Friday, December 30, 2022

Weekly Commentary: 2022 Year in Review

“US Stocks Suffer Worst Year Since Financial Crisis.” “Stock and Bond Markets Shed More Than $30tn in ‘Brutal’ 2022.” “Nasdaq Closes Out its First Four-Quarter Slump Since Dot-Com Crash.” “Elon Musk Becomes First Person Ever to Lose $200 Billion.”

There are books and chapters to be written. This “Review” CBB can only scratch the surface. The year history’s greatest Bubble was pierced – with a most protracted period of monetary disorder coming home to roost. The “everything Bubble” morphing into the everything bust. And rarely has a Warren Buffett quip been as apropos: “Only when the tide goes out do you discover who’s been swimming naked.” A Revealing Year at Beach Nudist Colony.

It’s said that “bull markets create genius.” Brilliance vaporized in 2022 (in a mushroom cloud). Musk, Woods, Bankman-Fried, Xi Jinping come quickly to mind. So much boom-time BS belatedly recognized as such. More striking than the humbling of bull market icons was the specter of Crowds scurrying around in their birthday suits, befuddled that trading options and buying dips had turned into money losers. A confluence of FOMO (fear of missing out), TINA (there is no alternative), and bursting speculative Bubbles chastened tens of millions. The downside of manias.

The sad reality is that millions of unsuspecting Americans parted ways with a chunk of their financial security. They didn’t realize they were speculating rather than investing. For too long, our Federal Reserve ensured that disregarding risk became the go-to winning strategy. The undoubting had no idea they were about to be slammed by the double whammy of collapsing Bubbles and rampant consumer price inflation.

It had all been a grand illusion: the Fed and free “money” generating a permanent plateau of prosperity. The year saw inflationism’s inescapable scourge of wealth destruction and misery begin to be revealed.

Bitcoin dropped 64% in 2022. It was a cryptocurrency relative outperformer. Solana collapsed 94%, Cardano 81% and Ethereum 68%. Binance Coin fell 52%, XRP 59% and Dogecoin 60%. Initial industry bankruptcies included hedge fund Three Arrows Capital, Singapore-based 3AC, Voyager Digital, Celsius Network, BlockFi, Core Scientific and, of course, FTX. Wunderkind Sam Bankman-Fried (SBF), with peak Bubble “wealth” estimated at $26 billion, will start the new year under court-ordered detention at his parent’s California home on a $250 million bond (facing eight federal counts of “wire fraud, money laundering, and conspiracy, carrying a maximum of 115 years in federal prison”).

Tesla’s stock collapsed 65% this year, Meta/Facebook 64%, Zoom 63%, Rivian 82%, Netflix 51%, Nvidia 50%, Amazon 50%, Intel 49%, Micron 46%, Qualcomm 40%, Alphabet/Google 39%, Moderna 29%, Microsoft 29%, and Apple 27%. The Philadelphia Semiconductor Index dropped 35.8%, with the NYSE Arca Computer Technology Index sinking 32.4%. The colossal “tech” Bubble sprang myriad leaks – crypto, stocks, venture capital, SPACs, private equity…

Generac was the biggest decliner in the S&P500, losing 71% of its value. In the DJIA, Salesforce lost 47.8%, Disney 43.9%, 3M 32.5% and Nike 29.8%. The Bloomberg REIT Index dropped 29.2%.

The “Periphery to Core” analytical framework is helpful. Speculative Bubbles burst at the high-risk fringe – crypto, equities, corporate debt and EM.

The Argentine peso lost 42.0%, Turkish lira 28.9%, Colombian peso 15.9%, Hungarian forint 13.1%, Indian rupee 10.2%, Taiwanese dollar 9.9%, Indonesia rupiah 8.5%, Philippine peso 8.5%, Chinese renminbi 7.9%, Polish zloty 7.8%, and the South African rand 6.5%. On the positive side, the Brazilian real gained 5.6%, the Mexican peso 5.3%, and the Peruvian sol 5.1%.

At the global “core,” “king dollar” went on a moonshot. After beginning the year at 95.67, the Dollar Index almost hit 115 on September 28th – with the UK bond market at the cusp of collapse. Global de-risking/deleveraging was in a “doom loop” of forced bond liquidations, a surging dollar, EM central bank Treasury sales to support faltering currencies, heightened liquidity concerns, and only more deleveraging and hedging-related selling.

The bursting global bond Bubble came alarmingly close to dislocating. UK gilt yields spiked 146 bps in six sessions (September 16th to 27th) to a 16-year high 4.59%. The catalyst was the new Truss government’s “mini budget” heavy on tax cuts and spending. Markets for years (of loose financial conditions) welcomed reckless deficit spending. But with surging inflation, powerful global deleveraging, and waning liquidity, market reaction was swift and brutal.

While hedge funds and other speculative leverage were surely contributing, deleveraging in the UK pension system was in September the epicenter of bond market dislocation. So-called “liability-driven investing,” or LDI, had in the UK tripled in size over the past decade to $1.7 TN (from Bloomberg). These strategies accumulated huge amounts of leverage and derivatives, with surging market yields sparking self-reinforcing liquidations, higher yields and more forced liquidations. It was one massive, self-reinforcing margin call – most conspicuously in the UK, but global in nature.

Contagion effects were powerful. Greek yields surged 60 bps in six sessions to a five-year high 4.84%, with Italian yields up 62 bps to an almost decade-high 4.64%. Ten-year Treasury yields surged 57 bps in seven sessions to an intra-day high of 4.01% on Wednesday, September 28th – trading above 4% for the first time since 2008. The U.S. bond volatility MOVE index surged to about 160, just below the March 2020 crisis high. U.S. corporate CDS (investment-grade and high-yield) spiked to the highest prices since the 2020 pandemic crisis. During UK crisis week, 10-year yields surged 73 bps in Poland, 62 bps in Croatia, 52 bps in Hungary, 43 bps in the Czech Republic, and 41 bps in Peru.

China’s “big four” bank CDS surged to multi-year highs. China sovereign CDS posted a two-week 37 bps spike to 112 - the high back to January 2017. With developer bond prices collapsing, the yield on China’s high-yield dollar bond index jumped over 200 bps in a week to 25.25%. Asian high-yield bond yields rose 133 bps to 17.54%.

Global bank CDS spiked higher. U.S. bank CDS prices jumped to highs since the pandemic. EM CDS surged. Dollar-denominated EM bond yields spiked higher. In short, highly synchronized world markets were at the brink. Markets were “seizing up” – and doing so in an environment with newfound central bank liquidity backstop (i.e. “Fed put”) ambiguity.

It was a year of unprecedented global monetary tightening. There were scores of rate increases, including four extraordinary 75 bps Fed hikes, along with some central bank balance sheet shrinkage (“QT”). Yet the most consequential policy move of the year was the Bank of England’s September 28th emergency “pivot.” Just weeks ahead of its scheduled start to QT (quantitative tightening), the Bank of England abruptly resorted to another round of QE to stabilize the gilt market. BOE: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.”

The Bank of England bailout marked the year’s high in the Dollar Index (114.78), as well as highs for key risk indicators. Peak 2022 prices were set on September 28th for US investment-grade CDS (114bps), US high-yield CDS (640 bps), JPMorgan CDS (114bps), European (sub.) bank bond CDS (289bps), and European high-yield CDS (695bps).

