who trades CDS and bonds, said… Both speculators and bondholders are failing to find counterparties to hedge their liabilities, he added.”

Developments point to a momentous shift in speculative dynamics. Bond prices are collapsing in increasingly illiquid markets. Evergrande bonds faced trading halts during the week. Hedges for a company with hundreds of billions of liabilities are no longer available. Such circumstances dictate that speculative leverage must be reduced, with losses and illiquidity impacting the risk vs. reward calculus for other sectors and markets – in China, Asia and globally. Contagion gathered important momentum this week.

September 16 – Bloomberg (Sofia Horta e Costa): “Intensifying concern over the impact of a China Evergrande Group default is rippling through the nation’s financial markets. Developers led declines on the Hang Seng China Enterprises Index, with Country Garden Holdings Co. -- the nation’s largest developer by sales -- losing 7.2% and Sunac China Holdings Ltd. sinking 11%. This week alone the two stocks have fallen more than 21%. China’s high-yield dollar bonds fell as much as 4 cents on the dollar Thursday…, with those issued by Fantasia Holdings Group Co. -- a weaker-rated developer -- down about 10 cents. Yields on China’s junk notes have climbed to an 18-month high…”

According to Bloomberg (Shuli Ren): “Its inventory quality is really poor. To redeem its investors, apartments were offered at 28% discount to their market value, and parking lots were given away at a 52% discount… That’s because most of Evergrande’s projects are not prime real estate. As of 2020, 57% and 31% of its land acquisitions were in Tier-3 and weak Tier-2 cities… As of June, it was already taking the developer over 3.5 years to sell unfinished projects.”

“On top of this, Evergrande has sold wealth management products to its employees, suppliers and apartment buyers over the years. We don’t know how much is at stake — it was essentially off-balance-sheet shadow banking, which means its actual debt could be much greater. About 70,000 retail investors were tied up in these products, according to a REDD report.”

Beyond the stated $305 billion of balance sheet liabilities, there is likely a major issue with “off-balance-sheet shadow banking.”

Bloomberg, May 20th: “The [off-balance sheet] funding is often masked as equity offerings that are debt-like in nature. Another avenue is to provide guarantees to joint ventures or associates that borrow on behalf of the developers, Cheng said. Funding sourced via such guarantees for joint ventures accounted for about 9% of total debt issued by Fitch-rated developers last year, based on Fitch estimates, reaching a record 460 billion yuan ($71 billion). It’s outside of mainland China where the impact on developers has been most telling. One of the popular approaches in the past three years has been using so-called orphan special purpose vehicle structures to issue private debt, said Chen Yi, head of global capital markets at Haitong International Securities Group Ltd. Under such a structure, the issuer of the debt is an orphan that is not an affiliate or subsidiary of a company, so the debt won’t appear on the companies’ balance sheet… Companies that rely on joint ventures for financing could see such off-balance sheet debt accounting for as much as 40% of their debt, said Cheng.”

September 13 – Reuters (Clare Jim and Samuel Shen): “Cash-strapped property group China Evergrande Group said… it has engaged advisers to examine its financial options and warned of default risks amid plunging property sales… The real estate giant has been scrambling to raise funds it needs to pay lenders and suppliers, with regulators and financial markets worried that any crisis could ripple through China’s banking system and potentially trigger wider social unrest… Evergrande said two of its subsidiaries had failed to uphold guarantee obligations for 934 million yuan ($145 million) worth of wealth management products issued by third parties. That could ‘lead to cross-default’, which would ‘would have a material adverse effect on the group's business, prospects, financial condition and results of operations,’ it said…”

Evergrande issues go much beyond the bond market and financial engineering – to literally millions of individuals and businesses. Its employees, customers, and suppliers are heavily exposed.

September 14 – Bloomberg: “China Evergrande Group’s high-yield consumer products have become a lightning rod for the embattled developer, with investors protesting losses and delayed payments from accounts marketed as safe. More than 70,000 people across China have bought the wealth management products, Du Liang, general manager of Evergrande’s wealth division, said… About 40 billion yuan ($6.2bn) of them are now due, Caixin reported, citing people briefed by Du. Such off-balance sheet investment offerings are a key source of funding for cash-strapped Evergrande. The demonstrations that are breaking out across China could sway any bailout decisions by the government, which places a high priority on social stability.”

From Reuters: “Many of the [wealth management] investors are Evergrande workers, after the company encouraged staff to purchase the products. In Anhui province alone, 70% to 80% of local employees bought them and that’s likely to be the situation for branches nationwide…”

Reuters: “Hundreds of thousands of uncompleted units… need to be delivered to buyers.” “I collapsed when I heard that construction had halted. How my heart hurts,’ a middle-aged woman… told Reuters outside the sales office. “For regular folks like us, all our life-savings had gone into the house.”

September 16 – Reuters (David Kirton): “Wu Lei says his small construction company in central China has accepted commercial paper from property developer Evergrande as payment for two years but with that paper’s value now in doubt, his firm is on the verge of collapse... ‘We were working for Evergrande, so our suppliers trusted us with the materials without us paying upfront. Now they’re suing me, courts have frozen my property and I’ve sold my car. And I still have employees who need to be paid,’ he said. The plight of Wu and many others like him has thrown a spotlight on the extensive use of commercial paper in China’s property sector. Developers favour it as they prefer to not pay upfront and because it doesn’t count as interest-bearing debt.”

It's being dubbed “China’s Lehman Brothers Moment.” While a pivotal development for China’s vulnerable Bubble, it still seems premature to invoke the “Lehman Moment” comparison. The Lehman blowup was the culmination of 15-months of unfolding Crisis Dynamics. The crisis of confidence in Lehman’s “repo” market liabilities was the catalyst for panic liquidation and dislocation throughout the repurchase agreement (repo) marketplace.

In the “Periphery vs. Core” analytical framework, the U.S. repo market was at the system’s very core – perceived safe and liquid “money” suddenly viewed as involving significant risk. With the “repo” market providing a core funding source for the securities and derivatives markets, illiquidity and dislocation proved cataclysmic. The resulting panic unleashed de-risking/deleveraging dynamics that risked a systemic meltdown/financial collapse. Market perceptions had abruptly shifted from “Washington will never allow a housing bust” to panic that crisis dynamics were spiraling out of the Fed’s control.

At this point, the Evergrande crisis remains at China’s “Periphery.” While they could allow defaults and a painful restructuring, markets remain confident that Beijing will safeguard China’s $55 TN banking system. Beijing is still perceived to be very much in control. And this explains why China’s top-tier onshore bond market has yet to be rattled. It also explains why the unfolding Evergrande collapse has yet to reverberate through U.S. and European Credit markets.

Bloomberg: “Real estate contributes to about 29% of China’s economic output if its wider influences are factored in, according to a joint research by Harvard University and Tsinghua University.”

While not yet a “Lehman Moment,” a strong analytical case can be made that Evergrande presents a major catalyst for a deflating China Bubble. Bond investors will now approach housing finance with a much keener focus on risk. Apartment buyers will be less willing to provide developers big purchase deposits. Evergrande and others will unload apartments, unleashing downside pressure on prices. Declining prices will likely see large quantities of unoccupied units (purchased for speculation) come to market, further depressing prices. Estimates have between 50 and 65 million empty Chinese apartments. Sinking prices would spur bankers to tighten lending conditions. Apartment bust.

