Saturday, January 22, 2022

Weekly Commentary: Market Structure in the Crosshairs

Please join Doug Noland and David McAlvany Thursday, January 27th, at 4:00 pm Eastern/ 2:00 pm Mountain time for the Tactical Short Q4 recap conference call, “Things Went Wild. Now What?” Click here to register.

Markets will on occasion reveal subtle hints, clues that can be critical when nearing inflection points. Last week’s CBB discussed the elevated correlations between the cryptocurrencies, technology stocks, and some financial conditions indicators. This suggested heightened risk of a bout of “risk off” selling that could presage illiquidity, panic and bursting speculative Bubbles. Not subtly, this dynamic gained important momentum this week.

Bitcoin’s 11% Friday drop boosted losses for the week to 15.6%. Etherium dropped 28% this week, Litecoin 27%, and Binance 28%. It was a technology bloodbath, with the Semiconductors sinking 11.9%. There was an element of panic in many of the online trading community’s favorite stocks. A Friday afternoon Bloomberg headline: “Nasdaq 100’s Unrelenting Declines Ring a Dot-Com Bust Alarm Bell.” While there are notable similarities, the nineties was a rather petite Bubble in comparison to today’s gross obesity.

Markets this week provided inklings of a potentially far-reaching Critical Juncture. Wednesday trading deserves special attention. Stocks opened the session higher, only to reverse sharply lower. “Risk off” was gaining momentum, with technology stocks and the cryptocurrencies appearing particularly vulnerable. But even in the face of faltering risk market Bubbles, Treasury yields were marching higher – trading Wednesday to 1.90%, the high since year-end 2019.

Meanwhile, Gold surged $27 during the session. Buying went beyond the “shiny metal”. Silver jumped 67 cents, or 2.8%, Platinum $41, or 4.2%, and Palladium $104, or 5.4%. And gains were not limited to the precious metals. Nickel jumped 4.9%, Copper 1.7%, Tin 1.4%, and Aluminum 1.0%. In the soft commodities, Cotton rose 2.4%, Sugar 2.2%, Coffee 2.0%, and Cattle 1.1%. In hot energy markets, Crude added another 94 cents to close at the high since 2014 ($85.80).

The Bloomberg Commodities Index advanced 1.3% Wednesday, while the Nasdaq100 fell 1.1%. The dynamic was new and not all that subtle, though barely a peep was uttered from the punditry on such a potentially momentous development: The emergence of Bubble vulnerability in Financial Assets spurring heightened demand for Hard Assets.

The Bloomberg Commodities Index’s 1.8% gain for the week boosted early-2022 gains to 6.2%. Meanwhile, the Nasdaq100 dropped 7.5%, pushing y-t-d losses to 11.5%. So-called “safe haven” Treasury bonds (the TLT ETF) ended Wednesday’s session with y-t-d losses already approaching 5% (after losing 4.6% in 2021).

Elsewhere, Bitcoin and the cryptocurrencies suddenly looked a rather tarnished “new (digital) gold.” They certainly weren’t performing as an inflation hedge or providing portfolio diversification. A Friday Bloomberg headline: “Crypto Meltdown Erases More Than $1 Trillion in Market Value.”

It was one of those weeks that left an unsettled feeling in the pit of my stomach. A lot of money was lost in the cryptocurrencies and high-flying tech stocks. Before this is over, astonishing amounts of perceived wealth will have vanished into thin air. Tens of millions of unsuspecting “investors” will lose meaningful amounts of their savings. They bought into the mania, threw caution to the wind, and will suffer the consequences. Blindsided.

Sure, individuals made their own decisions. But who could blame them? With Trillions of liquidity inflating financial asset prices, zero rates on savings, and the Fed having repeatedly proved they would backstop the markets, it became perfectly rational to buy into the bullish Wall Street propaganda. Stocks always go up. There are few sure things in life, but stocks are one of them.

Wednesday from Bloomberg: “The Next Big Treasuries Shock Could Come From a Huge Option Position.” The article highlighted a note from Nomura’s Charlie McElligott, who was focused on a “monster” put option positioned (slightly “out of the money” 127 strike for the 10-year Treasury contract): “This level should continue to be monitored as a potential ‘acceleration point’ on a break lower.”

While appearing miraculous on the upside, I have long argued contemporary finance doesn’t function well in reverse. So long as Credit and speculative leverage are expanding, markets will appear highly liquid, financial conditions will remain loose, and asset price inflation will maintain self-reinforcing momentum. But fragility lies in wait – just below the surface. Derivatives – they lurk as an accident waiting to happen. And the lying and lurking can persist for years, long forgotten but ready to pounce.

“Portfolio insurance” played an instrumental role in the 1987 stock market crash. Derivatives were fundamental to market dislocations in 1994, 1998, and 2000. Hedging and leveraging strategies - through listed and over-the-counter derivative products - were integral to the mortgage finance Bubble and its fateful collapse. Derivatives and the gargantuan ETF complex were central to March 2020’s scary market dislocation.

We’re heading toward a historic test of market function. I recognize that conventional thinking has it that markets have faced various challenges over the years/decades and inevitably passed every test. It’s different this time. Past performance is not indicative of future results.

Bond yields collapsed during the 1987 stock market crash, providing key reinflationary stimulus for late-eighties (“decade of greed”) excess. And since ’87, sinking bond yields repeatedly provided key post-crisis stimulus. After beginning 1990 at 8%, a historic bond bull market saw yields trend lower for three decades, trading down to 0.50% following the Fed’s March 2020 market bailout.

The Fed for three decades enjoyed incredible latitude to employ increasingly aggressive stimulus measures. Greenspan’s cryptic utterances and “baby step” rate increases, to aggressive rate slashing, to Bernanke’s Trillion dollar QE, to Powell’s $5 Trillion. And the contemporary bond market had absolutely no issue with ever more outlandish monetary inflation. After surpassing 6.0% in 1990, y-o-y inflation was as low as 1.1% by 2002. And after running negative in 2009, CPI bounced back to trade as high as 3.9% in 2011. But between 2012 and 2021, CPI spent much of the time below 2%. The Fed responded with momentous monetary stimulus in March 2020 - with zero fear of inflationary consequences.

There’s a strong case that the approaching market test will prove monumental. Total Debt Securities increased $9.1 TN, or 20%, over the past nine quarters. Covertly, systemic risk to higher market yields has been rising exponentially. Then inflation surged to a 40-year high 7.0%. Treasury yields have been moving higher, with mounting losses and attendant fund outflows. There is ample evidence supporting the view of secular shifts in inflation and bond market dynamics.

Charlie McElligott’s focus this week was on a particularly chunky Treasury options strike, and how those who wrote/sold this interest-rate protection might be forced to aggressively sell Treasuries to hedge their derivatives exposure. Yet the bigger question is who will be on the other side of trades if a spike in yields forces massive derivatives-related selling. What will be the source of liquidity if “the market” attempts to offload interest-rate risk into an impaired and illiquid marketplace?