Markets interpreted the BOE’s move as confirmation of the dependability of central bank market liquidity backstops. All the hawkish talk would vanish, with surefire central banks doing what they do when crisis dynamics take hold. Soon there were indications of a more general weakening in the knees for the central banker community. Fed vice chair Lael Brainard delivered a speech on October 10th laying out “a case for exercising caution as the central bank raises interest rates.” Hawk James Bullard suggested a 2023 policy shift, while Neel Kashkari contemplated a pause.

Markets could relax. The “Fed put” was alive and well. Talk of Volcker and inflation-fighting resolve was, at the end of the day, all talk.

A major global deleveraging episode had been subdued. Meanwhile, the U.S. economy showed notable resilience. It was a year of speculative Bubbles bursting everywhere. It’s reasonable to assert that the great Credit Bubble was pierced at the periphery. Importantly, however, rapid Credit growth was ongoing at home and abroad.

From the Fed’s Z.1, we know that historic U.S. Credit expansion ran unabated through the first three quarters of the year. Non-Financial Debt (NFD) expanded a seasonally-adjusted and annualized (SAAR) $5.438 TN during Q1, $4.318 TN for Q2, and $3.284 TN during Q3. For perspective, NFD expanded $2.439 TN during 2019, the strongest annual Credit expansion since 2007’s record $2.533 TN. NFD ballooned (without precedent) $6.791 TN during 2020, then somewhat came off the boil for 2021’s $3.869 TN.

Barring a sharp Q4 slowdown, 2022 Credit growth will be second only to 2020. First-half mortgage Credit growth was the strongest since 2007. Through three quarters, Consumer Credit expanded at the fastest pace since 2001.

The ongoing lending boom was 2022’s best kept secret. Bank Loans expanded (a nominal) $1.076 TN, or 11.4% annualized, during 2022’s first three quarters. Over four quarters, Bank Loans surged an unprecedented $1.504 TN, or 12.3%. For perspective, Bank Loans expanded $519 billion during 2021, above the past decade’s annual average of $467 billion (below 2005’s record $685bn).

Markets began the year pricing in an expected 0.82% Fed funds rate by the time of the December 14th FOMC meeting. Two-year Treasuries yielded 0.73%, with the 10-year at 1.51%.

As expected, the Fed was way too timid in reversing its ultra-loose, crisis-period monetary stimulus. A relatively hawkish Powell warned in January of impending hikes - yet waited until March for a little baby-step 25 bps nudge off the “zero bound.” The policy rate didn’t reach 1% until the June 15th meeting. Compounding the policy blunder, the Fed stuck with balance sheet expansion almost through the end of June (Fed Credit having expanded almost $150bn y-t-d).

M2 “money supply” surged $6.641 TN, or 42%, in the three years ended March 31, 2022, to a record $21.740 TN. Breaking down the extraordinary monetary expansion (from the Fed’s Z.1), Total (checking and time) Deposits (and currency) surged $6.642 TN, or 37%, to a record $24.382 TN over three years.

Household “liquidity” (cash, deposits and money market funds) surged an unprecedented $4.99 TN, or 37%, in the first two years of the pandemic (2020 and 2021) to $13.360 TN. Corporate liquidity (currency, deposits, money markets and “repo”) also inflated. Ending 2019 at $3.767 TN, Fed QE was instrumental in boosting corporate liquidity by $1.244 TN, or 33%, to end 2021 at $5.011 TN.

The Fed feared a disorderly market reaction to monetary tightening after a period of unprecedented monetary stimulus. Understandably, the fixation was on market fragility. This drew attention away from both non-market (i.e. bank and “private Credit”) lending booms and the phenomenal pools of “money” created during the Fed’s historic balance sheet expansion.

The Fed belatedly recognized that “transitory” was the wrong adjective. They nonetheless believed hawkish talk and the prospect of a tightening cycle would suffice in tightening financial conditions and quashing incipient inflationary pressures. Confirmation of this thesis was seen in tightened market financial conditions – more specifically with widening corporate bond spreads and the shuttering of the junk bond market.

Yet the larger story of 2022 was the ongoing lending boom thriving outside the markets. Moreover, with household and corporate spending bolstered by huge cash reserves, the greater U.S. economy – and inflation – remained surprisingly immune to Fed tightening measures.

FT headline: “Year in a Word: Inflation.” Too simplistic. This year’s key dynamic was a momentous shift in inflation dynamics, from years of asset market-centric price inflation to broad-based consumer, commodities and employment pricing pressures. Inflation dynamics are complex. But a confluence of developments conspired to alter the global inflation backdrop.

Trillions of pandemic monetary inflation were a tinderbox waiting to ignite. Russia’s March invasion of Ukraine dramatically shifted energy and grain supply/pricing dynamics. It also hastened “de-globalization.” Xi and Putin’s “partners without limits” agreement just weeks before the war was undeniable evidence that the world was in the throes of profound and alarming change.

Hopes for a timely return to pre-pandemic supply chains and resource availability conditions were crushed. The future was now murky. Meanwhile, drought, floods, fires, hurricanes, heat waves and deep freezes stirred climate change anxieties. The combination of climate-related food supply issues and a whirlwind of renewable investment also underpinned the new inflationary environment.

The U.S. officially surpassed one million Covid deaths in May. Many millions suffer some degree of “long-Covid” issues. The number of individuals “not in the labor force” remains about five million higher than pre-Covid levels. After beginning the year at a historically elevated 11.5 million, available job openings (JOLTS) peaked in March at a record 11.9 million. By October, the number had dipped to 10.3 million, still more than three million jobs ahead of pre-pandemic levels. After beginning the year at 3.9%, the unemployment rate was down to 3.7% near year-end.

Despite Fed tightening measures, the inflationary boom ran unabated – fueled by rapid Credit growth, huge cash balances, and a newfound inflationary mindset. Borrowing and spending is habitual, borrowing that spurs the Credit growth necessary to sustain rising prices. Inflated gas and food prices directly feed into huge growth in credit card balances.Why not buy now when prices are surely only going higher? Besides, jobs are plentiful and wages are growing.

Monetary tightening and bursting speculative Bubbles. War and troubling geopolitical developments. It was a year of drama. But the essence of why 2022 was historic is subtler. Momentous secular change. The year marked the end of a multi-decade cycle of ever-looser monetary policy, declining funding costs, inflating financial asset prices, expanding global integration and trade relationships (“globalization”), and associated scores of financial and speculative Bubbles.

Years of reckless monetary inflation, bypassing consumer prices as it stoked asset price inflation and Bubbles, had finally come to a conclusion. No longer could central bankers simply fixate on the financial markets and lean on unconventional monetary stimulus, while disregarding inflation risk.

Deteriorating U.S. and China relations are emblematic of unfolding new cycle dynamics. Xi Jinping has achieved absolute power, as confidence in Beijing policymaking hits lows. A mishandling of “zero-Covid,” and then a lack of preparation for today’s Covid free-for-all. This follows years of economic mismanagement. A historic apartment Bubble burst this year, while a deeply maladjusted “Bubble Economy” was beset by intense pressures.