September 14 – Bloomberg: “China’s residential property slowdown deepened last month, signaling that regulatory tightening and an escalating crisis at the country’s most indebted developer are hurting buyer sentiment. Home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus shut swathes of the economy at the start of last year, according to Bloomberg calculations based on National Bureau of Statistics data…”

Back during the U.S. mortgage financial Bubble period, the CBB would regularly highlight a metric “Calculated Transaction Value” (CTV) – multiplying home sales volume by average selling prices. This was reflective of mortgage Credit creation, finance fueling housing inflation, and new purchasing power propelling the Bubble Economy. And when a tightening of mortgage Credit led to slowing transaction volumes and falling prices, CTV indicated the degree of Credit slowdown weighing on the economic boom.

There is now ample evidence of a marked Chinese Credit slowdown. It may not be a “Lehman Moment,” but it’s definitely an “Evergrande Moment.” And it’s difficult to envisage sufficient Credit growth to sustain China’s historic Credit and apartment Bubbles.

“The U.S. will not allow Mexico to collapse” – 1994. “The West will never allow Russia to collapse” – 1998. “Washington would never tolerate a housing bust” – 2007. “Beijing has everything under control and will do whatever it takes to sustain China’s boom” – 2021.

Late Bubble cycle exultant confidence in policymakers is the kiss of death. After all, faith that crisis dynamics will be summarily quashed by omnipotent central bankers and government officials ensures aggressive risk-taking, speculation and leveraging. I’ve studied these dynamics for a while now, but I’ve never witnessed such faith in the competence and power of a government as is these days afforded to the great Beijing meritocracy – and that’s here in the U.S. as much as in China.

September 14 – Financial Times (Sun Yu and Tom Mitchell): “China’s biggest cities have suspended land auctions after new central government rules failed to rein in prices, in a setback for President Xi Jinping’s campaign to reduce social inequality. The rules were introduced as part of Xi’s efforts to promote ‘common prosperity’ by cracking down on the high property costs borne by middle-class families, and were intended to reduce demand and runaway house prices. But they had the opposite effect, serving to drive up red-hot real estate costs.”

China has over 160 cities with populations of at least one million. As they say, “real estate markets are local.” And as I’ve been saying, China – their policymakers, bankers, apartment owners/speculators, regulators… – have no experience with the downside of Bubbles – no background in controlling housing manias. Evergrande is in serious trouble, and this places China’s Bubbles in jeopardy.

Copper sank 4.6% this week. Iron Ore collapsed 16.0%, with Nickel down 5% and Lead 6%. Global resource stocks were under significant selling pressure. Commodity currencies were sold. It appears markets began discounting a Chinese housing downturn, with negative economic ramifications for China and the world. Silver fell 5.7%, Platinum 1.9%, and Gold 1.9%. As for precious metals weakness, perhaps traders are moving to get ahead of further dollar strength, a rally that would gain momentum in the event of abrupt renminbi weakness.

Global markets showed signs of nascent speculator de-risking/deleveraging, with Chinese contagion stealthily gaining momentum. China, after all, evolved during this cycle into the marginal source of global Credit and, I believe, speculative leverage. The unfolding “Evergrande Moment” portends trouble ahead for myriad global asset and speculative Bubbles. However, complacency continues to reign throughout U.S. markets. Evergrande ramifications are dismissed, while attention remains fixated on a Fed seemingly determined to ride its reckless experiment in monetary inflation for as long as it can.

For the Week:

The S&P500 declined 0.6% (up 18.0% y-t-d), while the Dow was little changed (up 13.0%). The Utilities sank 3.3% (up 5.0%). The Banks rallied 1.0% (up 28.9%), while the Broker/Dealers declined 0.8% (up 23.6%). The Transports fell 0.7% (up 14.1%). The S&P 400 Midcaps dipped 0.3% (up 16.1%), while the small cap Russell 2000 recovered 0.4% (up 13.3%). The Nasdaq100 lost 0.7% (up 19.0%). The Semiconductors were little changed (up 22.4%). The Biotechs rallied 1.2% (up 3.8%). With bullion sinking $33, the HUI gold index dropped 2.3% (down 20.7%).

Three-month Treasury bill rates ended the week at 0.03%. Two-year government yields added a basis point to 0.22% (up 10bps y-t-d). Five-year T-note yields jumped five bps to 0.86% (up 50bps). Ten-year Treasury yields gained two bps to 1.36% (up 45bps). Long bond yields fell three bps to 1.90% (up 26bps). Benchmark Fannie Mae MBS yields gained five bps to 1.85% (up 51bps).

Greek 10-year yields rose four bps to 0.81% (up 19bps y-t-d). Ten-year Portuguese yields gained three bps to 0.26% (up 23bps). Italian 10-year yields added two bps to 0.72% (up 18bps). Spain's 10-year yields rose two bps to 0.36% (up 31bps). German bund yields jumped five bps to negative 0.28% (up 29bps). French yields rose five bps to 0.05% (up 33bps). The French to German 10-year bond spread was unchanged at 33 bps. U.K. 10-year gilt yields surged nine bps to 0.85% (up 65bps). U.K.'s FTSE equities index declined 0.9% (up 7.8% y-t-d).

Japan's Nikkei Equities Index added 0.4% (up 11.1% y-t-d). Japanese 10-year "JGB" yields increased one basis point to 0.05% (up 3bps y-t-d). France's CAC40 fell 1.4% (up 18.4%). The German DAX equities index declined 0.8% (up 12.9%). Spain's IBEX 35 equities index rallied 0.8% (up 8.5%). Italy's FTSE MIB index was little changed (up 15.6%). EM equities were mixed. Brazil's Bovespa index dropped 2.5% (down 6.4%), and Mexico's Bolsa slipped 0.4% (up 16.4%). South Korea's Kospi index recovered 0.5% (up 9.3%). India's Sensex equities index jumped 1.2% (up 23.6%). China's Shanghai Exchange sank 2.4% (up 4.1%). Turkey's Borsa Istanbul National 100 index lost 1.3% (down 3.9%). Russia's MICEX equities index added 0.8% (up 22.7%).

Investment-grade bond funds saw inflows of $3.0 billion, while junk bond funds posted outflows of $499 million (from Lipper).

Federal Reserve Credit last week jumped $35.1bn to $8.352 TN. Over the past 105 weeks, Fed Credit expanded $4.625 TN, or 124%. Fed Credit inflated $5.541 Trillion, or 197%, over the past 462 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $0.2bn to an almost 10-month low $3.471 TN. "Custody holdings" were up $764bn, or 1.9%, y-o-y.

Total money market fund assets dropped $39.7bn to $4.465 TN. Total money funds increased $48bn y-o-y, or 1.1%.

Total Commercial Paper jumped $19.3bn to $1.182 TN. CP was up $198bn, or 20.2%, year-over-year.

Freddie Mac 30-year fixed mortgage rates declined two bps to 2.86% (down 1bp y-o-y). Fifteen-year rates fell seven bps to 2.12% (down 23bps). Five-year hybrid ARM rates jumped nine bps to a two-month high 2.51% (down 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down two bps to 3.03% (down 1bp).