After trading Wednesday to 1.90%, 10-year Treasury yields reversed lower into expiration, closing the week at 1.76%. The Treasury market was let off the hook by some panic selling of stocks (tech in particular) and cryptocurrencies. And while “risk off” may leave a Treasury market test for another day, that in no way allays the seriousness of the unfolding test of contemporary finance more generally.

January 21 – Reuters (Gaurav Dogra): “Global exchange-traded funds (ETFs) drew record inflows last year as investors plowed their growing cash balances into the low-cost, transparent investment products. According to Refinitiv Lipper data, global exchange-traded funds received a record $1.22 trillion in inflows last year, which was about 71% higher than the previous year. Their net assets swelled to a record $9.94 trillion. U.S. ETFs were the biggest recipients, receiving $901 billion, while European and Asian ETFs drew about $190 billion and $88 billion respectively.”

ETF industry assets have inflated tremendously since the cataclysmic March 2020 market dislocation (that saw quick 20% losses for key bond and equities funds). Who will take the other side of trades when panicked ETF holders rush for the exits (with the leverage speculating community keen to profit from retail’s misfortune)? The “Moneyness of Risk Assets” has been a prevailing concern of mine since Bernanke unleashed QE. I’ve had particular unease with the perception of safety and liquidity afforded to ETF shares in funds that purchase less than liquid securities (i.e. small cap stocks and junk bonds). A new breed of ETFs (i.e. ARK Funds) took risk to a whole new level, loading up on highly volatile speculative stocks in a mania. Miraculous money-making – and self-reinforcing fund flows - on the upside is now collapsing with a big thud.

Who takes the other side of the trade if the public panics out of equity funds? And I’m not referring to some of these high-flying specialty funds. The largest stock losers in the S&P500 so far this year included Moderna, Netflix, Etsy, Enphase Energy, EPAM Systems, Align Technology, and Bio-Techne. It’s been quite a mania.  The greater the speculation and the higher the price, the more likely a stock will make its way into the S&P500 index. Tesla began 2020 at $86. It was included in the S&P500 on December 21, 2020, after its stock price had surged to $650.

The small cap ETFs have been under intense pressure to begin the year. When hit with outflows, these funds face the challenge of raising cash by selling often liquidity-challenged securities. As the big tech stocks came under heavy selling pressure to start 2022, the S&P500 was supported by a (convenient) melt-up in the big financial shares. The Banks (BKX) surged 11.7% in 2022’s first nine sessions.

While attention was focused this week on collapsing cryptocurrencies and tech shares, it’s worth noting the ominous reversal in financial stocks. Sinking 10.0%, the Bank Index actually suffered larger losses this week than the Nasdaq100 (down 7.5%). Goldman Sachs fell 9.7%, JPMorgan 8.1%, Bank of America 6.2% and Citigroup 5.5%. Robinhood sank 14.3%, Wisdom Tree 9.7%, Interactive Brokers 7.3%, and Charles Schwab 6.6%.

It’s worth noting this week’s jump in Bank CDS prices, especially on Friday. Notable Friday moves included a five-point jump in Morgan Stanley CDS (to 65bps), four points for Bank of America (to 57bps), and three points for JPMorgan (to 55bps). For the week, Citigroup CDS jumped five to a one-month high 64 bps; Morgan Stanley five to (high since July 2020) 65 bps, Goldman Sachs five to 70 bps; JPMorgan five to (one-month high) 55 bps; and Bank America five to (near 18-month high) 57 bps.

Bank stocks were under pressure globally this week, though nowhere suffered the bludgeoning the big U.S. financial institutions did. U.S. banks also led the CDS leaderboard. It was as if there was a sudden awakening to U.S. fragility. U.S. Market Structure in the Crosshairs?

Let’s return to the unfolding U.S. “test.” It was notable that the S&P500 was clobbered 5.7%, yet 10-year Treasury yields were unchanged. Two-year yields actually rose another four bps this week. Curiously, despite clear indications of faltering Bubbles, market expectations held steady with four rate increases this year.

Not only is the consensus expecting multiple rate hikes, forecasts have the Fed commencing balance sheet contraction, or quantitative tightening, as early as the Spring. I can’t see it. Market Structure can’t take it. The Fed is still at least a couple months from its first little baby step rate increase – yet speculative Bubbles are already coming unglued. Talk is that the Fed will use its balance sheet (QT) to impose tightening in lieu of a more aggressive rate hike cycle. Today’s fragile Market Structure – including unprecedented speculation and leverage, problematic derivative structures, an ETF time-bomb, and myriad fragile market Bubbles – would not withstand QT.

I don’t see the Fed’s tightening cycle getting far. And while faltering risk market Bubbles would be expected to temper inflationary momentum, the surprise could be inflation’s resilience. And this week’s Hard Asset over Financial Assets Dynamic is definitely worthy of contemplation. There are today Trillions of available cash balances. Risk aversion towards Financial Assets might just bolster flows into perceived superior stores of value in real things. And this dynamic could underpin inflationary pressures in many things – including food, energy, commodities and such – that will combine with acute wage pressures to feed persistently elevated inflation.

Meanwhile, persistently elevated inflation creates a momentous challenge both for Fed policymaking and U.S. Market Structure. “Risk off” without an aggressive Fed response? De-risking/deleveraging not automatically triggering massive QE liquidity injections? I cannot overstate how this would radically alter the risk profile of key aspects of Market Structure and contemporary finance more generally. The risk of runs on the fund industry turning disorderly. The risk of derivative accidents. Self-reinforcing asset deflation and deleveraging. Risk aversion in corporate Credit.

Market Structure is becoming a huge issue. Contemporary Finance Doesn’t Function Well in Reverse – and that’s an understatement. Illiquidity and mayhem. Rather than “Ring a Dot-Com Bust Alarm Bell,” it was the systemic risk bells that began chiming this week.

For the Week:

The S&P500 sank 5.7% (down 7.7% y-t-d), and the Dow fell 4.6% (down 5.7%). The Utilities slipped 0.6% (down 4.1%). The Banks were hammered 10.0% (up 0.1%), and the Broker/Dealers dropped 6.3% (down 5.1%). The Transports lost 4.1% (down 7.5%). The S&P 400 Midcaps sank 6.8% (down 8.7%), and the small cap Russell 2000 was pummeled 8.1% (down 11.5%). The Nasdaq100 sank 7.5% (down 11.5%). The Semiconductors were clobbered 11.9% (down 13.0%). The Biotechs lost 6.6% (down 11.0%). With bullion rising $17, the HUI gold index jumped 1.8% (down 1.0%).

Three-month Treasury bill rates ended the week at 0.1575%. Two-year government yields rose four bps to 1.01% (up 27bps y-t-d). Five-year T-note yields were unchanged at 1.56% (up 30bps). Ten-year Treasury yields declined three bps to 1.76% (up 25bps). Long bond yields fell five bps to 2.07% (up 17bps). Benchmark Fannie Mae MBS yields added two bps to a two-year high 2.53% (up 46bps).