Three percent 2022 GDP growth will uncharacteristically fall below Beijing’s 5% bogey. Most troubling, it required another year of double-digit system Credit growth to muster the weakest Chinese economic performance in decades. Annual growth in Aggregate Financing will likely surpass 2020’s record $4.6 TN. As of September 30th, Chinese Bank Assets had added another $5.0 TN y-o-y to a record $54.2 TN (3-yr growth 31%). Most recent data show China’s M2 “money supply” is expanding at a 12.4% rate.

Similar to the U.S., China’s Credit Bubble inflated in the face of collapsing speculative Bubbles. Massive Beijing stimulus and bank lending held financial crisis and economic depression at bay.

Tokyo also did its utmost to hold back crisis dynamics. It’s worth contemplating the extent to which Japan’s ongoing negative rates and Bank of Japan monetization bolstered global liquidity throughout 2022.

Arguably, Japan’s extremely loose monetary policy (negative rates/QE/YCC) has been integral to global leveraged speculation. Speculators have borrowed for free (or better) in Japan and used these funds to leverage in higher-yielding securities around the globe. The weak yen made many “carry trade” speculations profitable this year (offsetting losses on bond positions). And as Japanese institutional and retail accounts were forced overseas for positive yields, this liquidity surely provided critical support for vulnerable 2022 global markets. Market upheaval could have been worse had the BOJ joined the global tightening effort.

The Bank of Japan purchased a monthly record $128 billion of bonds in December to maintain the ceiling on its yield curve control (YCC) program. It’s unsustainable buying/monetization for a dangerously unsustainable policy. Ramifications for a reversal of Japanese monetary policy are global and major – though policy normalization will unfold over months. After getting over the initial shock of a doubling of the yield ceiling to 0.50%, markets were reassured by the prospect of additional BOJ QE necessary to support ongoing YCC. Japan avoided crisis in 2022, but at a cost of the most outlandish case of kicking the can down the road I’ve witnessed in my few decades of macro analysis.

“Pension funds and other 'non-bank' financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said,” read a December 4th Reuters article. It was an ominous revelation. I’ll assume this “hidden, off balance sheet dollar debt” played a role in the deleveraging episode that threatened global bond markets during the late-September UK gilts crisis. BOE crisis operations (with help from others) ended that phase of global de-risking/deleveraging.

Ten-year Italian yields ended the year at 4.70%, up 83 bps for the month of December to the high since October. Ten-year Treasury yields rose 27 bps this month to seven-week highs. Looking ahead, we’re justified for fearing that the next round of global de-risking/deleveraging now smolders. It was an extraordinary year and portentous start to the new cycle.

For the Week:

The S&P500 was little changed (down 19.4% for 2022), while the Dow slipped 0.2% (down 8.8%). The Utilities declined 0.6% (down 2.3%). The Banks rose 1.6% (down 23.7%), while the Broker/Dealers dipped 0.3% (down 7.7%). The Transports fell 1.3% (down 18.7%). The S&P 400 Midcaps declined 0.2% (down 14.5%), while the small cap Russell 2000 was unchanged (down 21.6%). The Nasdaq100 slipped 0.4% (down 33.0%). The Semiconductors were little changed (down 35.8%). The Biotechs declined 0.3% (down 4.3%). While bullion jumped $26, the HUI gold equities index slipped 0.9% (down 11.2%).

After beginning the year at three basis points, three-month Treasury bill rates ended 2022 at 4.24%. Two-year government yields rose 11 bps this week to 4.43% (up 370bps during 2022). Five-year T-note yields jumped 15 bps to 4.01% (up 274bps). Ten-year Treasury yields rose 13 bps to 3.88% (up 237bps). Long bond yields gained 14 bps to 3.97% (up 206bps). Benchmark Fannie Mae MBS yields surged 19 bps to an eight-week high 5.38% (up 332bps).

Greek 10-year yields gained six bps to 4.57% (up 325bps during 2022). Italian yields surged another 21 bps to 4.72% (up 354bps). Spain's 10-year yields jumped 19 bps to 3.66% (up 310bps). German bund yields rose 17 bps to 2.57% (up 275bps). French yields gained 18 bps to 3.12% (up 292bps). The French to German 10-year bond spread widened about one to 55 bps. U.K. 10-year gilt yields increased four bps to 3.67% (up 270bps). U.K.'s FTSE equities index slipped 0.3% (up 0.9% in 2022).

Japan's Nikkei Equities Index declined 0.5% (down 9.4% for 2022). Japanese 10-year "JGB" yields gained four bps to 0.42% (up 35bps for 2022). France's CAC40 dipped 0.5% (down 9.5%). The German DAX equities index was little changed (down 12.3%). Spain's IBEX 35 equities index declined 0.5% (down 5.6%). Italy's FTSE MIB index fell 0.7% (down 13.3%). EM equities were mixed. Brazil's Bovespa index was about unchanged (up 4.7%), while Mexico's Bolsa index sank 4.2% (down 9.0%). South Korea's Kospi index dropped 3.3% (down 24.9%). India's Sensex equities index gained 1.7% (up 4.4%). China's Shanghai Exchange Index recovered 1.4% (down 15.1%). Turkey's Borsa Istanbul National 100 index added 1.0% (up 197%). Russia's MICEX equities index rallied 1.4% (down 43.1%).

Investment-grade bond funds posted outflows of $2.316 billion, while junk bond funds reported inflows of $103 million (from Lipper).

Federal Reserve Credit declined $4.9bn last week at $8.526 TN. Fed Credit was down $375bn from the June 22nd peak. Over the past 172 weeks, Fed Credit expanded $4.799 TN, or 129%. Fed Credit inflated $5.715 Trillion, or 203%, over the past 529 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were up $9.4bn last week at $3.318 TN. "Custody holdings" were down $95bn, or 2.8%, y-o-y.

Total money market fund assets rose $22.2bn to $4.735 TN. Total money funds were up $30bn, or 0.6%, y-o-y.

Total Commercial Paper fell $17.3bn to $1.261 TN. CP was up $174bn, or 16.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 21 bps to 6.41% (up 330bps y-o-y). Fifteen-year rates surged 30 bps to 5.80% (up 347bps). Five-year hybrid ARM rates jumped 23 bps to 5.62% (up 321bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 6.59% (up 336bps).

Currency Watch:

December 30 – Reuters (Winni Zhou and Brenda Goh): “China's yuan finished the domestic session at a two-week high against the dollar on Friday, but still looked set for the worst annual performance in 28 years. The onshore yuan finished the domestic trading session at 6.9514 per dollar, the strongest such close since Dec. 14. If it finishes the late night session at the domestic closing level, it would have lose 8.6% against the dollar for the year…”

For the week, the U.S. Dollar Index declined 0.8% to 103.49, reducing 2022 gains to 8.2%. For the week on the upside, the Australian dollar increased 1.4%, the Japanese yen 1.4%, the South Korean won 1.2%, the New Zealand dollar 1.1%, the Swedish krona 1.0%, the Swiss franc 0.9%, the Norwegian krone 0.9%, the Singapore dollar 0.9%, the euro 0.8%, the Canadian dollar 0.3% and the British pound 0.3%. On the downside, the Brazilian real declined 2.2%, the Mexican peso 0.7%, and the South African rand 0.1%. The Chinese (onshore) renminbi gained 1.32% versus the dollar (down 7.86% for 2022).

