Friday, November 11, 2022

Weekly Commentary: Derivatives, Squeezes and Fiascos Aplenty

How does one chronicle a week like this one?

“Sam Bankman-Fried’s $32bn FTX Crypto Empire Files for Bankruptcy.” “What’s Next for Crypto as FTX Collapse Triggers ‘Lehman Moment’?” “Stocks Skyrocket in Best Post-CPI Day on Record.” “Apple’s $191 Billion Single-Day Surge Sets Stock-Market Record.” “Big Tech Job Cull May be the Start of Things to Come.” “Credit Market Rallies Most in Two Years as Inflation Abates.” “Dollar Suffers Biggest Plunge Since 2009 as CPI Smacks Fed Bets.” “Yen Set for Best Week Since 2008 as Fed Stance Seen Softening.” “Beaten-Down Chinese Developer Stocks Set for Best Week on Record.” “Asia Stocks Jump Most Since 2020 as China Covid Zero Pivot Seen.” “Biggest Junk-Bond ETFs Post Record Inflow in Dash Back to Risk.” “Control of U.S. Congress Hangs in Balance as States Labor to Count Ballots.” “How Young Voters Became the Wall for the ‘Red Wave'.”

We’ll start with Thursday’s incredible trading session. October CPI was reported up 0.4%, versus estimates of 0.6%. Core prices gained 0.3% versus 0.5%. All Hell Broke Loose.

From Bloomberg: “Thursday’s shock CPI print was a positive surprise after a week of worry and risk aversion. It set off one of the biggest cross-asset rallies in decades. The Bloomberg US Treasury index has only had three better days this century. Two were during the pandemic volatility of March 2020 and one was March 18, 2009 – the day the Fed announced plans to expand its QE program… The S&P500 and Nasdaq 100 both also had their best day since 2020. The dollar fell by the most since March 18, 2009. Investment-grade bonds, which are even more yield-sensitive than Treasuries, had their best single day in more than 30 years.”

The Semiconductors (SOX) jumped 10.2% during Thursday’s session, the Nasdaq Computer Index 9.0%, the Nasdaq100 8.4%, and the Bloomberg REIT Index 7.1%. The “average stock” Value Line Arithmetic Index gained 6.2%. The small cap Russell 2000 rose 6.1%, with the S&P400 Midcaps jumping 5.8%. The Banks (KBW) rose 5.8%. The S&P500 gained 5.5%.

The Goldman Sachs Short Index surged 10.9% Thursday, with a two-day 17.5% spike. Zerohedge referred to “the biggest short squeeze on record.” When it comes to ferocious short squeezes, I’ll never forget early 1991. Jim Grant’s Interest Rate Observer aptly captured the market environment with a humorous cartoon. It has mamma and papa bear in bed. In obvious distress, papa bear had awoken from what must have been a horrifying nightmare. The caption: “I dreamt the market was open.”

I’ve lived (sleep deprived) through more than my share of short squeezes. The Thursday/Friday squeeze episode was epic for how spontaneous combustion erupted simultaneously across global markets. International markets again demonstrated the characteristics of one big Crowded Speculative Bubble. Stock bears crushed – in the U.S., Europe, China and Asia. Hong Kong’s Hang Seng Index rallied 7.7% Friday.

Currency bears - crushed. The Japanese yen surged 3.9% Thursday, the biggest one-day gain since March 2020. For the week, the yen gained 5.6%, the South Korean won 7.6%, the Swiss franc 5.7%, the Swedish krona 5.1%, the British pound 4.0% and the euro 3.9%. The Colombian peso surged 6.5%, the Thai Baht 4.5%, the Czech Koruna 4.4%, and the Bulgarian lev 4.1%.

Treasury and bond bears – crushed. Ten-year Treasury yields sank 28 bps Thursday, with the iShares Treasury Bond ETF (TLT) surging 3.8%. Benchmark MBS yields sank a ridiculous 54 bps in Thursday trading. Hedging run amuck. High-yield CDS prices collapsed 53 bps, the largest one-day drop since April 9th, 2020. Investment-grade CDS fell nine to a two-month low 83 bps, the biggest decline since September 2020. Italian yields sank 28 bps Thursday. Yields dropped 109 bps over two sessions in Hungary. Indonesian yields dropped 40 bps this week. Yields were down 36 bps this week in Canada and 37 bps in Mexico. Dollar bond yields were down 38 bps in Chile and Peru, and 37 bps in Panama.