Greek 10-year yields surged another 17 bps to 1.68% (up 37bps y-t-d). Ten-year Portuguese yields added a basis point to 0.56% (up 10bps). Italian 10-year yields increased two bps to 1.29% (up 12bps). Spain's 10-year yields were unchanged at 0.64% (up 7bps). German bund yields declined two bps to negative 0.07% (up 11bps). French yields were little changed at 0.33% (up 14bps). The French to German 10-year bond spread widened two to 40 bps. U.K. 10-year gilt yields added two bps to 1.17% (up 20bps). U.K.'s FTSE equities index declined 0.6% (up 1.5% y-o-y).

Japan's Nikkei Equities Index dropped 2.1% (down 4.4% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.14% (up 7bps y-t-d). France's CAC40 fell 1.0% (down 1.2%). The German DAX equities index lost 1.8% (down 1.8%). Spain's IBEX 35 equities index declined 1.3% (down 0.2%). Italy's FTSE MIB index dropped 1.8% (down 1.0%). EM equities were mostly lower. Brazil's Bovespa index rose 1.9% (up 3.9%), while Mexico's Bolsa sank 4.0% (down 3.2%). South Korea's Kospi index slumped 3.0% (down 4.8%). India's Sensex equities index lost 3.6% (up 1.3%). China's Shanghai Exchange was little changed (down 3.2%). Turkey's Borsa Istanbul National 100 index fell 3.0% (up 8.3%). Russia's MICEX equities index sank 4.4% (down 9.2%).

Investment-grade bond funds saw inflows of $639 million, while junk bond funds posted outflows of $2.139 billion (from Lipper).

Federal Reserve Credit last week surged $88.6bn to a record $8.826 TN. Over the past 123 weeks, Fed Credit expanded $5.099 TN, or 137%. Fed Credit inflated $6.015 Trillion, or 214%, over the past 480 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $13.3bn to $3.447 TN. "Custody holdings" were down $94.4bn, or 2.7%, y-o-y.

Total money market fund assets dropped $57.9bn to $4.617 TN. Total money funds increased $309bn y-o-y, or 7.2%.

Total Commercial Paper declined $4.0bn to $1.044 TN. CP was down $14.6bn, or 1.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to a 22-month high 3.56% (up 79bps y-o-y). Fifteen-year rates surged 17 bps to 2.79% (up 58bps). Five-year hybrid ARM rates increased three bps to 2.60% (down 20bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up eight bps to an 19-month high 3.59% (up 68bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 0.5% to 95.17 (unchanged y-t-d). For the week on the upside, the South African rand increased 1.9%, the Brazilian real 1.4%, the Japanese yen 0.5%, the Swiss franc 0.3% and the Singapore dollar 0.2%. On the downside, the Swedish krona declined 1.9%, the Norwegian krone 1.6%, the New Zealand dollar 1.3%, the British pound 0.9%, the Mexican peso 0.8%, the euro 0.6%, the South Korean won 0.6%, the Australian dollar 0.3% and the Canadian dollar 0.2%. The Chinese renminbi increased 0.22% versus the dollar (up 0.27 y-t-d).

Commodities Watch:

January 19 – Bloomberg (Julian Lee): “The oil market is getting tighter and there may be even less slack in the system than forecasts suggest. The latest outlooks from the International Energy Agency and the U.S. Energy Information Administration show the world needing more oil this year from the members of the Organization of Petroleum Exporting Countries than they did a month ago. The bigger worry is the growing mismatch between the level of oil stockpiles they can measure and the volumes their models predict.”

The Bloomberg Commodities Index rose another 1.8% (up 6.2% y-t-d). Spot Gold jumped 1.0% to $1,835 (up 0.3%). Silver surged 5.8% to $24.30 (up 4.2%). WTI crude rose $1.32 to $85.14 (up 13%). Gasoline added 1.0% (up 10%), while Natural Gas dropped 6.2% (up 7%). Copper rose 2.3% (up 1%). Wheat surged 5.2% (up 1%), and Corn jumped 3.4% (up 4%). Bitcoin collapsed $6,660, or 15.5%, this week to $36,435 (down 21%).

Coronavirus Watch:

January 16 – Associated Press (Meg Kinnard and Bryan Gallion): “COVID-19 infections are soaring again at U.S. nursing homes because of the omicron wave, and deaths are climbing too, leading to new restrictions… Nursing homes were the lethal epicenter of the pandemic early on, before the vaccine allowed many of them to reopen to visitors last year. But the wildly contagious variant has dealt them a setback. Nursing homes reported a near-record of about 32,000 COVID-19 cases among residents in the week ending Jan. 9, an almost sevenfold increase from a month earlier… A total of 645 COVID-19-related deaths among residents were recorded during the same week, a 47% increase from the earlier period.”

January 17 – Bloomberg: “Omicron has breached the political, financial and technology centers of China for the first time, putting pressure on the country’s response to the more transmissible variant as it awaits the Winter Olympics starting in less than three weeks. China has detected locally-transmitted omicron infections in the capital Beijing, the financial center Shanghai, and Guangdong, where the southern technology center of Shenzhen is located, which together account for one-fifth of the country’s gross domestic product. The highly mutated strain has been detected in one out of every five provinces, while 14 of them have reported imported cases.”

Covid Disruption Watch:

January 19 – Bloomberg: “China’s capital found a Covid-19 cluster among cold chain workers on Wednesday, the latest sign the country is seeing more infections resulting from a controversial claim of transmission through contaminated goods. Five people who worked at a cold chain storage facility in the Fangshan district of Beijing tested positive for Covid, with genetic sequencing showing three of them were infected by the delta variant… The refrigeration facility also deals with imports, and the workers who tested positive hadn’t left the city in the past two weeks...”

January 17 – Reuters (David Stanway): “China is doubling down on its ‘zero-COVID’ strategy, saying the spread of the potentially milder Omicron variant is no reason to lower its guard amid warnings of economic disruptions and even public unrest as lockdowns drag into a third year. As other countries talk about a transition from ‘pandemic’ to ‘endemic’, China has stepped up policies to stamp out any new outbreak as soon as it arises, sealing off cities, shutting transport links and launching mass testing programmes.”

January 16 – New York Times (Ana Swanson and Keith Bradsher): “Companies are bracing for another round of potentially debilitating supply chain disruptions as China, home to about a third of global manufacturing, imposes sweeping lockdowns in an attempt to keep the Omicron variant at bay. The measures have already confined tens of millions of people to their homes in several Chinese cities and contributed to a suspension of connecting flights through Hong Kong from much of the world for the next month. At least 20 million people, or about 1.5% of China’s population, are in lockdown…The country’s zero-tolerance policy has manufacturers — already on edge from spending the past two years dealing with crippling supply chain woes — worried about another round of shutdowns at Chinese factories and ports.”