For 2022, the Brazilian real gained 5.59%, the Mexican peso 5.28% and the Singapore dollar 0.71%. On the downside, the Swedish krona fell 13.18%, the Japanese yen 12.23%, the British pound 10.71%, the Norwegian krone 10.05%, the New Zealand dollar 6.97%, the Canadian dollar 6.77%, the South African rand 6.46%, the Australian dollar 6.20%, the South Korean won 6.05%, the euro 5.85% and the Swiss franc 1.25%.

Commodities Watch:

December 28 – Financial Times (Harry Dempsey): “Central banks are scooping up gold at the fastest pace since 1967, with analysts pinning China and Russia as big buyers in an indication that some nations are keen to diversify their reserves away from the dollar. Data compiled the World Gold Council… has shown demand for the precious metal has outstripped any annual amount in the past 55 years… The flight of central banks to gold ‘would suggest the geopolitical backdrop is one of mistrust, doubt and uncertainty’ after the US and its allies froze Russia’s dollar reserves, said Adrian Ash, head of research at BullionVault, a gold marketplace. The last time this level of buying was seen marked a historical turning point for the global monetary system. In 1967, European central banks bought massive volumes of gold from the US, leading to a run on the price and the collapse of the London Gold Pool of reserves.”

December 25 – Reuters (Lisa Jucca): “The global trade war will shift from fossil fuels to metals and raw materials. Russia’s invasion of Ukraine highlighted the risk of relying on autocratic states for energy. Even if Europe’s gas crisis eases, Western manufacturers’ focus will switch to reducing China’s dominance in materials key to a cleaner economy. Europe needs to cumulatively spend $5.3 trillion on clean energy projects by 2050. That requires a sixfold increase in the global production of copper, lithium, graphite, nickel and some rare earths by 2040… Yet China dominates the processing, and to a lesser extent the extraction, of many critical industrial ingredients. It refines 58% of lithium produced globally, 65% of cobalt and over one-third of nickel and copper. Ostracised Russia is also big in nickel, palladium and cobalt. Europe, which imports between 75% and 100% of most metals, looks particularly vulnerable.”

The Bloomberg Commodities Index added 0.2%, closing 2022 up 13.8%. Spot Gold jumped 1.4% to $1,824 (down 0.3%). Silver gained 0.9% to $23.95 (up 2.8%). WTI crude added 70 cents to $80.26 (up 7%). Gasoline jumped 3.2% (up 10%), while Natural Gas dropped 11.9% to $4.48 (up 20%). Copper was little changed (down 15%). Wheat gained 2.1% (up 3%), and Corn rose 1.8% (up 14%). Bitcoin fell $200, or 1.4%, this week to $16,600 (down 64%).

Market Instability Watch:

December 29 – Bloomberg (Masaki Kondo): “The Bank of Japan announced an unprecedented third day of unscheduled bond purchases as it fights back against speculation it is about to end its super-accommodative monetary policy. The combination of additional fixed-rate and fixed-amount purchases announced Friday have boosted this month’s buying to about ¥17 trillion ($128bn), a monthly record… The BOJ’s avalanche of bond buying follows a surge in yields since the central bank unexpectedly raised its ceiling for the benchmark 10-year note to 0.5% at its Dec. 20 meeting.”

December 27 – Wall Street Journal (Heather Gillers): “Cash holdings are the lowest since the financial crisis at U.S. government pension funds and just above last year’s 13-year low for U.S. corporate pensions, heading into a year that many on Wall Street expect to test investors. Cash holdings hit 1.9% of assets at state and local government pension funds and 1.7% of assets at corporate pension funds as of June 30, according to… Wilshire Trust Universe Comparison Service. Those figures compare with the 15-year average of 2.45% at public pensions and 2.07% at corporate pensions. The recent figures are lower than in 2008, when some retirement funds had to sell whatever they could to pay benefits during the financial crisis.”

December 27 – Bloomberg (Leda Alvim): “Investors pulled $11.1 billion from US bond funds, the biggest weekly outflow this year according to Barclays, as the worst year in a generation for the asset class draws to a close. Outflows from US bond funds have totaled $83 billion so far in 2022, the bank’s data for the week ending Dec. 21 show.”

Crypto Bubble Collapse Watch:

December 28 – Bloomberg (Hannah Miller): “Solana, the blockchain network once championed by Sam Bankman-Fried, is drawing immense scrutiny as industry watchers wonder whether its former close ties to the disgraced crypto mogul and his now-defunct FTX empire will jeopardize its future. Its founders are doing everything they can to break that connection. The price of Solana’s crypto token, SOL, has plummeted 96% from its all-time high of $260 in November 2021 to about $10, hurt first by a year-long crypto rout that engulfed the whole market and then again by FTX’s fall. SOL dropped as much as 12% on Wednesday alone on concern large holders are offloading the token, which is used as the base cryptocurrency for financial transactions on the blockchain.”

Bursting Bubble and Mania Watch:

December 26 – Wall Street Journal (Akane Otani): “Almost everyone on Wall Street and in Washington got 2022 wrong. The Federal Reserve expected 2021’s inflation surge to be transitory. It wasn’t. Core inflation climbed to a four-decade high this fall, nearly tripling the Fed’s full-year forecast. Top Wall Street analysts predicted markets would have a so-so year. They didn’t. With just a few trading days left in 2022, the S&P 500 is down 19% and on course for its biggest annual loss since the 2008 financial crisis. Bonds are headed for their worst year on record. The extent to which many investors, analysts and economists were wrong-footed has left many looking at the coming year with a sense of unease.”

December 24 – Financial Times (John Plender): “Equities, bonds, long-dated index-linked gilts, credit, crypto — the list of market horror stories in 2022 is extensive. Yet the biggest casualty this year was surely the reputation of big central banks. In the period since the onset of the coronavirus pandemic and Russia’s invasion of Ukraine, their inflation forecasting has been dismally off-beam. Their response to the rapidly rising price level was slow and, in the notable case of the US Federal Reserve, initially timorous. Central banking conventional wisdom held that it was necessary to ‘look through’ supply-side shocks such as oil and gas price increases and closures of ports and semiconductor plants because their impact on potential output was transitory. Yet it is clear that the supply shocks and inflation arising from factors such as deglobalisation will bring about a lasting reduction in potential output.”

December 29 – Financial Times (Ivan Levingston, Ortenca Aliaj and Kaye Wiggins): “Global dealmaking suffered a record fall during the second half of this year… Mergers and acquisitions worth $1.4tn were announced during the six months to December, according to… Refinitiv, down from the $2.2tn agreed in the first half of 2022. It was the biggest swing, from one six-month period to the next, since records began in 1980. The overall volume of deals struck globally in 2022 was down 38% from 2021, the largest year-on-year drop since 2001. Still, it was at high levels by historical standards, above the global totals seen in 2016 and 2017.”

December 29 – CNBC (Ari Levy): “Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud… The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye… In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.”