The sound of hedges blowing up everywhere. 2022 has been a year of massive hedging across global markets. Especially in Treasuries and global fixed-income, derivatives have surely been a major factor in exacerbating the yield melt-up. Meanwhile, derivative hedges and speculations have been instrumental in the dollar melt-up – and the corresponding yen melt-down, in particular.

Things were turning serious a few weeks back. The UK bond market was at the brink of collapse, with contagion effects weighing on bond markets around the globe. The yen was dislocating to the downside, while it appeared a break of the BOJ’s yield peg could unleash mayhem. European markets were fragile. EM bond yields were spiking higher. Asian bond markets were dislocating, with particular worry for South Korea. Eastern European bonds and currencies were under intense pressure.

Chinese developer and housing collapses were gaining momentum. China’s weak recovery was faltering, while a new Covid wave was unfolding. Adding to the gloom, China’s national congress was alarming on multiple levels. There was every reason to hedge risk just about everywhere.

It started with the Bank of England’s bond market rescue. The Bank of Canada then raised rates less aggressively than expected and appeared to pivot dovish. The Bank of Japan held firm with the loosest monetary policy imaginable in an inflationary world. Some Fed officials indicated a less hawkish policy course was approaching, as concerns grew for housing and layoffs. And then Beijing began to tinker with Covid zero.

Powell’s press conference provided a final ingredient for this week’s squeeze. Unequivocally hawkish, it’s fair to assume that the 5% post-meeting stock market drop (along with big moves in bond yields and the currencies) was at least partially fueled by aggressive hedging-related selling.

On the one hand, there was ample evidence that global central bankers and Beijing had shifted focus to crisis management. Markets pondering that the “fix” could be in. On the other hand, an ugly CPI print would ensure Fed hawkish resolve and another potentially highly destabilizing surge in yields and the dollar. Derivative hedging markets around the world were keying off the possibility of a bad Thursday’s CPI report. It was good, and a simultaneous reversal of hedges unleashed panic buying and an epic short squeeze across markets. And, for good measure, throw in FOMO (fear of missing out).

Was it a ridiculous market reaction to one month’s data? Absolutely. But these are dysfunctional markets. Way too much market risk is being offloaded to derivatives markets. Derivatives-related selling has the clear potential to spark cascading sell orders, market dislocation and crashes. For now, however, markets remain confident that central bankers retain the capacity to thwart the crash scenario. This ensures Crowded Hedging Markets are especially susceptible to abrupt upside reversals, panic buying, squeezes, melt-ups and mayhem.

Crowded Hedging Markets are certainly a primary source of today’s acute market instability. Moreover, they ensure that hedges don’t work as advertised. For many, hedges have been a drag on performance in 2022 – a year when they should have helped mitigate risk. I’ll assume that scores of managers and investors will throw in the towel on hedging risk for 2023. Just assume the bear market is over. Besides, hedging doesn’t work well anyway.

I understand why most want to see this week’s big rally in a positive light. And I wish I wasn’t negative so much of the time. But it all looks like an accident in the making to me.

Wall Street asks, is October’s positive inflation surprise enough to move the needle for the Fed? It might be for Jay Powell, though not in the markets’ desired direction. I suspect this is exactly the dynamic Powell frets – a major loosening of market financial conditions. And he also faces the prospect of markets turning giddy for a year-end rally.

With Crowded Derivatives Hedging, markets virtually become binary. They either falter in de-risking/deleveraging, illiquidity, dislocation and crisis, or markets do an abrupt about-face, in your face “risk on” panic buying and speculative excess. And “risk on” loose financial conditions undermine the Fed’s inflation fight, increasing the odds for a longer and more challenging tightening cycle.

A chronicle of this week’s developments would be incomplete without noting some major cost cutting announcements. Mark Zuckerberg confronted the reality that the halcyon free “money” days are over. As a former employee stated: “The Bubble has burst.” It’s worth noting that Meta’s stock rallied on the aggressive cost-cutting news, the same reaction stocks had to cost cutting announcements from Netflix, Amazon, Intel, Microsoft, Google and others. CEOs will continue to cut jobs and expenses so long as they’re rewarded for it. Can Twitter slash costs fast enough? And what debt holders are on the hook for Musk’s Twitter fiasco?

November 10 – Financial Times (Cristina Criddle and Hannah Murphy): “After 18 years of bumper growth, a new reality dawned on Meta… as chief executive Mark Zuckerberg announced a drastic retrenchment of his company’s workforce. The deep job cuts — equal to about 13% of its workforce, or 11,000 employees — speak to the competitive threats that Meta, which owns Facebook, Instagram and WhatsApp, is facing from deep-pocketed Chinese rival TikTok. They are also the first sign that Zuckerberg has been forced to moderate, at least partly, his costly bet on building a digital avatar-filled metaverse amid heightened scrutiny from investors over his spending. ‘The bubble has burst,’ one former Meta staffer said.”