January 17 – CNBC (Sumathi Bala): “Supply chain disruptions are being prolonged driven largely by China’s strict zero-Covid policy, according to an economist from Moody’s Analytics. The bottlenecks have lasted for about a year now but are expected to ‘materially ease in the early months of this year,’ said Katrina Ell, a senior economist… at Moody’s… ‘So we would start to see material downward pressure on things like producer prices, input prices that kind of thing. But given China’s zero-Covid policy and how they tend to shut down important ports and factories — that really increases disruption,’ she told CNBC…, adding it amplifies ongoing supply chain pressures.”

January 14 – Reuters (Siddharth Cavale and Christopher Walljasper): “High demand for groceries combined with soaring freight costs and Omicron-related labor shortages are creating a new round of backlogs at processed food and fresh produce companies, leading to empty supermarket shelves at major retailers across the United States.”

Market Mania Watch:

January 18 – Bloomberg (Dave Sebastian and Hardika Singh): “Moonshot stocks are coming back to Earth. As the Federal Reserve moves closer to raising interest rates, investors are repricing their bets on one of the riskiest corners of the market: shares of companies that don’t make money. Cash-burning technology firms, biotechnology companies without any approved drugs and startups that listed quickly via mergers with blank-check companies—some of which soared during the pandemic—have dropped sharply.”

January 20 – Bloomberg (Evgenia Pismennaya and Andrey Biryukov): “Russia’s central bank proposed a blanket ban on the use and creation of all cryptocurrencies within one of the world’s biggest crypto-mining nations, citing the dangers posed to the country’s financial system and environment. Crypto bears the hallmarks of a pyramid scheme and undermines the sovereignty of monetary policy, the central bank said... It also took aim at mining, which it said hurts the country’s green agenda, jeopardizes Russia’s energy supply and amplifies the negative effects of the spread of cryptocurrencies, creating incentives for circumventing attempts at regulation.”

January 18 – Bloomberg (Carolynn Look): “Advocates of a decentralized future of money based on distributed ledger technology are chasing an illusion, according to Bank of International Settlements General Manager Agustin Carstens. Their vision, which is to ‘democratize finance’ by cutting out big banks and other middlemen, is ‘not what decentralized finance applications are delivering,’ he said… addressing an event in Frankfurt. ‘There is a large gulf between vision and reality,’ Carstens argued.”

January 19 – Bloomberg (Justina Lee): “A booming $4.9 trillion branch of the U.S. asset management industry is funneling investor cash into funds that are pricier and worse-performing than alternatives, new research claims. So-called model portfolios -- off-the-shelf investment strategies often comprising bundles of ETFs -- are ridden with conflicts of interest that undermine one of the hottest and most opaque businesses on Wall Street, a trio of academics argues.”

January 19 – Yahoo Finance (Ines Ferré): “It's been roughly a year since GameStop began overtaking headlines and a 'meme stock' phenomenon was born. However speculative assets have been under pressure recently amid rising inflation and a more hawkish-toned Federal Reserve. ‘I do hope that investors will refocus on fundamental values,’ Thomas Peterffy, founder of Interactive Brokers told Yahoo… ‘This meme stock idea — it's fun, but it's not sustainable… I think a lot of people will lose a lot of money on these meme stocks. It's not good for the market, and it’s not good for the people,’ said Peterffy.”

January 18 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… tumbled the most in more than 18 months after the firm’s stock traders posted a lackluster fourth quarter, another sign that the frenzied market activity spurred by the pandemic is cooling… Compensation and benefits, the single biggest driver of expenses at Goldman, jumped 33% to $17.7 billion in 2021, an indication of big rewards for employees after a record year.”

Market Instability Watch:

January 19 – Bloomberg (Edward Bolingbroke): “The potential catalyst for the next leg higher in Treasury yields is hiding in plain sight in the options market, where a single put strike expiring next month has exploded in size since the start of the year. While the bearish option remains out-of-the-money, or uneconomical to exercise, falling prices for 10-year Treasury note futures are nearing the option strike price. Should they get there, hedging by dealers that are short the option could send yields to new highs.”

January 20 – Bloomberg (Tasos Vossos): “The safest corporate bonds in the world are having their worst start to the year in just over two decades as investors brace for tighter monetary policies. A global index of investment-grade company debt has posted total return losses of 2.2% since the start of the year, the most since data going back to 2000. The gauge is faring worse than all others in the category of credit securities outside of emerging markets.”

January 20 – Bloomberg (Selcuk Gokoluk): “The boom times in the emerging-market junk bonds are giving way to a deep freeze. Not a single bond has been sold by a developing-nation government with a non-investment grade this year. In the corporate world, there’s been a handful of tiny deals, only one coming in above $500 million. It’s a dramatic turnaround from the previous two years, when investors were clamoring for high-yield debt and companies and governments flooded markets with more than $250 billion in sales.”

January 19 – Bloomberg (Olivia Raimonde): “Rapidly rising yields have dragged junk bonds down by the most since the pandemic started, led by the highest-rated bonds, which face record losses. The Bloomberg U.S. Corporate High Yield Bond Index is down 1.23% year-to-date, headed for its biggest monthly tumble since March 2020 and worst January performance in six years. About half that index is rated BB -- the rating tier with most duration, or sensitivity to rising rates -- and those bonds have fallen by 1.7%.”

January 17 – Reuters (Marc Jones and Karin Strohecker): “Ukrainian sovereign dollar bonds tumbled into distress territory and Russian bonds suffered sharp falls on Monday as fears of another Russian military foray into Ukraine showed no sign of easing. The premium investors demand to hold Ukraine bonds over safe-haven U.S. Treasuries as measured by the JPMorgan EMBI Global Diversified index surged past 1,000 bps for the first time since the… pandemic emerged in March 2020.”

Inflation Watch:

January 19 – Reuters (Dhara Ranasinghe): “Already less transitory than forecast, central bankers' inflation headache may be about to become more acute as they face the prospect of $100-plus oil that lifts consumers' price expectations and intensifies simmering wage hike pressures. Brent crude futures, which soared 50% in 2021, are up a further 14% already in 2022 at seven-year highs of $89 a barrel . With production capacity tight, inventories low and geopolitics racking several producing regions, oil is hurtling towards $100, a level Goldman Sachs predicts will be breached by mid-year.”

January 19 – Wall Street Journal (Sharon Terlep): “Procter & Gamble Co. is betting the world’s consumers will remain undeterred by higher prices on household staples from Pampers diapers to Gillette razors. The… consumer-products giant said sales increased 6% in the quarter ended Dec. 31 compared with a year earlier, fueled in part by the company’s largest average price increases since the spring of 2019. Executives… said its price increases will continue throughout 2022, and predicted higher profitability and improved margins in coming quarters even as labor, freight and raw-materials costs continue to balloon due to the global supply-chain turmoil… Executives said there is no relief in sight from higher costs for labor, transportation of goods and raw materials such as fuel, resin and pulp. ‘The flexibility that we’ve talked about that our supply people have generated doesn’t come for free,’ Mr. Moeller said. ‘When we need to shift to alternate materials, when we need to shift to alternate suppliers, all our sources of materials geographically, that comes at a premium.’”