December 25 – Wall Street Journal (Amrith Ramkumar): “During the boom in blank-check companies, their creators couldn’t launch them fast enough. Now they are rushing to liquidate their creations before the end of the year, marking an ugly conclusion to the SPAC frenzy… Roughly 70 special-purpose acquisition companies have liquidated and returned money to investors since the start of December. That is more than the total number of SPAC liquidations in the market’s history, according to… SPAC Research. SPAC creators have lost more than $600 million on liquidations this month and more than $1.1 billion this year…”

December 24 – Wall Street Journal (Leslie Scism): “The hottest thing in life insurance for more than a decade might be cooling off. A long-running stock-market rally and low interest rates combined to create the perfect conditions for indexed universal-life policies. Sales of these policies rose from 4% of life-insurance sales in 2008, as measured by new annualized premiums, to 28% in the third quarter… The millions of Americans who now own them saw those ideal conditions reversed in 2022, exposing the policies’ high fees and complexity. The insider joke about indexed universal-life policies is that it takes an actuary, an attorney and maybe even an engineer to understand how the product works.”

December 27 – Bloomberg (Shruti Singh): “As 2022 unfolded, Chicago’s long-troubled pension funds faced a new shortfall: A delay in property tax receipts left the system without enough money to pay the city’s retirees. Pension managers contended with the difficult decision of whether to sell off pension assets to raise cash quickly. Instead, they got an advance from Mayor Lori Lightfoot’s administration to plug the gap. In the end, Chicago funneled in at least $512 million that was earmarked for payments later in the year and early 2023. The payout was the largest advance ever in one year in Chicago, a sign of just how fragile the pension system is, especially at a time when markets are headed for their worst annual return since 2008.”

December 27 – Reuters (Hyunjoo Jin and Nivedita Balu): “Tesla buyers who waited months for their new car have had an unusual choice for much of the past two years: keep the new electric vehicle, or sell it at a profit to someone with less patience. But the days of the Tesla flip are numbered… Prices of used Teslas are falling faster than those of other carmakers and the clean-energy status symbols are languishing in dealer lots longer…The average price for a used Tesla in November was $55,754, down 17% from a July peak of $67,297. The overall used car market posted a 4% drop during that period, according to Edmunds data. The used Teslas were in dealer inventory for 50 days on average in November, compared with 38 days for all used cars.”

December 27 – Bloomberg: “Foreigners bought the least amount of Chinese domestic shares this year after a selloff in the world’s second-largest stock market amid stringent Covid curbs and a housing slump. Overseas investors have purchased a net 87 billion yuan ($12.5bn) of stocks in Shanghai and Shenzhen so far this year through trading links with Hong Kong. That’s about a fifth of last year’s total and the smallest amount since 2017…”

Ukraine War Watch:

December 29 – Reuters (Dan Peleschuk and Pavel Polityuk): “Russia fired scores of missiles into Ukraine early on Thursday, targeting Kyiv and other cities including Lviv in the west and Odesa in the southwest, sending people rushing to shelters and knocking out power in one of Moscow's largest aerial assaults. ‘Senseless barbarism. These are the only words that come to mind seeing Russia launch another missile barrage at peaceful Ukrainian cities ahead of New Year,’ Ukrainian Foreign Minister Dmytro Kuleba tweeted.”

U.S./Russia/China/Europe Watch:

December 25 – Associated Press: “Chinese Foreign Minister Wang Yi defended what he said was his country’s position of impartiality on the war in Ukraine… and signaled that China would deepen ties with Russia in the coming year. Wang… also blamed America for the deterioration in relations between the world’s two largest economies, saying that China has ‘firmly rejected the United States’ erroneous China policy.’ China has pushed back against Western pressure on trade, technology, human rights and its claims to a broad swath of the western Pacific, accusing the U.S. of bullying… Wang said that China would ‘deepen strategic mutual trust and mutually beneficial cooperation’ with Russia.”

December 28 – Reuters (Guy Faulconbridge): “Russia and China have completed naval drills in the East China Sea, after a week of joint exercises which included practising how to capture an enemy submarine with depth charges and firing artillery at a warship… The Dec. 21-27 exercises, entitled ‘Maritime Interaction-2022’, included Russia's Pacific Fleet and were carried out in waters off Zhoushan and Taizhou in China's Zhejiang Province, China's official Xinhua news agency said.”

December 26 – Reuters (Idrees Ali): “The United States is concerned by China's military activity near Taiwan, which it called ‘provocative’ and ‘destabilizing,’ the White House said… ‘We will continue to assist Taiwan in maintaining a sufficient self-defense capability in line with our long-standing commitments and consistent with our one China policy,’ the White House National Security Council said… Seventy-one Chinese air force aircraft including fighter jets and drones entered Taiwan's air defence identification zone in the past 24 hours…, the largest reported incursion to date.”

De-globalization and Iron Curtain Watch:

December 28 – Reuters (Alexander Marrow and Vladimir Soldatkin): “President Vladimir Putin… delivered Russia's long-awaited response to a Western price cap, signing a decree that bans the supply of crude oil and oil products from Feb. 1 for five months to nations that abide by the cap. The Group of Seven major powers, the European Union and Australia agreed this month to a $60-per-barrel price cap on Russian seaborne crude oil effective from Dec. 5… The decree… was presented as a direct response to ‘actions that are unfriendly and contradictory…’”

December 30 – Reuters (Darya Korsunskaya): “Russia's finance ministry… said the maximum possible share of Chinese yuan in its National Wealth Fund (NWF) had been doubled to 60% as it restructures its rainy-day fund to reduce dependency on currencies from so-called ‘unfriendly’ nations. The ministry said the permitted share of gold in the NWF would also be doubled, to 40%. It said balances in the British pound and Japanese yen had been reduced to zero.”

Inflation Watch:

December 26 – Financial Times (Chris Giles): “Inflation regained its position as the enemy of economic progress this year after a 40-year absence. With the rate of price increases hitting peaks close to 10% in the US, eurozone and UK, a generation has had to worry about a rapidly rising cost of living for the first time in their working careers. They have hated it. US president Joe Biden classed inflation as ‘the bane of our existence’, making its defeat his top economic priority. He released the US strategic petroleum reserves in a bid to bring oil prices down. In Europe, leaders first blamed Vladimir Putin’s invasion of Ukraine and then, realising they had to do more, subsidised energy bills to take the sting out of a cost of living crisis. Central banks could no longer claim to have given birth to a ‘great moderation’ in inflation and instead have joined together in battle against the beast.”

December 28 – Wall Street Journal (Jon Hilsenrath and Rachel Wolfe): “Inflation is often called a tax on the poor, but this time it’s hit middle-income households the hardest. Many low-income households, benefiting from exceptionally low unemployment rates, have found jobs and experienced wage increases that lifted income more than the cost of living… At the high end, many households have seen big losses in stock and bond markets, but their income and savings were large enough that they were able to keep spending aggressively. The middle has been in a vise. Purchasing power from paychecks fell 2.9% for middle-income households in 2022 compared with 2021, while rising 1.5% for the bottom fifth of households and 1.1% for the top, according to the CBO study. A growing share of middle-income households say they are having more trouble making ends meet…”

Biden Administration Watch:

December 29 – Reuters (Jeff Mason): “President Joe Biden… signed a $1.66 trillion bill funding the U.S. government for fiscal year 2023, the White House said… The legislation includes record military funding, emergency aid to Ukraine, more aid for students with disabilities, additional funding to protect workers' rights and more job-training resources, as well as more affordable housing for families, veterans and those fleeing domestic violence.”