Currency Watch:

For the week, the U.S. Dollar Index gained 0.7% to 93.20 (up 3.6% y-t-d). For the week on the downside, the South African rand declined 3.5%, the Swiss franc 1.6%, the Australian dollar 1.1%, the New Zealand dollar 1.0%, the Brazilian real 0.8%, the euro 0.8%, the British pound 0.7%, the Mexican peso 0.6%, the Swedish krona 0.6%, the Canadian dollar 0.6%, the South Korean won 0.5%, the Singapore dollar 0.5%, and the Norwegian krone 0.4%. The Chinese renminbi declined 0.34% versus the dollar (up 0.94% y-t-d).

Commodities Watch:

September 13 – CNBC (Patti Domm): “Natural gas prices have surged more than 35% in the past month, as worries grow there is not enough gas stored up for the winter should temperatures be especially cold in the northern hemisphere. The usually quiet market for the commodity has become hot in the last couple of weeks, as investors focus on the growth in demand around the world and supplies remain below normal. The biggest problem area is Europe, where supply is at a record low for this time of year.”

September 16 – Bloomberg (Stephen Stapczynski): “The energy crunch in Europe is sparking panic among Asian fuel buyers, causing importers from Japan to India to pay a hefty price for supplies. Worried the eye-watering price of natural gas in Europe will spill over, LNG traders in Asia say they’re paying record prices for this time of year. Buyers in China and Pakistan have also pushed up the price of gas, coal, propane and fuel oil in order to compete with the U.K. and Spain. The scramble for fuel isn’t likely to subside any time soon, with the weather getting colder and energy shortages worldwide.”

September 17 – Bloomberg (Krystal Chia): “Iron ore sank below $100 a ton as China’s moves to clean up its heavy-polluting industrial sector spurred a swift and brutal collapse. Prices have more than halved since peaking in May as the world’s biggest steelmaker intensifies production curbs to meet a target for lower volumes this year, and a sharp downturn in China’s property sector hurts demand.”

The Bloomberg Commodities Index added 0.5% (up 25.0% y-t-d). Spot Gold fell $33 to $1,754 (down 7.6%). Silver sank 5.7% to $22.39 (down 15.2%). WTI crude rallied $2.25 to $71.97 (up 48%). Gasoline gained 0.8% (up 54%), and Natural Gas jumped 3.4% (up 101%). Copper sank 4.6% (up 21%). Wheat rose 2.9% (up 11%). Corn advanced 1.9% (up 9%). Bitcoin rallied $1,849 this week to $47,281 (up 62.6%).

Coronavirus Watch:

September 16 – CNBC (Berkeley Lovelace Jr.): “The fast-spreading delta variant is so contagious, it’s exposed weaknesses in vaccine protection and changed the outlook for ending the pandemic, Moderna President Stephen Hoge said… Delta is ‘just so good at infecting people and replicating that it raises the bar on how good vaccines have to be,’ he said... ‘It’s actually shown some of the weaknesses that [vaccines] have earlier than you might expect…’ ‘The breakthrough cases are not all delta’s fault,’ Hoge said. He said he suspects the Covid cases in vaccinated people are a result of both vaccine protection waning over time and the highly transmissible variant.’”

September 12 – Bloomberg (James Paton): “Variants that can eventually evade Covid vaccines are increasingly likely with vast parts of the world unprotected, and rich countries should hold back on booster doses until others catch up, according to a special envoy to the World Health Organization. ‘Variants that can beat the protection offered by vaccines are bound to emerge all over the world in the coming months and years,’ David Nabarro, the WHO envoy, said… ‘This is an ongoing battle, and we need to work together.’”

Market Mania Watch:

September 10 – Financial Times (Chris Flood): “Inflows into exchange traded funds have surged past 2020’s record total globally as enthusiasm for the low-cost vehicles accelerates, prompting growing numbers of traditional fund managers to launch their own ETFs. Worldwide net investor inflows reached $834.2bn at the end of August, already surpassing the last year’s total of $762.8bn. Rising markets and investments helped global assets held in ETFs to balloon to $9.7tn, more than double the $4.8tn managed in the funds and products at the end of 2018, according to… ETFGI.”

September 12 – Financial Times (Steve Johnson): “The bulk of the $9tn exchange traded funds industry consists of plain vanilla index trackers focused on mainstream assets. But a couple of much higher risk variants are now growing rapidly — albeit from a low base. Cryptocurrency ETFs may still be awaiting regulatory approval in the US but they have taken off in other jurisdictions including Canada, Switzerland, Germany and Jersey. Total assets in these funds tripled from $3bn at the end of last year to $9bn as of June… Meanwhile, the sums committed to leveraged and inverse exchange traded products — which are designed to amplify gains from market rises or conversely profit from falling asset prices — has risen from $79bn at the end of 2019 to a record $109bn, ETFGI has found.”

Market Instability Watch:

September 16 – Bloomberg: “Chinese high-yield dollar bonds were down as much as 4 cents on the dollar Thursday, according to credit traders, led by developers amid signs of growing contagion from Evergrande’s debt woes.”

September 16 – Bloomberg (Joanna Ossinger): “Rallying energy prices are stoking concerns about a challenging stagflation-like environment for markets, where elevated price pressures combine with a slowing economic recovery. Energy prices have soared as economies emerge from the pandemic. The Northern Hemisphere winter could exacerbate the trend, ratcheting up inflationary pressure and hurting both consumers and companies. A backdrop of elevated costs and slower growth could be challenging for stocks and bonds.”

Inflation Watch:

September 13 – Wall Street Journal (Michael S. Derby): “Americans’ expectations of future inflation hit a record high last month, according to… the Federal Reserve Bank of New York, potentially challenging the central bank’s confidence that inflation pressures will ebb over time. In its August Survey of Consumer Expectations, the bank said… respondents see inflation a year from now at 5.2%, up from expectations of 4.9% last month. Three years from now, it is expected to be at 4%, up from the 3.7% expected in July. Both readings mark record-high readings for data that goes back to 2013. The report also found projections of big increases in some of the most important costs Americans face on a regular basis. Food prices are seen rising by 7.9% a year from now, rent by 10% and medical-care costs by 9.7%.”

September 14 – USA Today (Paul Davidson): “After years of puny increases in their Social Security checks, older Americans will likely get the equivalent of a big raise next year. The 68 million people -- including retirees, disabled people and others – who rely on the benefits are likely to receive a 6% to 6.1% cost-of-living adjustment next year because of a COVID-19-related spike in inflation, according to the Senior Citizen League. Such a rise would far outpace 1.4% average bumps in Social Security payments since 2010 and amount to the largest increase since 1982… For the average retiree who got a monthly check of $1,559 this year, a 6% rise would increase that payment by $93.54, to $1,652.54, in 2022.”

September 15 – Wall Street Journal (Austen Hufford): “Manufacturers are facing the highest steel and aluminum prices in years, another hurdle for U.S. companies already struggling to make enough cars, cans and other products. Rapidly increasing metal costs are pushing manufacturers to take what steel they can get… The rising costs are flowing through to some producers of consumer goods: Campbell Soup Co. is paying more to get the cans it fills with tomato soup; Peloton… is seeing prices rise for parts that go into its stationary bikes; and Steelcase Inc. is paying more to make metal desks and filing cabinets. Car makers like Ford… and General Motors Co. are also dealing with rising metal prices. ‘It’s crazy for steel,’ said Brian Nelson, president of HCC Inc., which sells large metal accessories to tractor manufacturers. ‘I can’t even get material at times.’”