January 21 – Wall Street Journal (Jon Emont and Jenny Carolina Gonzalez): “From South America’s avocado, corn and coffee farms to Southeast Asia’s plantations of coconuts and oil palms, high fertilizer prices are weighing on farmers across the developing world, making it much costlier to cultivate and forcing many to cut back on production. That means grocery bills could go up even more in 2022, following a year in which global food prices rose to decade highs. An uptick would exacerbate hunger—already acute in some parts of the world because of pandemic-linked job losses—and thwart efforts by politicians and central bankers to subdue inflation.”

January 17 – Bloomberg (Lauren Etter and Brendan Murray): “Ocean shipping rates are expected to stay elevated well into 2022, setting up another year of booming profits for global cargo carriers — and leaving smaller companies and their customers from Spain to Sri Lanka paying more for just about everything. The spot rate for a 40-foot container to the U.S. from Asia topped $20,000 last year…, up from less than $2,000 a few years ago, and was recently hovering near $14,000. What’s more, tight container capacity and port congestion mean that longer-term rates set in contracts between carriers and shippers are running an estimated 200% higher than a year ago, signaling elevated prices for the foreseeable future.”

January 20 – Yahoo Finance (Adriana Belmonte): “Health care costs have continued to increase over the past decade despite the landmark passage of Obamacare in March 2010. A recent report from the Commonwealth Fund found that health insurance premiums and deductibles for Americans with employer-sponsored coverage accounted for 11.6% of median income in 2020, a whopping 9.1% increase from 2010.”

January 18 – Yahoo Finance (Brian Cheung): “Higher pay to retain and attract employees impacted Goldman Sachs profits, and the big bank’s CEO says companies across industries are experiencing the same thing. ‘There is real wage inflation everywhere in the economy. Everywhere,’ Goldman Sachs CEO David Solomon told analysts… The nation’s largest bank, JPMorgan Chase, reported that it had similarly seen a 14% year-over-year increase in compensation expenses. ‘The CEOs shouldn’t be crybabies about it. They just deal with it,’ JPMorgan… CEO Jamie Dimon told analysts…”

January 17 – Wall Street Journal (Kirk Maltais): “Government agricultural forecasters said they expect the smallest Florida orange crop since World War II, touching off a rally in juice futures that were already at their highest level in years... The U.S. Agriculture Department said… it expects Florida to produce 44.5 million 90-pound boxes of oranges this year, trimming its already low expectations and predicting that the crop will wind up smaller than the one that was ruined by 2017’s Hurricane Irma. If the forecast is accurate, it will be the smallest harvest since 1945. The big culprit this time around… is citrus greening, an incurable disease that thins the crowns of trees and saps their vitality.”

January 19 – CBC (Pete Evans): “The Consumer Price Index increased at an annual pace of 4.8% in December, as sharply higher prices for food led to the cost of living going up at its fastest rate since 1991. Statistics Canada reported… that grocery prices increased by 5.7%, the biggest annual gain since 2011.”

January 19 – Reuters (David Milliken and Andy Bruce): “Inflation in Britain rose faster than expected to its highest in nearly 30 years in December, intensifying a squeeze on living standards and putting pressure on the Bank of England to raise interest rates again. The annual rate of consumer price inflation increased to 5.4% from November's 5.1%, the highest since March 1992…”

Biden Administration Watch:

January 19 – CNBC (Katia Dmitrieva): “President Joe Biden said… he expects Russian President Vladimir Putin to order an invasion of Ukraine, and warned that ‘a disaster’ awaits Russia if that happened. Biden’s remarks came after intelligence agencies warned such an attack could happen within a month. ‘My guess is he will move in, he has to do something,’ Biden said when asked about the more than 100,000 Russian troops positioned along Ukraine’s border. ‘It is going to be a disaster for Russia if they further invade Ukraine. Our allies and partners are ready to impose a severe cost on Russia and the Russian economy,’ Biden said…”

January 19 – Bloomberg (Katia Dmitrieva): “President Joe Biden said it’s the Federal Reserve’s job to rein in the fastest pace of inflation in decades, and supported the central bank’s plans to scale back monetary stimulus. ‘The critical job in making sure that the elevated prices don’t become entrenched rests with the Federal Reserve,’ Biden said… ‘Given the strength in the economy, and the pace of recent price increases, it’s appropriate,’ as Fed Chair Jerome Powell has indicated, ‘to recalibrate the support that is now necessary,’ Biden said…”

January 19 – Bloomberg (Laura Davison): “Several House Democrats promise to sink President Joe Biden’s economic agenda if a scaled-back version now being considered eliminates an expansion of the federal deduction for state and local taxes. Their demands, critical in a chamber where Democrats can afford only four defections, add to the long list of hurdles the party must clear as lawmakers rewrite Biden’s centerpiece legislation to push it through the evenly divided Senate.”

January 19 – Bloomberg (Ben Bain): “Gary Gensler is putting hedge funds and private equity firms on notice that the fees they charge clients are going to draw more scrutiny from Wall Street’s main regulator in 2022. The U.S. Securities and Exchange Commission will look at what fund managers charge as part of a broader effort to boost efficiency, competition and transparency in markets, Gensler said… The comments follow similar remarks the SEC chief made last year when he took aim at hedge fund fees, including the long-standing 2-and-20 model for charging clients.”

Federal Reserve Watch:

January 16 – Financial Times (Ana Swanson and Keith Bradsher): “When the Federal Reserve voted in 2011 on a draft of a sweeping new rule preventing banks from making certain speculative investments, Sarah Bloom Raskin was the lone dissenter among senior colleagues at the US central bank. The so-called Volcker rule, she concluded, was not stringent enough as it stood, its guardrails ‘insufficient’ and open to ‘significant abuse’. In expressing her opposition, Raskin, then a Fed governor, helped to secure much tougher terms and distinguished herself as a leading voice on regulatory matters. If confirmed as vice-chair for supervision, Raskin is expected to again take a bold approach on a range of thorny issues, from patching up weak spots in the post-financial crisis regulatory apparatus to steering the Fed to more seriously consider climate-related financial risks.”

U.S. Bubble Watch:

January 20 – CNBC (Jeff Cox): “Jobless claims took an unexpected turn higher last week in a potential sign that the wintertime omicron surge was hitting the employment picture. Initial filings for the week ended Jan. 15 totaled 286,000, well above the Dow Jones estimate of 225,000 and a substantial gain from the previous week’s 231,000.”

January 18 – CNBC (Diana Olick): “The average rate on the popular 30-year fixed mortgage hit 3.7% Tuesday morning, according to Mortgage News Daily. That is the highest since early April 2020 and now 83 bps higher than the same time one year ago.”