December 27 – Reuters (Anirban Sen and Diane Bartz): “Investment bankers and deal lawyers accustomed to regulatory hurdles to their mergers face an unprecedented challenge under U.S. President Joe Biden - antitrust watchdogs who are undaunted when they lose such battles in court. The U.S. Justice Department and Federal Trade Commission (FTC) have attempted to thwart 22 mergers since Biden came into office in January 2021… That outnumbers the antitrust challenges during the first two years of former President Barack Obama's first term in office and is twice as many as in Donald Trump's first two years…”

Federal Reserve Watch:

December 24 – Financial Times (Colby Smith): “Persistently high US inflation will be difficult to squelch after taking root in the services sector of the economy, economists warn, suggesting the Federal Reserve will be forced to press ahead with further interest rate rises in 2023. After a year of skyrocketing consumer prices, the US inflation rate is poised to decline rapidly next year. But many economists caution underlying pressures will keep it at levels well above what the Fed considers palatable. ‘The risk of confusion here is that this is going to sound on the one hand like massive progress and it’s going to feel like maybe we can relax,’ said Jean Boivin, the former deputy governor of the Bank of Canada who now heads up the BlackRock Investment Institute. ‘But those numbers at the end of year will be nowhere near the zip code of [what] the Fed will be comfortable with.’”

U.S. Bubble Watch:

December 27 – Dow Jones (Gregg Robb): “The numbers: The U.S. international trade deficit in goods narrowed 15.6% to $83.3 billion in November… It is the smallest deficit since December 2020. In October, the deficit had widened to $98.8 billion from $92.6 billion in the prior month. Economists… were looking for the deficit to narrow only to a $97 billion deficit in November.”

December 28 – Bloomberg (Augusta Saraiva): “US pending home sales fell for a sixth month in November to the second-lowest on record as higher borrowing costs and an uncertain economic outlook kept many potential buyers out of the market. The National Association of Realtors index of contract signings to purchase previously owned homes decreased 4% last month to 73.9, the lowest outside of the pandemic in data back to 2001… Contract signings were down nearly 39% in November from a year ago on an unadjusted basis. Pending sales fell in all four regions in the month, led by the Northeast and Midwest.”

December 27 – Reuters (Dan Burns): “Annual price growth in the increasingly fragile U.S. housing market slid into the single digits in October for the first time in about two years… The S&P CoreLogic Case Shiller national home price index increased by 9.2% in October, down from 10.7% in September and notching the first single-digit gain since November 2020. Meanwhile the Federal Housing Finance Agency… said annual home price growth slowed to 9.8% in October from 11.1% in September… On a month-over-month basis, S&P Case Shiller's index fell for a fourth straight month, while FHFA's gauge was unchanged.”

December 28 – Bloomberg (Alice Kantor): “High-end US home sales slumped the most on record in the three months ended Nov. 30… Sales of luxury homes fell 38% year-over-year, according to… Redfin Corp., which measured the top 5% of listings in the 50 most populous US metro areas. That’s the biggest decline in data going back to 2012. Nassau County on Long Island fared the worst, with sales falling 66%... San Diego, San Jose, Riverside and Anaheim in California also experienced large drops in sale volumes. Home prices are falling across the spectrum as overstretched budgets and an anticipated economic downturn keep buyers on the sidelines.”

December 29 – Bloomberg (Ian Kullgren and Rebecca Rainey): “At least 150 large union contracts are set to expire next year, potentially heralding more worker unrest amid soaring inflation and rising corporate profits. The lapsing agreements represent at least 1.6 million workers… Among those are the Detroit automakers with 150,000 workers among three companies, UPS with 256,000 workers, and SAG-AFTRA performers with 160,000 workers…”

Fixed-Income Watch:

December 29 – Wall Street Journal (Telis Demos): “While some investors were hibernating in the fourth quarter, the private market for deal financing has been roaming free. The overwhelming majority of private equity-style deals late in the year have used financing by so-called private credit rather than by the marketing and selling of loans to a wide group of investors by banks. PitchBook LCD tracked 46 leveraged buyouts financed by private credit in the fourth quarter through Dec. 8, versus just one financed by the broadly syndicated loan market… Private credit is made up of firms and funds, including business-development companies, that directly lend money to companies, and the loans aren’t designed to be traded.”

China Watch:

December 27 – Bloomberg: “Chinese residents saw their confidence in the job market and their incomes plunge to new lows, while interest in buying homes also fell as the economic slowdown worsened this year. The People’s Bank of China’s Employment Sentiment Index — which is based on a survey of households’ outlook for jobs — declined to 33.1 in the last three months of 2022, worse than the prior quarter’s record low dating back to when data began in 2010… The Income Confidence Index — a gauge measuring expectations for income in the next three months — slid to 44.4, another record low dating back to 2001… Only 14% of respondents to the central bank survey expected home prices to rise next quarter — another fresh low in data going back to 2010. Some 18.5% expected home prices to fall, the highest proportion since 2012.”

December 25 – Bloomberg: “China’s economy continued to slow in December as the massive Covid-19 outbreak spread across the country, with activity slumping as more people stay home to try and avoid getting sick or to recover. Bloomberg’s aggregate index of eight early indicators showed a contraction in activity in December from an already weak pace in November and the outlook is grim for the new year… The 3.6 million trips made on the Beijing subway last Thursday were 70% below the level on the same day in 2019, and traffic congestion on the city’s streets was only 30% of the level in January 2021… Other major cities such as Chongqing, Guangzhou, Shanghai, Tianjin and Wuhan are seeing a similar drop. That looks to be impacting home and car sales…”

December 26 – Reuters (Ellen Zhang and Joe Cash): “Profits at China's industrial firms contracted further in the January-November period as strict COVID 19-related curbs disrupted factory activity and supply chains… Industrial profits fell 3.6% in January-November from a year earlier to 7.7 trillion yuan ($1.11 trillion)… That compares with a 3.0% drop for January-October.”

December 29 – Reuters (Tony Munroe): “Xi Jinping secured an historic third leadership term in October, emerging as China's most powerful ruler since Mao Zedong, bolstered by a Politburo Standing Committee stacked with allies and no successor-in-waiting to challenge him. It was a rare highlight for Xi in 2022, a tumultuous year capped by unprecedented street protests followed by the sudden reversal of his zero-COVID policy and coronavirus infections rampaging across the world's most populous country. While frustration over zero-COVID and its devastating impact on the second-largest economy did little to disrupt Xi's march towards five more years as general secretary of the ruling Communist Party, 2022 was a year of crises at home and abroad... China's economy is on track to grow at around 3% in 2022, far short of its official target of roughly 5.5%...”

December 29 – Reuters (Casey Hall and Bernard Orr): “China's thinly resourced countryside is racing to beef up medical facilities before millions of factory workers return home for the Lunar New Year holiday next month from cities where COVID-19 is surging… Hospitals and funeral homes in major cities have been under intense pressure but the main concern over the health system's ability to cope is focused on the countryside.”