September 13 – Reuters (Howard Schneider and Timothy Aeppel): “Before supply chain breakdowns and shortages swept the world in the wake the COVID pandemic, buying the bits and pieces for an assembly line was often as easy as clicking a button and waiting a few days or, at most, a few weeks for delivery. Shortages of metals, plastics, wood and even liquor bottles are now the norm. The upshot is a world where buyers must wait for delivery of items that were once plentiful, if they can get them at all. Rash has piles of tents she can’t ship because she can’t get the right aluminum tubing for their frames, for instance, while others lack the right zippers. Along with the shortages come hefty price increases, which has fueled fears of a wave of sustained inflation… Shortages are hitting everything from bulldozers to bourbon.”

September 15 – CNBC (Lauren Thomas): “Prices of goods online have now risen for an unprecedented 15 consecutive months, following what was a historical period of declines, according to… Adobe Digital Insights. Inflation is hitting categories including pet products, nonprescription drugs, apparel, furniture and flower arrangements, the report said. The growth in digital sticker prices across the industry means e-commerce transactions are on pace to soon account for roughly $1 of every $5 spent by Americans, up from $1 of every $6 in 2017... Adobe Digital Insights’ economy index tracks more than 1 trillion visits to U.S. retail sites and over 100 million products across 18 categories. Last month, Adobe found online prices grew 3.1% year over year... From 2015 to 2019, online prices on average fell 3.9% annually.”

September 16 – Wall Street Journal (Thomas Gryta): “Transportation costs—typically a fraction of a finished product’s price—are emerging as another supply-chain hurdle, overwhelming some companies already paying more for raw materials and labor. The fabric and crafts retailer Jo-Ann Stores LLC said it has spent 10 times more than its historical cost in some cases to move products from one point to another. ‘Sometimes the ocean freight now is actually more expensive than the cost of the product,’ Chief Executive Officer Wade Miquelon said… The company hasn’t raised any base prices and is hoping the extra supply-chain expenses are temporary. ‘I think they probably are, but does transient mean six months or 24 months?’ he said.”

September 16 – Wall Street Journal (Alistair MacDonald and William Boston): “Soaring natural-gas prices in Britain have prompted U.S. fertilizer maker CF Industries Holdings Inc. to close two U.K. plants, in a sign that Europe’s energy crunch is affecting industry as the economy struggles with several other disruptions amid the recovery from the pandemic. Businesses across Britain are complaining about high energy costs, with some steelmakers forced to halt production for periods during the day as the price of electricity rises almost seven times higher than at the same point last year. Power markets have also jumped in France, the Netherlands and Germany, ahead of anticipated higher demand in the winter.”

September 11 – Bloomberg (Joe Deaux): “Supply-chain snags that have roiled commodity markets and helped push aluminum prices to a 13-year high this week are unlikely to ease any time soon. That’s the message coming from producers, consumers, traders and shippers at North America’s largest aluminum conference… Aluminum has jumped 48% this year on surging demand, shipping bottlenecks and production curbs in China, stoking inflation concerns and causing a major headache for consumer-goods producers facing worsening material shortages alongside the sharp rise in costs. Snarled supplies will continue to dog the industry through most of 2022…”

September 14 – Financial Times (Cheng Ting-Fang): “Prices of chips and of the electronic devices they power are on track to rise into 2022 as the world’s biggest contract chipmaker joins its rivals in ramping up production fees. Prices of semiconductors have been climbing since the last quarter of 2020 amid a global supply crunch. But news that Taiwan Semiconductor Manufacturing Co was preparing its biggest price rise in a decade still came as a shock to some, bringing home just how entrenched chip price inflation has become. TSMC controls over half the global foundry market, making chips for the likes of Apple, Nvidia and Qualcomm. Known for its cutting-edge tech and high quality, the Taiwanese company normally commands production fees around 20% higher than its rivals…”

September 14 – CNBC (Pippa Stevens): “The solar industry is among many sectors feeling the pinch of higher prices, according to a report… by the Solar Energy Industries Association and Wood Mackenzie. Prices rose quarter over quarter and year over year across every solar segment during the period. It’s the first time that residential, commercial and utility solar costs have risen in tandem since the energy consultancy began tracking prices in 2014… A separate report from Rystad Energy… said global solar panel prices have jumped 16% this year compared to 2020′s levels. Overall costs, which include soft costs like labor, are up 12% in 2021.”

September 16 – Financial Times (Misyrlena Egkolfopoulou and Claire Ballentine): “The pandemic-era rental market in Manhattan gave people the chance of a lifetime to move into the apartment of their dreams. Ten months is all they got. Landlords are jacking up rents — often by 50, 60 or 70% — on tenants who locked in deals last year when prices were in freefall. Some renters are being forced to move at a time when the market is roaring back to nearly pre-pandemic levels. And concessions are slipping away. Andy Kalmowitz didn’t think twice in November before signing a 10-month lease on a two-bedroom, two-bathroom apartment in the desirable East Village neighborhood for $2,100 a month. When it was time to renew, his landlord asked for $3,500, a 67% increase.”

Biden Administration Watch:

September 15 – Reuters (Jarrett Renshaw and David Lawder): “Democrats are crafting a massive spending package as big as $3.5 trillion that would transform the U.S. economy by investing in free community college, childcare and green energy, funded by tax hikes on the wealthy and larger companies. The bill’s authors must balance the Biden White House’s campaign pledges and the party’s progressives and moderates, all while catering to lawmakers empowered by Democrats’ razor-thin majorities in Congress to demand pet concessions. Facing unified Republican opposition, Democrats will need to pass the bill on strict party lines using a legislative tool called budget reconciliation. They cannot afford to lose even one vote in the Senate and more than three votes in the House of Representatives.”

September 12 – CNBC (Samantha Subin): “Sen. Joe Manchin… said he would not vote for the $3.5 trillion budget bill, adding that there’s ‘no way’ to meet the September 27 deadline set by Democrats… ‘There’s no way that we can get this done by the 27th if we do our job,’ the West Virginia Democrat said.”

September 16 – Bloomberg (Erik Wasson): “Senate Minority Leader Mitch McConnell rejected an appeal by Treasury Secretary Janet Yellen…, for Republicans to join with Democrats in raising the federal debt ceiling, leaving the two sides at odds with potentially weeks to go until the limit is breached. ‘The leader repeated to Secretary Yellen what he has said publicly since July: This is a unified Democrat government, engaging in a partisan reckless tax and spending spree,’ McConnell spokesman… said... ‘They will have to raise the debt ceiling on their own and they have the tools to do it.’”

September 13 – Reuters (David Lawder): “U.S. House Ways and Means Committee Chairman Richard Neal… proposed a major rollback of Trump-era tax cuts on corporations and wealthy Americans to raise as much as $2.9 trillion to fund Democratic President Joe Biden’s social spending plans… The Massachusetts Democrat’s proposal here will be debated within the tax-writing committee in coming days… Following are key elements of Neal’s proposal… Boosts the top individual tax rate to its pre-2017 level of 39.6%, from 37% currently, for taxable income above $400,000 for individuals and $450,000 for married couples. Biden proposed the same top rate, but kicking in at higher thresholds of $452,700 for individuals and $509,300 for married couples. Adds a surcharge of 3% on taxable income above $5 million… Increases the top long-term capital gains tax rate to 25% from 20% on individuals with taxable income over $400,000.”