November 9 – Reuters (Aditya Soni and Nivedita Balu): “Meta Platforms Inc said… it would cut more than 11,000 jobs, or 13% of its workforce, as the Facebook parent doubled down on its risky metaverse bet amid a crumbling advertising market and decades-high inflation. The mass layoffs, among the biggest this year and the first in Meta's 18-year history, follow thousands of job cuts at other tech companies including Elon Musk-owned Twitter Inc, Microsoft Corp and Snap Inc .”

November 10 – Reuters (Chavi Mehta and Nivedita Balu): “ Inc is undertaking a review of its unprofitable businesses, including the devices unit that houses voice assistant Alexa, to cut costs…, sending its shares up 11%. Following a months-long review, Amazon has told employees in some unprofitable units to look for jobs elsewhere in the company, while moving to redeploy staff from certain teams to more profitable areas and closing teams in areas such as robotics and retail…”

November 11 – Reuters (Katie Paul and Paresh Dave): “Twitter Inc's new owner Elon Musk on Thursday raised the possibility of the social media platform going bankrupt, capping a chaotic day that included a warning from a U.S. privacy regulator and the exit of the company's trust and safety leader. The billionaire on his first mass call with employees said that he could not rule out bankruptcy…, two weeks after buying it for $44 billion - a deal that credit experts say has left Twitter's finances in a precarious position.”

November 7 – Reuters (Matt Tracy): “Elon Musk's revelation that Twitter has suffered a ‘massive’ revenue drop since he took over 10 days ago underscores the precarious nature of the social media company's finances after he saddled it with $13 billion in debt, credit experts say. Musk tweeted… that Twitter was losing more than $4 million a day, largely because advertisers started fleeing once he took over. He has blamed civil rights activists pressuring advertisers, though many in the advertising industry say his tweets spreading conspiracy theories have contributed.”

Elon Musk was said to have warned of the risk of bankruptcy only two weeks after his leveraged buyout. FTX went from glorious riches to bankruptcy in a few days. The crypto space is turning into one historic debacle. Unfortunately, millions of unsuspecting “investors” were lured into one of history’s spectacular speculative Bubbles. Things like this are invariably much worse than we ever could have imagined. Panic. Runs and collapses.

November 11 - Financial Times (Joshua Oliver, Scott Chipolina and Nikou Asgari): “Bankman-Fried, who one week ago was among the most respected figures in the crypto industry, with a $24bn fortune and close links with US lawmakers, Wall Street and celebrities, on Friday resigned as FTX’s chief executive. John R Ray, a restructuring specialist who oversaw the Enron and Nortel Networks bankruptcy cases, will take the reins… In just over three years, FTX had secured a $32bn valuation and had wooed a roster of blue-chip investors, including Paradigm, SoftBank, Sequoia Capital and Singapore’s Temasek. Venture capital firms Sequoia and Paradigm have in recent days marked their investment down to zero. The sprawling business empire run by a tight-knit group of longtime associates around Bankman-Fried, many of whom lived together in a Nassau, Bahamas, penthouse, has around 100,000 creditors and $10-50bn of assets and liabilities, according to the filing.”

November 11 – Wall Street Journal (Vicky Ge Huang): “Stephen Gibbs got spooked this week when he heard about problems brewing at FTX and he decided it was time to take his money out of the crypto exchange. Mr. Gibbs, a musician in Thailand, said he tried to withdraw his money Tuesday. But FTX that day halted both crypto and fiat withdrawals from its international unit. As of Thursday, Mr. Gibbs said, his transaction was still listed as 'requested.' On Friday, FTX filed for bankruptcy protection. ‘If you couldn’t trust an exchange like FTX, you can’t trust any exchange,’ Mr. Gibbs said before the bankruptcy filing. ‘And then if you can’t trust exchanges, the whole premise of cryptocurrency doesn’t work.’”

Little wonder Beijing is moving aggressively on all fronts. October Credit growth was alarmingly weak. China’s broad measure of Credit growth, Aggregate Financing (AG), expanded only $128 billion in October, down from September’s almost $500 billion and just over half of estimates. At $4.04 TN, y-t-d growth is almost 9% above 2021 (and down 8% from 2020, while up 34% from 2019).