December 28 – Bloomberg (Tommaso Ebhardt and Chiara Albanese): “Italian health authorities will begin testing all arrivals from China for Covid after almost half of the passengers on two flights to Milan were found to have the virus… China has seen outbreaks of the virus since the government there abandoned its strict zero-Covid policies. Uncertainty over the scale of the spread has prompted countries, including the US, to consider new restrictions on entry.”

December 28 – Bloomberg: “Covid is starting to tear through nursing homes in China despite efforts by facilities to keep elderly residents protected, showing how severe the consequences of the country’s abrupt pivot from Covid Zero may be. As China dropped its most severe pandemic-related curbs early this month with little preparation…, many care homes took the decision to shut themselves off from the public and operate in a closed-loop system… The lockdowns have proven ineffective in keeping the virus out, and the toll exacted on nursing homes could fuel public anger over why Beijing didn’t do more to protect its most vulnerable population before allowing the virus to rip through the country.”

December 26 – CNN (Yong Xiong, Xiaofei Xu and Nectar Gan): “China will drop quarantine requirements for international arrivals from January 8, in a major step toward reopening its borders that have shut the country from the rest of the world for nearly three years. Inbound travelers will only be required to show a negative Covid test result obtained within 48 hours before departure… Currently, they are subject to five days of hotel quarantine and three days of self-isolation at home.”

December 27 – Financial Times (Thomas Hale): “More than a year after China’s property crisis began, the government has finally changed its tune on the best way to overcome it. In its initial stages, which were dominated by the default of heavily indebted real estate developer Evergrande and a host of its peers, widely held expectations of government support failed to materialise… Companies were unable to borrow new money as markets froze on the spectacle of Evergrande’s excess defaulted on the old and construction activity slumped. But in November this year, as concerning housing data continued to emerge, authorities appeared to reconsider the dangers of debt. The government unveiled 16 support measures for the property sector. Then state-run banks pledged an eye-watering amount — around $256bn according to S&P — in potential credit to specific developers.”

December 29 – Bloomberg (Jill Disis): “Hong Kong’s exports plummeted in November by the most in nearly seven decades as a slump in China’s economy and global demand worsened… Overseas shipments plunged 24.1% last month from a year earlier… That was the worst decline since 1954… Exports fell 10.4% in October. Imports declined 20.3% in November from a year earlier — the biggest drop since 2009…”

Central Banker Watch:

December 24 – Reuters (Francesco Canepa): “The European Central Bank must be prepared to take the heat and raise interest rates further, including by more than the market expects, if that is needed to bring down inflation, ECB policymaker Isabel Schnabel said… Investors now expect the rate that the ECB pays on bank deposits, currently at 2%, to rise to 3.4% next year, compared to a 2.75% peak priced in before last week's decision. Schnabel, the leading voice in the ECB's hawkish camp…, opened the door to increasing the deposit rate even further than the market expects if the inflation outlook requires it.”

December 25 – Financial Times (Martin Arnold): “A veteran member of the European Central Bank’s rate-setting council believes it has only just passed the halfway point of its tightening cycle and needs to be ‘in there for the long game’ to tame high inflation. After more than a decade of aggressive easing, 2022 was the year when many leading central banks began to raise rates… The ECB increased borrowing costs by 2.5 percentage points, capping the year with its fourth rise in a row to leave its benchmark deposit rate at 2%. Klaas Knot, head of the Dutch central bank…, told the Financial Times that, with five policy meetings between now and July 2023, the ECB would achieve ‘quite a decent pace of tightening’ through half percentage point rises in the months ahead before borrowing costs eventually peaked by the summer.”

Global Bubble Watch:

December 30 – Financial Times (Adam Samson and Tommy Stubbington): “Global stocks were… set to close out the worst year since the 2008 financial crisis after the battle by central banks to tame inflation and the war in Ukraine sent powerful waves rushing across asset markets. The broad MSCI All-World index of developed and emerging market equities has shed nearly a fifth of its value in 2022… Bond markets also endured heavy selling: the US 10-year government bond yield, a global benchmark for long-term borrowing costs, has shot up to 3.8% from about 1.5% at the end of last year — the biggest annual increase on Bloomberg records stretching to the 1960s.”

December 28 – Bloomberg (Neil Callanan, Tasos Vossos and Olivia Raimonde): “Multiple stress points are emerging in credit markets after years of excess, from banks stuck with piles of buyout debt, a pension blow-up in the UK and real-estate troubles in China and South Korea. With cheap money becoming a thing of the past, those may just be the start. Distressed debt in the US alone jumped more than 300% in 12 months, high-yield issuance is much more challenging in Europe and leverage ratios have reached a record by some measures… Globally, almost $650 billion of bonds and loans are in distressed territory… It’s all adding up to the biggest test of the robustness of corporate credit since the financial crisis and may be the spark for a wave of defaults.”

Europe Watch:

December 27 – Financial Times (Richard Milne and Martin Arnold): “When inflation reached an almost unthinkable 20% this year in Lithuania, residents in the rural south of the Baltic country began to tighten their belts. ‘People are buying less. It’s hard. Everybody is trying harder, wearing what they already have more, shopping less,’ says Laima, a 58-year-old woman who sells socks and other clothes from the boot of her car… Inflation has been on the rise across the west to levels last seen decades ago, but few places have experienced a rise in prices quite like Estonia, Latvia and Lithuania, where inflation rose above 20% this summer and is still above 21% in all three countries.”

EM Crisis Watch:

December 26 – Reuters (Marcela Ayres): “Brazil's sovereign floating rate bond redemptions will hit a record high next year, underscoring the fiscal challenge facing President-elect Luiz Inacio Lula da Silva as he raises the spending ceiling to fund a social welfare package. Redemptions on the LFT bonds, which are linked to benchmark interest rates, will reach 464 billion reais ($89bn) in 2023, with 178 billion reais due in March and 286 billion in September.”

Japan Watch:

December 25 – Bloomberg (Yoshiaki Nohara and Erica Yokoyama): “Bank of Japan Governor Haruhiko Kuroda stressed that the bank’s latest tweaks on its bond yield control program were not the beginning of an exit of monetary easing, but a way to make it sustainable and run smoothly. ‘This is definitely not a step toward an exit,’ Kuroda said… ‘The bank will aim to achieve the price stability target in a sustainable and stable manner, accompanied by wage increases, by continuing with monetary easing under the framework of yield curve control.’”

December 28 – Bloomberg (Erica Yokoyama and Masaki Kondo): “The Bank of Japan’s shock move to double its yield cap was aimed at keeping stimulus on tap, not at changing the trajectory of policy, according to a summary of opinions from the December meeting… Board members expressed concern over a deterioration in the functioning of the Japanese government bond market… At the December gathering, the BOJ blindsided economists and investors by widening the range of movement of benchmark 10-year yields to 0.5 percentage point either side of its target. ‘The expansion of the range of 10-year JGB yield fluctuations from the target level is not intended to change the direction of monetary easing,’ said one member. The measure was instead meant to make the current monetary easing more sustainable by helping improving bond market functioning, the member added.’”