September 12 – Wall Street Journal (Richard Rubin): “House Democrats expect to propose raising the corporate tax rate to 26.5% from 21% and imposing a 3-percentage-point surtax on individual income above $5 million, according to two House Democratic aides… The tax increases would be part of the House Ways and Means Committee’s plans to pay for the party’s priorities in a fast-moving budget bill. Those items include an expanded child tax credit, a national paid-leave program and renewable-energy tax breaks.”

September 13 – Bloomberg (Billy House): “House Democrats said they will ‘undo’ the $10,000 cap on the federal deduction for state and local taxes, after the Ways and Means Committee didn’t address the tax break in a package of proposals... Ways and Means Chairman Richard Neal in a joint statement with Representatives Tom Suozzi of New York and Bill Pascrell of New Jersey said the committee’s tax plan was not the final step for legislation to enact President Joe Biden’s agenda. They called the SALT limit enacted in the Republican’s 2017 tax law ‘short-sighted.’”

September 14 – Bloomberg (Allyson Versprille and Ben Steverman): “The latest plan released by House Democrats scales back many of President Biden’s proposals to hike taxes on corporations and rich investors, as moderates and progressives tussle over how far to go to address inequality. But they included an element the White House left out. The package by the Ways and Means Committee calls for a revamp of the U.S. estate-and-gift tax, a levy on the country’s largest fortunes which has been greatly weakened over decades. If House Democrats have their way, rich Americans will soon be scrambling for new and probably more expensive ways to pass wealth onto heirs.”

Federal Reserve Watch:

September 16 – Reuters (Howard Schneider): “Federal Reserve Chair Jerome Powell has ordered a sweeping review of the ethics rules governing financial holdings and dealings by senior officials at the U.S. central bank… Powell ordered the review late last week…. following recent reports that two of the Fed system's 12 regional reserve bank presidents had been active investors during 2020… Those revelations… prompted senior U.S. lawmakers - including Senator Elizabeth Warren of Massachusetts - to demand more stringent restrictions on such activities. ‘Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell late last week directed Board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,’ the statement said.”

U.S. Bubble Watch:

September 13 – Associated Press (Martin Crutsinger): “The U.S. budget deficit rose to $2.71 trillion through August, on track to be the second largest shortfall in history due to trillions of dollars in COVID relief… The Treasury Department said… the deficit for the first 11 months of this budget year is 9.9% less than the imbalance during the same period last year. For the entire budget year, which ends Sept. 30, the Congressional Budget Office is forecasting a deficit of $3 trillion, which would be just below the record deficit of $3.13 trillion set last year. Last year’s deficit was more than double the previous record of $1.4 trillion set in 2009…”

September 14 – Bloomberg (Olivia Rockeman): “Prices paid by U.S. consumers rose in August by less than forecast, snapping a string of hefty gains and suggesting that some of the upward pressure on inflation is beginning to wane. The consumer price index increased 0.3% from July, the smallest advance in seven months… Compared with a year ago, the CPI rose 5.3%. Excluding the volatile food and energy components, so-called core inflation climbed 0.1% from the prior month, the smallest gain since February and a reflection of declines in the prices of used cars, airfares and auto insurance. Economists… called for a 0.4% increase in the overall CPI from the prior month and a 5.3% gain from a year earlier…”

September 17 – Bloomberg (Olivia Rockeman): “U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions for household durables deteriorated to their worst since 1980 because of high prices. The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August… Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.”

September 15 – CNBC (Diana Olick): “Fall is usually the start of the slower season for the housing market, but nothing is usual in today’s pandemic-driven housing market. Potential homebuyers are seeing a slight rise in inventory and consequently rushing back into the fray. Mortgage applications to purchase a home jumped 7% last week from the previous week… That is the highest level since April of this year. These applications were still 11% lower than the same week one year ago, but that was the smallest annual decline in 14 weeks.”

September 16 – Reuters (Rithika Krishna and Sanjana Shivdas): “Semiconductor shortages and the delayed packaging and testing of the chips will cause production of global light vehicles to drop by five million this year, data firm IHS Markit said on Thursday, marking the biggest cut to its outlook in nine months. Citing supply chain challenges, IHS said it was cutting its light vehicle production forecast by 6.2% for 2021 and 9.3% for 2022, to stand at 75.8 million units and 82.6 million units, respectively.”

September 14 – Wall Street Journal (Sarah Chaney Cambon and Gwynn Guilford): “This should be the best of times for low-wage workers, as pandemic-induced labor shortages force employers to sharply raise pay. Yet for many, it doesn’t feel that way, because those same disruptions have pushed inflation to near its highest rate in over a decade. Troy Sutton… lost a job as a custodian at the start of the pandemic in 2020 that paid $12 an hour, and he spent more than a year unemployed. This past summer, he landed a job as a custodian at the University of Pennsylvania he said pays $18 or more an hour. But Mr. Sutton’s water, electricity and cable bills are higher than a year ago, he said. He is shelling out more for veterinary checkups and dog food for his two Chihuahuas… At the supermarket near Mr. Sutton’s house in Philadelphia, eggs climbed from about $2 a dozen in 2019 to $3.69 during the pandemic.”

September 16 – Bloomberg (Reade Pickert): “U.S. retail sales rose unexpectedly in August as a pickup in purchases across most categories more than offset weakness at auto dealers, showing resilient consumer demand for merchandise. The value of overall retail purchases climbed 0.7% last month following a downwardly revised 1.8% decrease in July… Excluding autos, sales advanced 1.8% in August, the largest gain in five months. The median estimate… called for a 0.7% decline in overall retail sales…”

September 14 – CNBC (Diana Olick): “Anyone searching for a home today knows full well the pickings are slim. The supply of U.S. homes for sale is near a record low, and the gap between supply and demand is widening. The U.S. is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million, according to… The U.S. Census found that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time. Single-family home construction has suffered from a severe labor shortage that began well before the pandemic but was then exacerbated by it. Supply chain disruptions in the past year have pushed prices for building materials higher, and as pandemic-induced demand soared, prices for land increased as well.”

September 13 – Reuters (Noor Zainab Hussain): “Insurers are bracing for claims of between $20 billion and $30 billion after assessing the damage from Hurricane Ida in many locations including New York and New Jersey, catastrophe risk modeling firm AIR Worldwide said... Included in the estimates are losses to onshore residential, commercial, industrial properties, and automobiles for their building, contents, and time element coverage, AIR said.”

September 14 – Wall Street Journal (John McCormick and Paul Overberg): “Americans last year saw their first significant decline in household income in nearly a decade… An annual assessment of the nation’s financial well-being, released… by the Census Bureau, offered insight into how households fared during the pandemic’s first year. It arrives as Washington debates how much more to spend to bolster the economy during the worst public-health crisis in a century. Median household income was about $67,500 in 2020, down 2.9% from the prior year, when it hit an inflation-adjusted historical high.”

September 15 – Reuters (Pete Schroeder): “The regulator overseeing housing giants Fannie Mae and Freddie Mac proposed… changes to recently imposed capital and leverage requirements on the pair. The proposed rule from the Federal Housing Finance Agency would encourage the pair to shift more risk from taxpayers to private investors, while allowing them to support the housing market, the agency said.”