January 19 – Reuters (Lucia Mutikani): “U.S. homebuilding rose to a nine-month high in December amid a surge in multi-family housing projects, but soaring prices for materials after the government nearly doubled duties on imported Canadian softwood lumber could hamper activity later this year. The report… also showed the housing construction backlog surged to a record high last month, underscoring the challenges builders are facing from supply strains, including labor shortages… Housing starts rose 1.4% to a seasonally adjusted annual rate of 1.702 million units last month, the highest level since March.”

January 18 – Bloomberg (Allison McNeely): “The time it would take to sell all available homes in some of the hottest U.S. housing markets continued to shrink in December as active listings fell. Seattle had the fewest months of supply, with San Jose and Denver close behind. Active listings in those markets fell by more than 30% in December compared to the previous month, according to… Redfin Corp. It would take less than a week to sell all the inventory in Seattle, and about 9 days for San Jose and Denver at current prices.”

January 19 – Associated Press (Jon Gambrell and David Koenig): “Some flights to and from the U.S. were canceled on Wednesday even after AT&T and Verizon scaled back the rollout of high-speed wireless service that could interfere with aircraft technology that measures altitude. Carriers that rely heavily on the wide-body Boeing 777 canceled flights or switched to different planes following warnings from the Federal Aviation Administration and Boeing. But airlines that solely or mostly fly Airbus jets, including Air France and Ireland’s Aer Lingus, seemed unaffected by the new 5G service.”

January 19 – Yahoo Finance (Mike Juang): “AT&T and Verizon agreed to delay the rollout of 5G frequency near some airports and aviation infrastructure, but a permanent fix still eludes all of the major players – including the government and airlines worried about the impact on flight technology.”

January 19 – Wall Street Journal (Anne Steele): “As investors rush to buy megastars’ music catalogs, Barry Massarsky and his firm are in the middle valuing most of the deals. He pioneered the economics of royalty cash flows in the early 1990s and together with his business partner, Nari Matsuura, developed a model to guide banks lending to music investors. Last year Massarsky Consulting valued over 300 catalogs totaling more than $6.5 billion. ‘Our website is deluged with more and more demands from newer buyers, from newer sellers,’ he says.”

Fixed-Income Bubble Watch:

January 19 – Bloomberg (Lara Wieczezynski): “U.S. leveraged loans continue to hold sway over investors looking for protection against inflation and rising rates, with average prices on the debt reaching the highest level since July 2007. The S&P/LSTA Leveraged Loan Price Index jumped 0.05% to 99.07 on Wednesday as buyers pile into the risky debt. Demand for the asset class has been robust for some time as its floating-rate benchmarks prove to be a big draw in a potentially volatile increasing-rate environment.”

January 19 – CNBC (Jack Pitcher and Brian Smith): “Goldman Sachs is selling $12 billion of bonds in six parts… The longest portion of the offering, a 21-year security, will yield 1.2 percentage points above Treasuries… The Goldman Sachs sale is the third-largest ever from a U.S. bank… The four largest sales have all occurred in the last two years… Morgan Stanley, meanwhile, is selling $6 billion of debt in three parts…”

China Watch:

January 17 – Reuters (Kevin Yao and Gabriel Crossley): “China's economy rebounded in 2021 with its best growth in a decade, helped by robust exports, but there are signs that momentum is slowing on weakening consumption and a property downturn, pointing to the need for more policy support. Growth in the fourth quarter hit a one-and-a-half-year low… shortly after the central bank moved to prop up the economy with a cut to a key lending rate for the first time since early 2020.”

January 7 – Bloomberg: “China’s property sector shrank at a faster pace in the final three months of last year as the country’s housing slump continues to take its toll on the economy. Output in the real-estate sector shrank 2.9% in the fourth quarter after a 1.6% contraction in the previous three months… That was the first consecutive quarterly decline since 2008. The construction sector also saw its output decline by 2.1% during the same period. Those two sectors combined were 13.8% of national output in 2021…, lower than the 14.5% in 2020.”

January 17 – Bloomberg: “China’s property market slump persisted in December, contributing to an economic slowdown that spurred policy makers to cut a key interest rate. The downturn spanned developers’ sales, investments, land purchasing and financing activities… Authorities’ efforts to ease some restrictions on real estate funding have done little to boost the housing market, which is contending with an intensifying credit crunch and weakening demand from homebuyers. The woes in December were particularly acute in property investment, which shrank 17% from November and 14% from a year earlier. Such spending directly contributed 13% of gross domestic product last year. Home sales by value declined 19.6% from a year earlier, a sixth consecutive monthly drop…”

January 18 – Bloomberg: “China’s central bank pledged to use more monetary policy tools to spur the economy and drive credit expansion, sending its clearest signal yet of an easing bias to boost market confidence. The People’s Bank of China will ‘open the monetary policy tool box wider, maintain stable overall money supply and avoid a collapse in credit,’ Deputy Governor Liu Guoqiang said...”

January 16 – Bloomberg: “China’s central bank cut its key interest rate for the first time in almost two years to help bolster an economy that’s lost momentum because of a property slump and repeated virus outbreaks. In a stark policy divergence with other major economies, the People’s Bank of China lowered the rate at which it provides one-year loans to banks by 10 bps -- the first reduction since April 2020.”

January 20 – Reuters (Winni Zhou and Andrew Galbraith): “China lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy, after data earlier in the week pointed to a darkening outlook for the country's troubled property sector. The cut to the one-year and five-year loan prime rates (LPR) followed surprise cuts by China's central bank on Monday to its short- and medium-term lending rates, and came days after the central bank's vice governor flagged more moves ahead.”

January 19 – Bloomberg: “Chinese regulators are considering lifting some restrictions on developers’ access to cash from presold properties tied up in escrow accounts, according to people with knowledge of the matter, a potentially major step toward easing the industry’s liquidity crunch… Regulators including the housing ministry and the banking watchdog are still discussing details and may convey the instructions through window guidance to local governments later this month…”

January 18 – Bloomberg: “Turmoil in China’s junk bond market has been testing investors’ nerves -- and that’s just concerning the debt they knew about. First troubled property developers including China Evergrande Group, Kaisa Group Holdings Ltd., Fantasia Holdings Group and Agile Group Holdings were found to have lots of opaque liabilities that may or may not be reflected on their balance sheets, making it hard to assess true credit risks. Now concerns are mounting about the transparency of some of China’s better developers, including Logan Group Co. A spate of defaults… have undermined confidence in China’s economy and led to mounting pressure on developers to reveal their hidden leverage. At least one has committed to no longer issuing this type of debt.”

January 19 – Bloomberg (Rebecca Choong Wilkins): “China’s real estate firms face a hefty debt bill just as signs of contagion begins to spill over to the nation’s stronger, larger developers. Nearly half the $99 billion of outstanding bonds maturing in 2022 are offshore notes, according to… Bloomberg. Prohibitively high borrowing costs in the overseas debt market have effectively prevented many weaker developers from refinancing, triggering a wave of defaults that could build if stronger firms also begin struggling to roll over their borrowings. Concerns that healthier builders may also be on the hook for hidden debt triggered a dramatic selloff among some investment-grade developers this week.”