December 28 – Bloomberg (Masaki Kondo and Marcus Wong): “The Bank of Japan announced two additional rounds of unscheduled bond-purchase operations, fighting back against traders betting it will further relax its yield-curve control policy. The central bank offered to buy unlimited amounts of two- and five-year notes at a fixed yield, along with 600 billion yen ($4.5bn) of one-to-10 year bonds. That was on top of Wednesday’s unplanned operations and a daily offer to buy 10-year debt at 0.5%, the top of its current yield target. The additional purchases illustrate the conundrum facing Japanese policy makers.”

December 26 – Reuters (Leika Kihara): “Bank of Japan (BOJ) Governor Haruhiko Kuroda… brushed aside the chance of a near-term exit from ultra-loose monetary policy, although markets and policymakers are signalling an increasing focus on what comes after Kuroda's tenure ends. Investors have continued to push up Japanese government bond (JGB) yields on expectations the BOJ will phase out its yield control under a new governor when Kuroda's second five-year term comes to a close in April... The shift in attention towards a post-Kuroda era was also evident in comments by Prime Minister Fumio Kishida on Monday that a decision on whether to revise Japan's decade-old blueprint for beating deflation will be made after a new BOJ governor is appointed.”

December 29 – Reuters (Leika Kihara): “Former Bank of Japan Deputy Governor Hirohide Yamaguchi, a vocal critic of Governor Haruhiko Kuroda's stimulus programme, is emerging as a strong candidate to become next head of the central bank, the Sankei newspaper reported… The choice would reflect Prime Minister Fumio Kishida's increasingly clear shift away from former premier Shinzo Abe's ‘Abenomics’ reflationary policies, which served as a backbone for Kuroda's stimulus. Yamaguchi had been considered a less likely candidate compared with deputy governor Masayoshi Amamiya and former deputy Hiroshi Nakaso. Amamiya and Nakaso have both served under Kuroda, and long been considered top contenders to succeed the dovish governor…”

December 28 – Reuters (Leika Kihara): “The Bank of Japan's decision to raise its bond-yield ceiling could be the first step toward normalising ultra-easy policy, Takatoshi Ito, a Columbia University professor who is close to BOJ Governor Haruhiko Kuroda, wrote… Kuroda said then that the move was not a prelude to an exit from ultra-loose policy, because recent price rises meant Japan's inflation-adjusted, real interest rate had been declining. ‘Kuroda is correct on this technical point. But the tweak to the YCC could still be the first step toward monetary-policy normalization,’ Ito said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 26 – Associated Press (Carolyn Thompson): “Buffalo residents hovered around space heaters, hunted for cars buried in snow drifts and looked for more victims Monday, after 28 people died in one of the worst weather-related disasters ever to hit western New York. The rest of the United States also was reeling from the ferocious winter storm, with at least another two dozen deaths reported in other parts of the country… ‘This is not the end yet,’ said Erie County Executive Mark Poloncarz, calling the blizzard ‘the worst storm probably in our lifetime,’ even for an area accustomed to punishing snow.”

December 26 – Associated Press (Carolyn Thompson and Jake Bleiberg): “Millions of people hunkered down against a deep freeze Sunday to ride out the winter storm that has killed at least 34 people across the United States and is expected to claim more lives after trapping some residents inside houses with heaping snow drifts and knocking out power to tens of thousands of homes and businesses. The scope of the storm has been nearly unprecedented, stretching from the Great Lakes near Canada to the Rio Grande along the border with Mexico. About 60% of the U.S. population faced some sort of winter weather advisory or warning, and temperatures plummeted drastically below normal from east of the Rocky Mountains to the Appalachians…”

December 26 – Financial Times (Ian Smith): “The chief executive of one of Europe’s biggest insurance companies has warned that cyber attacks, rather than natural catastrophes, will become ‘uninsurable’ as the disruption from hacks continues to grow. Insurance executives have been increasingly vocal in recent years about systemic risks, such as pandemics and climate change, that test the sector’s ability to provide coverage. For the second year in a row, natural catastrophe-related claims are expected to top $100bn. But Mario Greco, chief executive at insurer Zurich, told the Financial Times that cyber was the risk to watch. ‘What will become uninsurable is going to be cyber,’ he said. ‘What if someone takes control of vital parts of our infrastructure, the consequences of that?’”

December 26 – Bloomberg (Ari Natter): “Four power substations in Washington State were attacked on Christmas Day, disrupting service to thousands of residents, just weeks after gunfire at electricity facilities in North Carolina prompted an investigation by the FBI. Law enforcement agencies are now investigating at least eight attacks on power stations in four states in the past month that have underscored the vulnerability of the nation’s power grid.”

Leveraged Speculation Watch:

December 29 – Reuters (Patturaja Murugaboopathy and Summer Zhen): “Global hedge funds are set to register their worst returns in 14 years in 2022… Some hedge fund strategies that put money in commodities and currencies using macro-focused strategies and exploited price differences between related securities outperformed in 2022, handing decent gains to investors… According to… Preqin, hedge fund returns have fallen 6.5% this year, their biggest since a 13% decline in 2008… Alongside the tumble in traditional assets from equities to bonds, net assets of global hedge funds fell 4.8% in the first three quarters of this year to $4.3 trillion. They saw a combined outflow of $109.8 billion in that period…”

December 30 – Bloomberg (Hema Parmar and Miles Weiss): “Tiger Global Management started out as a traditional stock-picking hedge fund that dabbled in venture investments. Now, after a tumultuous 2022, its startup bets vastly outstrip equities… With the bulk of its assets now in venture-capital funds, Chase Coleman’s firm has been insulated from even steeper losses because such private investments are less susceptible to declines in public equities or the short-term whims of clients. The hedge fund tumbled 54% through the first 11 months of this year, on track for its worst annual performance, while its long-only fund plunged more than 60%, fueling a $42 billion drop in total assets.”

December 28 – Bloomberg (Katherine Burton and Hema Parmar): “In 2020, tech-heavy hedge fund Light Street Capital Management posted a banner year on bets including Inc. and Alibaba Group Holding Ltd. That was the last of the good times. The firm, along with other once-high-flying stock hedge funds, is coming off a second year of losses that erased billions of dollars in clients’ wealth. Light Street, Whale Rock Capital Management, Tiger Global Management and Perceptive Advisors each posted declines of more than 40% during the last two years…”

Geopolitical Watch:

December 26 – Associated Press (Hyung-Jin Kim): “South Korea’s military fired warning shots, scrambled fighter jets and flew surveillance assets across the heavily fortified border with North Korea on Monday, after North Korean drones violated its airspace for the first time in five years in a fresh escalation of tensions. South Korea’s military detected five drones from North Korea crossing the border, and one traveled as far as the northern part of the South Korean capital region... The military responded by firing warning shots and launching fighter jets and attack helicopters to shoot down the North Korean drones.”

December 28 – Reuters (Hyonhee Shin): “South Korean President Yoon Suk-yeol said… any provocation by North Korea must be met with retaliation without hesitation despite its nuclear weapons, his office said, after an intrusion by North Korean drones. Five North Korean drones crossed into South Korea on Monday, prompting South Korea's military to scramble fighter jets and attack helicopters to try to shoot them down, in the first such intrusion since 2017.”