Fixed Income Bubble Watch:

September 12 – Bloomberg (Jacqueline Poh): “Airlines are piling on more debt as surging coronavirus cases force travelers to cancel plans and stay home. The industry’s outstanding debt has jumped 23% since 2020 to $340 billion… So far this year, global air carriers have sold $63 billion in bonds and loans.”

September 12 – Wall Street Journal (Sebastian Pellejero): “Wall Street’s shift away from Libor is fueling sales in the red-hot market for bundles of risky corporate loans. Managers of collateralized loan obligations—securities made up of bundled loans with junk credit ratings—are rushing to close deals ahead of the year-end move away from the London interbank offered rate… U.S. issuance topped $19.2 billion in August, a monthly record in data going back a decade, according to S&P Global Market Intelligence’s LCD… As of August, sales of new CLOs in the U.S. in 2021 have surpassed $111 billion, according to LCD—on pace to pass 2018’s record of around $129 billion.”

China Watch:

September 12 – Bloomberg (Sofia Horta e Costa and Rebecca Choong Wilkins): “China Evergrande Group may undergo one of the country’s biggest-ever debt restructurings, if the developer’s distressed-level bond prices are any indication. It’s ‘almost unavoidable,’ said Nomura… credit analyst Iris Chen. Her base case is a government-supervised deal that ensures Evergrande delivers homes and pays suppliers, where dollar debt investors would get 25% of their money back. Luther Chai, a senior research analyst at CreditSights Singapore LLC, also predicts Evergrande may default and enter restructuring.”

September 17 – Bloomberg (Tian Chen and Tania Chen): “China injected more cash into its banking system in a sign authorities are seeking to avert a funding squeeze amid a seasonal rise in financing demand and the intensifying debt crisis at China Evergrande. The People’s Bank of China added 90 billion yuan ($14bn) of funds on a net basis through seven-day and 14-day reverse repurchase agreements on Friday, the most since February. Today was the first time this month it added more than 10 billion yuan short-term liquidity into the banking system on a single day. The move comes as the trouble facing China Evergrande Group fuels investor concern over the health of real estate and credit markets.”

September 17 – Reuters (Clare Jim): “The editor-in-chief of state-backed Chinese newspaper Global Times warned debt-ridden property giant Evergrande Group that it should not bet on a government bailout on the assumption that it is ‘too big to fail’. It was the first commentary to appear in state-backed media casting doubt on a government bailout for the country's No.2 property developer, whose shares fell on Friday for the fifth consecutive day amid concerns it is heading for default.”

September 13 – Bloomberg (Rebecca Choong Wilkins): “China Evergrande Group issued a dire assessment of its financial health, saying it faces ‘tremendous’ liquidity strains and has hired advisers for what could be one of the country’s largest-ever debt restructurings. The appraisal was Evergrande’s most downbeat since market confidence in the developer began deteriorating in May, and followed a spate of protests over the past week by angry homebuyers, retail investors and employees demanding that the company make good on its obligations.”

September 15 – Reuters (Stella Qiu and Gabriel Crossley): “China's factory and retail sectors faltered in August with output and sales growth hitting one-year lows as fresh coronavirus outbreaks and supply disruptions threatened the country's impressive economic recovery. Industrial production rose 5.3% in August from a year earlier, narrowing from an increase of 6.4% in July and marking the weakest pace since July 2020… Output growth missed the 5.8% increase tipped by analysts. Consumer spending also took a big hit from rising local COVID-19 cases and floods with sales rising only 2.5% in August from a year ago, much lower than the forecast 7.0% rise and the slowest clip since August last year.”

September 12 – Bloomberg: “Chinese President Xi Jinping has urged members of the ruling Communist Party to act more boldly when necessary, in a sign of frustration over the performance of lower-level officials in the country’s top-down political system. ‘For Communists, Mr. Nice Guy is not a really good person,’ Xi was quoted in a commentary… in the People’s Daily, the party’s official mouthpiece. The commentary said ‘nice guys’ were afraid of offending others and just wanted to protect their own interests, which would in turn hurt the party. ‘If you are a good person in the face of negative and corrupt phenomena, you cannot be a good person in front of the party and the people,’ Xi said… ‘You cannot have both.’”

September 14 – Bloomberg: “China’s economy took a knock in August from stringent virus controls and tight curbs on property, fueling concerns about the global recovery as countries battle to get delta outbreaks under control. Retail sales growth slowed to 2.5% from a year ago, much lower than the 7% estimate…, as consumers cut back on spending during the summer holiday break. Construction investment contracted 3.2% in the eight months of the year, a reflection of the government’s steady tightening of property restrictions as part of a campaign against financial risk.”

September 15 – Reuters (Liangping Gao and Ryan Woo): “China’s new home prices rose at their slowest pace in months in August as authorities stepped up efforts to rein in a red-hot property market, and cooling measures were expected to limit home price growth going forward. Average new home prices grew at their slowest pace since December on a monthly basis, and since January on an annual basis, after authorities stepped up property curbs this year, from capping banks' lending to the sector to restricting purchases.”

September 12 – Bloomberg (Tom Hancock): “Beijing should strengthen efforts to control the expansion of technology companies because the development of internet platforms leads to a ‘winner takes all’ dynamic, which increases inequality and slows economic growth, an advisor to China’s central bank said. ‘The new technological revolution with more prominent properties of increasing returns will inevitably produce an unprecedented tendency toward monopoly,’ Cai Fang, a member of the People’s Bank of China’s monetary policy committee, told the state-run Securities Times…”

September 16 – Reuters (Samuel Shen and Andrew Galbraith): “China has set up a cross-agency team, led by the country’s securities watchdog, to coordinate crackdown efforts against illegal activities in capital markets. The China Securities Regulatory Commission (CSRC) said… it recently held the first meeting with other team members, including the country’s propaganda department, supreme court, supreme procuratorate, police, ministry of justice and ministry of finance.”

September 15 – Reuters (Chen Aizhu, Florence Tan and Muyu Xu): “China’s first crude oil reserve auction could have an outsized impact on market sentiment, signalling the top oil importer remains committed to reining in inflation by controlling commodity prices… The initial sale from its strategic petroleum reserves (SPR) will be small - 7.38 million barrels, or about a half-day’s usage in China - barely registering in a global market that consumes nearly 100 million barrels every day. Even so, it demonstrates Beijing is prepared to sell off stockpiles that have previously been considered off limits, and that it intends to become more active in domestic oil markets…”

September 13 – Reuters (Aishwarya Nair): “Beijing wants to break up Alipay, the hugely popular payments app owned by Jack Ma's Ant Group, and create a separate app for the company's highly profitable loans business, the Financial Times reported… The plan will also see Ant turn over the user data that underpins its lending decisions to a new credit scoring joint-venture, which will be partly state-owned…”

September 13 – Reuters (Weizhen Tan): “China’s zero-Covid approach could worsen the debt situation of the country’s companies, some of which are already in financial distress, says ratings giant S&P Global Ratings. The firm warned… that the global resurgence of Covid and China’s zero-tolerance approach may further strain companies if outbreaks continue to lead to mobility restrictions and disruptions broadly. ‘COVID-19′s latest resurgence in China came at a time when risks are rising for Chinese corporates,’ analysts at S&P Global Ratings wrote. ‘Higher leverage, weaker cash flows, tighter liquidity, and volatile financing conditions are biting. And all this is occurring amid unprecedented distress events and regulatory actions,’ they said.”