January 20 – Bloomberg (Sofia Horta e Costa and Alice Huang): “A record-breaking rally in Chinese property bonds petered out on Thursday amid growing investor doubt over how much a reported plan to allow developers greater access to funds from presold homes will benefit distressed firms. High yield notes fell as much as 3 cents on the dollar after jumping Wednesday following the reports.”

January 20 – Bloomberg: “Country Garden Holdings Co. is raising HK$3.9 billion ($500 million) from the sale of convertible bonds, a show of strength by the embattled property giant after a report last week that it was struggling to issue debt.”

January 17 – Bloomberg (Rebecca Choong Wilkins and Alice Huang): “Fresh turmoil rocked Chinese property bonds on Monday on concern over the true scale of the industry’s hidden debts, deepening a selloff among higher-rated firms. A Logan Group Co. note due 2023 sank 14.1 cents to a record low 62.9 cents after Debtwire reported the developer could be on the hook for $812 million of guarantees on outstanding obligations due through 2023. Country Garden Holdings Co.’s bond due 2024 tumbled 12.9 cents to 67.7 cents, extending last week’s selloff for the country’s biggest developer. Mounting concerns about the transparency of China’s better developers is forcing bondholders to question the liquidity of firms whose finances appear sound.”

January 19 – Bloomberg (Russell Ward and Kevin Kingsbury): “China Aoyuan Group Ltd. won’t make payments on four dollar bonds and said that will trigger defaults on all other offshore debt, becoming the latest Chinese developer to succumb to the industry’s liquidity crisis.”

January 17 – Financial Times (Thomas Hale, Joe Rennison and Sun Yu): “The crisis at Evergrande, the world’s most indebted property company, reached a milestone last month when it officially defaulted on offshore bonds. But the rest of the saga could take years to unfold. The builder, a symbol of China’s heavily leveraged property sector, shook world markets when it started missing offshore bond payments in September. It took three months for Evergrande, weighed down by construction delays, litigation and its vast liabilities of more than $300bn, to formally default, by which time liquidity troubles had engulfed the sector… While last month brought some clarity over Evergrande’s default status, the developer’s fate and that of many of its peers remains uncertain… Beijing’s priority is to ensure that apartments are delivered to customers, many of whom paid for properties prior to their completion.”

January 20 – Bloomberg (Alice Huang): “China’s third largest developer by sales received its second credit downgrade in as many days, highlighting concerns over builders once perceived as safer bets. Sunac China Holdings Ltd. was dropped a notch to BB- by S&P Global Ratings... Both credit assessors’ outlook is negative. They cited uncertainty about the developer’s 2022 liquidity, with S&P saying that though it believes Sunac can meet this year’s debt maturities, ‘the margin of error is eroding.’”

January 17 – Financial Times (Edward White and Mark Wembridge): “China’s ‘common prosperity’ drive is not a pursuit of egalitarianism, President Xi Jinping said in a rare international defence of the policy... Xi, often described as China’s most powerful leader since Mao Zedong, was speaking via video link at the World Economic Forum’s annual meeting… ‘The common prosperity we desire is not egalitarianism,’ Xi said. ‘We will first make the pie bigger and then divide it properly through reasonable institutional arrangements. As a rising tide lifts all boats, everyone will get a fair share from development, and development gains will benefit all our people in a more substantial and equitable way.’”

January 17 – Bloomberg: “China’s population crisis continued to worsen in 2021, with the latest birth figures again sliding despite government efforts to encourage families to have more children. There were 10.62 million babies born in China last year, down from 12 million in 2020... That’s the fewest number of births since at least 1950…”

Central Banker Watch:

January 20 – Financial Times (Martin Arnold): “Christine Lagarde has rejected calls for the European Central Bank to raise interest rates more quickly than planned in response to record inflation, saying it had ‘every reason not to act as quickly or as ruthlessly’ as the US Federal Reserve. The ECB president warned that raising interest rates too soon risked ‘putting the brakes on growth’ and she told France Inter radio… she wanted its monetary policy to act as ‘a shock absorber’ instead. Soaring energy and food prices lifted inflation in the eurozone to a record high of 5% in December, well above the ECB’s 2% target, prompting calls for a faster withdrawal of its generous stimulus policies. Lagarde, however, predicted that inflation in the bloc would stabilise and ‘gradually fall’ back below its target by the end of this year.”

January 20 – Bloomberg (Alexander Weber and William Horobin): “The European Central Bank has ‘every reason’ not to respond as forcefully as the Federal Reserve to soaring consumer prices, according to President Christine Lagarde. ‘We’re all in very different situations,’ Lagarde told the France Inter radio station… Inflation is ‘clearly weaker’ in the euro area, while the region’s economic recovery is also not as advanced as in the U.S., she said. ‘We have every reason to not react as quickly and as abruptly as we could imagine the Fed might,’ Lagarde said. ‘But we have started to respond and we, of course, stand ready to respond with monetary policy if figures, data, facts, require it.’”

January 18 – Bloomberg (William Horobin): “The European Central Bank’s inflation forecasts aren’t a ‘blind certitude’ and the institution will take action if the price surge proves more persistent, Bank of France Governor Francois Villeroy de Galhau said. While the ECB was surprised by a bump in inflation that was higher and longer than it initially expected in recent months, officials including Villeroy have repeated they still expect pressures to fade in 2022. Yet the French central bank chief added… he and his colleagues will nonetheless keep their eyes ‘wide open’ on the incoming data.”

Global Bubble Watch:

January 17 – Reuters (Emma Batha): “The world's 10 wealthiest people more than doubled their fortunes to $1.5 trillion during the pandemic as poverty rates soared, according to a study released… ahead of a high-profile World Economic Forum (WEF) event… The 10 richest people have boosted their fortunes by $15,000 a second or $1.3 billion a day during the pandemic. They own more than the world's poorest 3.1 billion people combined. A new billionaire has been created every 26 hours since the pandemic began. More than 160 million people are estimated to have been pushed into poverty during the health crisis.”

January 19 – Reuters (Wayne Cole): “Australian employment raced ahead in December as the jobless rate fell to its lowest point since 2008… The unemployment rate fell to 4.2%, from 4.6% in November…”

EM Watch:

January 20 – Bloomberg (Dale Quinn): “Mexico registered a record number of new Covid-19 cases Wednesday -- more than double the amount seen in previous waves -- as the omicron variant extends its spread through the country. The country recorded 60,552 new coronavirus cases, pushing total cases up to 4,495,310…”

January 19 – Bloomberg (Caroline Aragaki and Luana Reis): “Brazil reported the biggest one-day increase in coronavirus cases since the start of the pandemic…, bringing the total tally to 23,416,748. Govt confirmed 204,854 new infections in the last 24 hours, beating a previous record of 150,106 on Sept. 18…”

Europe Watch:

January 15 – Bloomberg (Alex Morales and Rachel Morison): “Europe is gripped by one of the worst energy crunches in history, forcing politicians to step in as soaring prices threaten to leave millions of households unable to pay their bills. But with market forces signaling that the crisis will last way beyond the winter, the dilemma facing leaderships is that their stopgap measures are unlikely to be enough. The cost of electricity and gas across the continent already looks like one of the biggest challenges facing nations as they navigate their way out of the pandemic.”