New Bank Loans expanded only $86 billion (20% below estimates), down from September’s $350 billion and the weakest month of lending since December 2017. At $2.63 TN, y-t-d New Loan growth is running 6.5% ahead of 2021 (up 10.7% compared to 2020 and 31% ahead of 2019). Corporate Bank Loans dropped to $65 billion, down from September’s $270 billon (up from October 2021’s $44bn).

Consumer (chiefly mortgage) Loans were slightly negative, the first contraction since April. At $478 billion, y-t-d Consumer Loans are half of last year’s pace. What’s more, 2022 Consumer Loan growth is down 44% from comparable 2019. At 6.4%, one-year growth is down from the 12.5% rate to start the year - to the weakest pace in decades.

Corporate Bonds expanded a reasonably solid $33 billion, with y-t-d growth ($262bn) down 19% and 53% from comparable 2021 and 2020. Government Bonds gained $38 billion, with y-t-d growth of $872 billion 23% ahead of 2021 (down 14% from comparable 2020). “Shadow Banking” contracted about $25 during October. M2 “money supply” was up 11.8% y-o-y, near the strongest growth since 2016.

Beijing Friday released a list of “20 key parameters to guide officials on the ground as it eases… Covid Zero…” They look reasonable enough. There’s one worth noting: “React quickly to outbreaks to reduce size and duration needed for pandemic control.” This is the essence of Covid Zero, and there’s seemingly no easing of the pressure on local officials to take draconian measures to try to halt the transmission of a highly contagious virus.

For the Week:

The S&P500 rallied 5.9% (down 16.6% y-t-d), and the Dow jumped 4.1% (down 7.1%). The Utilities rose 1.7% (down 6.3%). The Banks gained 5.8% (down 16.9%), and the Broker/Dealers increased 2.4% (down 1.0%). The Transports advanced 8.0% (down 11.7%). The S&P 400 Midcaps rallied 5.3% (down 10.9%), and the small cap Russell 2000 recovered 4.6% (down 16.1%). The Nasdaq100 surged 8.8% (down 27.6%). The Semiconductors spiked 14.9% higher (down 30.2%). The Biotechs jumped 6.0% (down 5.3%). With bullion surging $89, the HUI gold equities index rallied 13.0% (down 13.1%).

Three-month Treasury bill rates ended the week at 4.06%. Two-year government yields sank 33 bps to 4.33% (up 360bps y-t-d). Five-year T-note yields dropped 40 bps to 3.94% (up 267bps). Ten-year Treasury yields fell 35 bps to 3.81% (up 230bps). Long bond yields dropped 23 bps to 4.02% (up 211bps). Benchmark Fannie Mae MBS yields sank 64 bps to 5.29% (up 322bps).

Greek 10-year yields dropped 19 bps to 4.51% (up 320bps y-t-d). Italian yields sank 26 bps to 4.21% (up 303bps). Spain's 10-year yields fell 15 bps to 3.20% (up 264bps). German bund yields dropped 14 bps to 2.16% (up 234bps). French yields declined 16 bps to 2.67% (up 245bps). The French to German 10-year bond spread narrowed two to 51 bps. U.K. 10-year gilt yields dropped 18 bps to 3.36% (up 239bps). U.K.'s FTSE equities index dipped 0.2% (down 0.9% y-t-d).

Japan's Nikkei Equities Index rallied 3.9% (down 1.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.24% (up 17bps y-t-d). France's CAC40 rose 2.8% (down 7.8%). The German DAX equities index surged 5.7% (down 10.5%). Spain's IBEX 35 equities index increased 2.0% (down 7.1%). Italy's FTSE MIB index jumped 5.0% (down 10.6%). EM equities were mostly higher. Brazil's Bovespa index dropped 5.0% (up 7.1%), and Mexico's Bolsa index increased 1.5% (down 2.5%). South Korea's Kospi index surged 5.7% (down 16.6%). India's Sensex equities index added 1.4% (up 6.1%). China's Shanghai Exchange Index increased 0.5% (down 15.2%). Turkey's Borsa Istanbul National 100 index surged 5.7% (up 140%). Russia's MICEX equities index recovered 2.9% (down 41.5%).

Investment-grade bond funds posted outflows of $1.739 billion, while junk bond funds reported inflows of $1.255 billion (from Lipper).

Federal Reserve Credit fell $19.3bn last week to $8.643 TN. Fed Credit was down $258bn from the June 22nd peak. Over the past 165 weeks, Fed Credit expanded $4.935 TN, or 132%. Fed Credit inflated $5.831 Trillion, or 207%, over the past 522 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $10.4bn to $3.321 TN. "Custody holdings" were down $159bn, or 4.6%, y-o-y.