September 12 – Yahoo Finance (Gina Lee): “Soho China Ltd.’s Hong Kong shares plummeted after a $3 billion takeover bid by Blackstone Group Inc. ended in failure. Shares plummeted 34.86%...”

Central Banker Watch:

September 17 – Financial Times (Chris Giles): “Public concerns about inflation rose sharply in August as satisfaction with the Bank of England’s control of prices sank to its lowest level in a decade. In the BoE’s quarterly survey of attitudes to inflation, more people were satisfied than dissatisfied with the BoE’s performance, but only a third of people said they thought it was doing a good job in keeping prices under control. The 33% satisfaction score was the lowest level since the survey started in 1999 and has only been hit once before in November 2011.”

September 12 – Reuters (Leika Kihara): “After years of shock-and-awe stimulus, the Bank of Japan is quietly rolling back radical policies introduced by its bold chief Haruhiko Kuroda and pioneering controversial new measures that blur the lines between central banking and politics. The unwinding of Japan's complex policy is driven by Deputy Governor Masayoshi Amamiya, insiders say, a career central banker considered the top contender to replace Governor Kuroda whose term ends in 2023. Amamiya and his top lieutenant Shinichi Uchida have worked behind the scenes to make Kuroda's complicated policy framework--a product of years of unsuccessful attempts to revive stagnant consumer prices--more manageable, and eventually return Japan to more normal interest rate settings…”

Global Bubble Watch:

September 14 – Reuters (Dhara Ranasinghe): “Global debt rose to a new record high of nearly $300 trillion in the second quarter, but the debt-to-GDP ratio declined for the first time since the start of the pandemic as economic growth rebounded, the Institute of International Finance (IIF) said… The rise in debt levels was the sharpest among emerging markets, with total debt rising $3.5 trillion in the second quarter from the preceding three months to reach almost $92 trillion… Debt as a share of gross domestic product fell to around 353% in the second quarter, from a record high of 362% in the first three months of this year… China has seen a steeper rise in its debt levels compared with other countries, while emerging-market debt excluding China rose to a fresh record high at $36 trillion in the second quarter, driven by a rise in government borrowing.”

September 14 – Bloomberg (Maria Elena Vizcaino): “Global debt loads surged during the second quarter as households seized on low mortgage rates and governments continued borrowing heavily to revive pandemic-battered economies. The amount of the world’s outstanding debt swelled during the three months by about $4.8 trillion to a record $296 trillion, according to… the Institute of International Finance. The increase was led by households that added $1.5 trillion of debt during the first half of the year, driven by the U.S., China and Brazil, with home buyers tapping into low interest rates and stepping up spending as countries emerged from lockdowns. Meantime, government and corporate debts increased by $1.3 trillion and $1.2 trillion, respectively, over the six-month period.”

September 12 – Financial Times (Jonathan Wheatley): “Global food prices have been climbing for a little over a year, heaping pressure on emerging markets where the poorest tend to spend a larger proportion of their income on staples. Prices have risen 40% over the past 15 months, according to… the UN’s Food and Agriculture Organization, the biggest gain since surging food prices spurred the unrest of the Arab Spring in 2010-11.”

September 14 – Bloomberg (Ann Koh and K Oanh Ha): “Global supply chains already tangled by the pandemic, labor shortages and sustained consumer demand in the U.S. are getting walloped by another disruptive force: Mother Nature. Typhoon Chanthu is expected to hover near the mouth of China’s Yangtze River through Wednesday, temporarily shutting operations at major ports. In Texas, the heart of the U.S.’s energy and chemical industries, Tropical Storm Nicholas made landfall overnight, forcing terminals in Houston to curb cargo handling and restrict vessel traffic little more than two weeks after Hurricane Ida barreled into neighboring Louisiana.”

September 13 – Financial Times (Valentina Romei): “Global house prices rose are rising at their fastest pace since 2005 as low interest rates, a shortage of housing and bountiful household savings continue to boost the housing market. The average annual price change across 55 countries rose to 9.2% in the 12 months to June, according to property consultancy Knight Frank. It is the fastest rise since the 12 months to March 2005, and is up from 4.3% over the same period last year as more countries’ property markets heat up. Overall, one in three countries registered double-digit price growth, including Russia and Germany. The US, Australia, New Zealand, Turkey and Canada registered nominal house price growth of more than 16%…”

September 15 – Bloomberg (Shelly Hagan): “Inflation in Canada accelerated to the fastest pace since 2003, a political headache for Prime Minister Justin Trudeau only five days before an election. The consumer price index rose 4.1% in August from a year earlier…, marking the fifth consecutive month of inflation readings above the Bank of Canada’s 3% cap.”

EM Watch:

September 10 – Financial Times (Michael Stott): “While policymakers at the US Federal Reserve conduct a drawn-out discussion over the pros and cons of starting to withdraw their multitrillion dollar pandemic stimulus, south of the border the debate is already over. Inflation is back with a vengeance and Latin American central banks are raising rates, some aggressively. Leading the pack is Brazil, where the newly independent central bank is struggling to prevent inflation from hitting double digits. ‘Brazil really had a very big inflation shock,’ central bank governor Roberto Campos Neto admitted... Days later figures were published showing annual headline inflation at a five-year high of 9.7% in August.”

September 16 – Financial Times (Bryan Harris): “Brazil’s populist leader Jair Bolsonaro has long relied on his base to fill the streets in protest, but his more raucous followers may be difficult even for him to control. After mobilising truckers for nationwide protests against the Supreme Federal Court last week, he was forced to call on them to back down after they blockaded highways, clogging the nation’s supply arteries. He sent a message: ‘Tell the truck drivers: they are our allies, but these blockades are interfering with our economy, they cause shortages, inflation. It harms everyone, especially the poorest. So please end it.’ For political observers, the incident was a worrying indicator of the turbulence ahead for Latin America’s largest nation as Bolsonaro gears up for re-election next year.”

Europe Watch:

September 15 – Reuters (Andy Bruce): “British inflation hit a more than nine-year high last month after the biggest monthly jump in the annual rate in at least 24 years… Consumer prices rose by 3.2% in annual terms last month after a 2.0% rise in July, the highest rate since March 2012… The 1.2 percentage point rise in the annual rate of inflation in the space of a month marked the sharpest such increase since detailed records started in 1997.”

September 17 – Bloomberg (Lars Paulsson and Megan Durisin): “Europe’s energy crisis is spreading to the fertilizer and meat industries, risking tighter food supplies and even higher prices. Major fertilizer producers Yara International ASA and CF Industries Holdings Inc. said soaring energy costs are forcing them to halt some output of nutrients crucial for growing crops. The shutdowns also risk hitting other parts of the food supply chain by crimping supplies of carbon dioxide, which is used in stunning animals for slaughter and food packaging that boosts shelf life.”

September 14 – Financial Times (David Sheppard): “Natural gas prices in the UK and continental Europe have soared to record highs because of tight supplies ahead of winter, raising fears of a severe economic hit to industry and weather-induced shortages. Day-ahead prices in the UK jumped 7% on Tuesday…, almost treble their level the start of the year and an increase of 70% since early August alone. That is also stoking record electricity prices, as gas is key for power generation… Concerns about tight supplies started with a prolonged cold winter that drained natural gas storage. Normally this would be refilled over the summer when demand for heating largely evaporates. But storage filling has not happened at the pace traders would have liked in 2021. Russia has been sending less gas to Europe, for reasons fiercely debated in the industry. These range from Russia’s need to refill its own storage to suspicions that it is trying to pressure European governments, including Germany, to approve the start-up of the highly controversial Nord Stream 2 gas pipeline.”