Japan Watch:

January 21 – Associated Press (Mari Yamaguchi and Aamer Madhani): “President Joe Biden and Japanese Prime Minister Fumio Kishida on Friday used their first formal meeting to discuss concerns about China's growing military assertiveness that's spurring increasing disquiet in the Pacific. Kishida said that the two leaders spent a “significant amount" of their 80-minute call on issues surrounding China, including shared concerns about China's increasing aggression toward Taiwan.”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 19 – Wall Street Journal (Leslie Scism): “Worried about wildfire exposure and frustrated by state regulations, insurers in California have been cutting back on their homeowner businesses. Now, affluent homeowners are feeling more of the pain, as two of the biggest firms offering protection for multimillion-dollar properties end coverage for some customers.”

Leveraged Speculation Watch:

January 16 – Financial Times (Laurence Fletcher and Jyoti Mann): “Large profits at Ken Griffin’s Citadel and Sir Christopher Hohn’s TCI helped the 20 best-performing hedge fund managers of all time to their biggest gains in more than a decade last year, although returns for the overall industry failed to keep pace with the rally in global stock markets. The top 20 managers… made total gains of $65.4bn, ahead of 2020’s $63.5bn according to… LCH Investments. That was their biggest annual gain since the fund of hedge funds… began compiling its data in 2010. The improved returns at some of the top funds comes despite a tough year for much of the $4tn hedge fund industry.”

January 20 – Reuters (Saikat Chatterjee): “Assets under management at global hedge funds topped $4 trillion for the first time ever at the end of 2021… industry tracker HFR said… The jump represents a turnaround from the first quarter of 2021, when total assets slipped below the $3 trillion mark. Despite the surge in popularity of relatively low-cost indexed funds, total assets have doubled over the past decade.”

January 20 – Bloomberg (Hema Parmar): “Many hedge fund managers would celebrate if they posted a 20% annual return, as Renaissance Technologies’ biggest fund did last year… Yet its customers keep heading for the exits. Redemptions from the firm -- one of the world’s biggest, oldest and most sophisticated hedge fund operators -- have swelled to about $14.6 billion across its three public funds over the past 14 months…”

Geopolitical Watch:

January 21 – Financial Times (Max Seddon and Henry Foy): “The US and Russian foreign ministers ended the highest-level talks yet on Moscow’s security demands over Ukraine by agreeing to continue diplomacy, in comments suggesting the meeting had created a small window for detente amid heightened risks of a conflict... The meeting between Antony Blinken and Sergei Lavrov in Moscow… was the latest diplomatic initiative designed to deter Russia from attacking Ukraine again. It came as Moscow clarified on Friday that it wants Nato to remove all its forces from Bulgaria, Romania and other ex-communist states in eastern Europe that joined the alliance after 1997 — a move deemed unacceptable by the transatlantic alliance.”

January 19 – Reuters (Simon Lewis): “U.S. Secretary of State Antony Blinken said… Russia could launch a new attack on Ukraine at ‘very short notice’ but Washington would pursue diplomacy as long as it could, even though it was unsure what Moscow really wanted. On a visit to Kyiv to show support for Ukraine, the top U.S. diplomat said Ukrainians should prepare for difficult days. He said Washington would keep providing defence assistance to Ukraine and renewed a promise of severe sanctions against Russia in the event of a new invasion.”

January 16 – New York Times (Anton Troianovski and David E. Sanger): “No one expected much progress from this past week’s diplomatic marathon to defuse the security crisis Russia has ignited in Eastern Europe by surrounding Ukraine on three sides with 100,000 troops and then, by the White House’s accounting, sending in saboteurs to create a pretext for invasion. But as the Biden administration and NATO conduct tabletop simulations about how the next few months could unfold, they are increasingly wary of another set of options for President Vladimir V. Putin, steps that are more far-reaching… Mr. Putin wants to extend Russia’s sphere of influence to Eastern Europe and secure written commitments that NATO will never again enlarge. If he is frustrated in reaching that goal, some of his aides suggested…, then he would pursue Russia’s security interests with results that would be felt acutely in Europe and the United States. There were hints, never quite spelled out, that nuclear weapons could be shifted to places — perhaps not far from the United States coastline…”

January 19 – Associated Press (Matthew Lee): “With critical talks approaching, the United States and Russia… showed no sign either will relent from entrenched positions on Ukraine that have raised fears of a Russian invasion and a new war in Europe. Speaking in Kyiv, U.S. Secretary of State Antony Blinken accused Russia of planning to reinforce the more than 100,000 troops it has deployed along the Ukrainian border and suggested that number could double ‘on relatively short order.’ …Ukraine, meanwhile, said it was prepared for the worst and would survive whatever difficulties come its way. The president urged the country not to panic.”

January 19 – Associated Press (Vladimir Isachenkov): “Russia is a sending an unspecified number of troops from the country’s far east to Belarus for major war games, officials said…, a deployment that will further beef up Russian military presence near Ukraine amid Western fears of a planned invasion. Amid the soaring tensions, the White House warned that Russia could attack its neighbor at ‘any point,’ while the U.K. delivered a batch of anti-tank weapons to Ukraine. Russia’s Deputy Defense Minister Alexander Fomin said the joint drills with Belarus would involve practicing a joint response to external threats.”

January 20 – Reuters (Phil Stewart and Idrees Ali, Yimou Lee): “The United States is looking for ways to potentially accelerate delivery of Taiwan's next generation of new-build F-16 fighter jets, U.S. officials said, bolstering the Taiwanese air force's ability to respond to what Washington and Taipei see as increasing intimidation by China's military.”

January 19 – Reuters (Hyonhee Shin): “North Korea will bolster its defences against the United States and consider resuming ‘all temporally-suspended activities’, state news agency KCNA said…, an apparent reference to a self-imposed moratorium on tests of nuclear weapons and long-range missiles. Tension has been rising over a recent series of North Korean missile tests. A U.S. push for fresh sanctions was followed by heated reaction from Pyongyang, raising the spectre of a return to the period of so-called ‘fire and fury’ threats of 2017.”

January 19 – Financial Times (Andrew England and Samer al-Atrush): “Iranian-aligned Yemeni rebels fired cruise and ballistic missiles as well as drones at the United Arab Emirates during this week’s attack on the Gulf state, a senior Emirati official has said, underscoring the scale of the assault and the threat posed by the militants. Yousef al-Otaiba, the UAE’s ambassador in Washington, said there were ‘several attacks’, adding that some of the projectiles were intercepted by the Gulf state’s defence systems and a ‘few of them’ were not.”