Japan Watch:

September 17 – Reuters (Kiyoshi Takenaka, Elaine Lies and Yoshifumi Takemoto): “Candidates vying to become Japan’s next prime minister promised to restore popular trust in the ruling party by tackling income disparity, the coronavirus pandemic and climate change as they launched campaigns on Friday. Vaccine minister Taro Kono, widely seen as the leading contender to the win the Sept. 29 race to lead the ruling Liberal Democratic Party (LDP), picked up an endorsement from outgoing Prime Minister Yoshihide Suga.”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 11 – Associated Press (Jennifer Peltz and Caina Calvan): “The world solemnly marked the 20th anniversary of 9/11…, grieving lost lives and shattered American unity in commemorations that unfolded just weeks after the bloody end of the Afghanistan war that was launched in response to the terror attacks.”

September 13 – Bloomberg (Áine Quinn): “Food supplies will struggle to keep pace with the world’s growing population as climate change sends temperatures soaring and droughts intensify, according to… Chatham House. Yields of staple crops could decline by almost a third by 2050 unless emissions are drastically reduced in the next decade, while farmers will need to grow nearly 50% more food to meet global demand, the think tank said. The Chatham House report was drawn up for heads of state before next month’s pivotal United Nations COP26 climate summit in Glasgow.”

September 14 – CNBC (Vicky McKeever): “A global study has found young people are suffering ‘profound psychological distress’ due to climate change and government inaction on the crisis. Some 45% of the 10,000 young people surveyed across 10 countries for the study, published Tuesday, said anxiety and distress over the climate crisis was affecting their daily life and ability to function. Three-quarters of respondents aged 16-25 felt that the ‘future is frightening,’ while 64% of young people said that governments were not doing enough to avoid a climate crisis. In fact, nearly two-thirds of young people felt betrayed by governments and 61% said governments were not protecting them, the planet or future generations.”

Leveraged Speculation Watch:

September 17 – Financial Times (Laurence Fletcher): “Assets in a hedge fund run by AQR have tumbled more than $10bn over the past four years, as a lengthy period of poor returns has persuaded many clients to pull out their cash. The AQR Managed Futures Strategy fund, a computer-driven mutual fund that tries to profit from market trends, has fallen in size from about $12bn in late 2017 to $1.5bn currently... While the fund’s bets have often lost money in recent years, most of the drop in assets pertains to client withdrawals.”

Geopolitical Watch:

September 16 – Bloomberg: “China slammed a move by the U.S. and U.K. to help Australia build nuclear submarines, saying the new partnership will stoke an ‘arms race’ as tensions heat up in Asia-Pacific waters. Prime Minister Scott Morrison joined with U.S. President Joe Biden and the U.K.’s Boris Johnson… to announce a new security partnership that will see Australia acquire nuclear-powered submarines. While it could take more than a decade for Australia to build one, the agreement shows the U.S. joining with key English-speaking allies to form a more cohesive defense arrangement to offset China’s rising military prowess. The partnership ‘greatly undermines regional peace and stability, aggravates the arms race and hurts the international non-proliferation efforts,’ Chinese Foreign Ministry spokesman Zhao Lijian told reporters… He also questioned Australia’s commitment to forgoing nuclear weapons, and said the U.S. and U.K. were ‘using nuclear exports as geopolitical gaming tool and applying double standards.’”

September 15 – Financial Times (Demetri Sevastopulo and Laura Hughes): “The US has launched a new trilateral security partnership with the UK and Australia that will enable Canberra to build a fleet of nuclear-powered submarines, a move that will strengthen the allies’ ability to counter China. President Joe Biden announced the effort, which is designed to bolster alliances amid rising tensions with China over disputes ranging from the South China Sea to Taiwan, in a virtual event on Wednesday evening with British prime minister Boris Johnson and his Australian counterpart Scott Morrison. Biden said the initiative, including the submarine plan, was necessary to ensure the countries had the best technology to ‘defend against rapidly evolving threats’, in rhetoric that appeared to be aimed at Beijing.”

September 16 – Reuters (Ben Blanchard and Yimou Lee): “Taiwan proposed… extra defense spending of T$240 billion ($8.69bn) over the next five years, including on new missiles, as it warned of an urgent need to upgrade weapons in the face of a ‘severe threat’ from giant neighbor China. Taiwan President Tsai Ing-wen has made modernizing the armed forces - well-armed but dwarfed by China's - and increasing defense spending a priority, especially as Beijing ramps up military and diplomatic pressure against the island it claims as ‘sacred’ Chinese territory.”

September 10 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The Biden administration is moving towards allowing Taipei to change the name of its representative office in Washington to include the word ‘Taiwan’, a move likely to trigger an angry response from Beijing. Multiple people briefed on internal US discussions said Washington was seriously considering a request from Taiwan to change the name of its mission in the US capital from ‘Taipei Economic and Cultural Representative Office’ (Tecro) to ‘Taiwan Representative Office’.”

September 12 – Financial Times (Henry Foy and Richard Milne): “Russia plans to use war games this week with Belarus to deepen its control over its neighbour’s armed forces and increase its military capabilities on the borders of Nato member states, western defence officials have warned. The seven-day Zapad-2021 exercise, which began on Friday, involves tens of thousands of troops from both countries and conventional and strategic weapons tests to simulate conflict with a western enemy, and comes amid increased pressure from the Kremlin for deeper integration with Minsk. ‘Zapad fits into a broader pattern: a more assertive Russia, significantly increasing its military capabilities and its military presence near our borders,’ said Jens Stoltenberg, Nato secretary-general.”

September 15 – Reuters (Hyonhee Shin and Josh Smith): “North Korea and South Korea test fired ballistic missiles on Wednesday, the latest volley in an arms race in which both nations have developed increasingly sophisticated weapons while efforts prove fruitless to get talks going on defusing tensions… North Korea fired a pair of ballistic missiles that landed in the sea off its east coast…, just days after it tested a cruise missile that analysts said could have nuclear capabilities. Japan's defence ministry said the missiles landed inside Japan’s exclusive economic zone (EEZ)…”

Friday Evening Links

[Yahoo/Bloomberg] Stocks Fall the Most in a Month; Bond Yields Climb: Markets Wrap

[Reuters] Treasuries - U.S. yields rise; investors await Fed hints on taper timeline

[Yahoo/Bloomberg] Triple Witching Roils Market Where Traders Pay Up for Hedges

[Reuters] U.S. FDA vaccine advisers vote in favor of COVID-19 booster shot for those 65 and older

[Yahoo/Bloomberg] Americans Haven’t Been This Down on Housing Market Since 1982

[Yahoo/Bloomberg] Red-Hot U.S. PVC Rally Is Latest Sign of Soaring Consumer Prices

[Yahoo/Bloomberg] Iron Ore’s Brutal Collapse Below $100 Flags More Trouble Ahead

[FT] Xi and Putin pledge to co-operate on Afghanistan after Taliban takeover

[Reuters] China enters Taiwan air defence zone a day after military budget boost

[Bloomberg] Unprecedented Inflation? That's What CEOs See