Total money market fund assets declined $13.8bn to $4.618 TN. Total money funds were up $51bn, or 1.1%, y-o-y.

Total Commercial Paper dipped $5.0bn to $1.296 TN. CP was up $164bn, or 14.5%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 13 bps to 7.08% (up 410bps y-o-y) - the high since April 2002. Fifteen-year rates rose nine bps to 6.38% (up 411bps) - the high since July 2007. Five-year hybrid ARM rates gained 11 bps to 6.06% (up 352bps) - the high since November 2008. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 39 bps to 6.84% (up 379bps).

Currency Watch:

November 7 – Reuters (Tetsushi Kajimoto): “Japan's foreign reserves extended declines in October, following the previous month's record drop, the Ministry of Finance said…, reflecting the largest ever amount of yen-buying, dollar-selling intervention… Japan's foreign reserves fell for a third consecutive month to $1.19 trillion as at the end of October… The decline of $43.5 billion marked the second sharpest month-on-month on record.”

For the week, the U.S. Dollar Index dropped 4.1% to 106.29 (up 11.1% y-t-d). For the week on the upside, the South Korean won increased 7.6%, the Swiss franc 5.7%, the Japanese yen 5.6%, the Swedish krona 5.1%, the British pound 4.0%, the euro 3.9%, the South African rand 3.9%, the Australian dollar 3.6%, the Norwegian krone 3.2%, the New Zealand dollar 2.9%, the Singapore dollar 2.6%, the Canadian dollar 1.5% and the Mexican peso 0.1%. On the downside, the Brazilian real declined 5.0%. The Chinese (onshore) renminbi gained 1.24% versus the dollar (down 10.36% y-t-d).

Commodities Watch:

November 6 – Bloomberg (David Fickling): “The instruction manual for surviving a zombie apocalypse is pretty straightforward. Once you’ve kitted out your bunker with canned goods and firearms, get a supply of bullion. You’ll need it to buy bullets and bribe your way out of a death fight in Thunderdome. That’s a line of thinking you might associate with cranky gold bugs, but it’s not a million miles away from the rationale behind fund flows in the precious metals market right now — and nations are in the driving seat. Central banks bought 400 metric tons of gold in the September quarter, the World Gold Council reported this week. That’s a record inflow on a par with what they’d purchase over a whole year in normal times.”

November 9 – Bloomberg (Nariman Gizitdinov and Maria Kolesnikova): “The world’s second-biggest buyer of gold among central banks last quarter believes there’s hardly such a thing as too much bullion. Uzbekistan has brought the share of the precious metal in its $32 billion reserves to almost two-thirds, in a reversal of a plan to cut it below 50% by buying US and Chinese sovereign debt. The proportion is now among the highest in developing economies tracked by the World Gold Council…”

The Bloomberg Commodities Index dipped 0.5% (up 17.9% y-t-d). Spot Gold surged 5.3% to $1,771 (down 3.2%). Silver jumped 4.1% to $21.70 (down 6.9%). WTI crude dropped $3.65 to $88.96 (up 18%). Gasoline fell 4.6% (up 17%), and Natural Gas sank 8.1% to $5.88 (up 58%). Copper jumped 6.2% (down 12%). Wheat lost 4.0% (up 6%), and Corn declined 2.6% (up 12%). Bitcoin sank $4,400 this week, or 20.7%, to $16,800 (down 64%).

Market Instability Watch:

November 11 – CNBC (Joshua Oliver and Nikou Asgari): “The $1tn digital asset market faces a crisis akin to the 2008 financial crash, according to Binance chief Changpeng Zhao, who warned more companies might fail in the coming weeks following the troubles at FTX. Zhao, founder of the world’s biggest digital asset exchange, said the full impact of the meltdown at rival crypto exchange FTX had yet to be felt… He said the global financial crisis was ‘probably an accurate analogy’ to this week’s events. ‘With FTX going down, we will see cascading effects,’ Zhao said. ‘Especially for those close to the FTX ecosystem, they will be negatively affected.’”

November 11 – Bloomberg (Jack Pitcher and Caleb Mutua): “US credit markets surged by the most in two years on Thursday after inflation showed signs of moderating, boosting the prospects of corporate borrowers. A key measure of US credit risk -- the Markit CDX North American Investment Grade Index -- saw spreads tighten the most since September 2020, while the equivalent high-yield gauge rallied the most since November 2020.”

November 11 – Bloomberg (Ishika Mookerjee): “Asia’s stock benchmark jumped by the most since March 2020 as China’s move to ease some rules related to quarantine and flight bans supercharged a rally sparked by softer-than-expected US inflation. The MSCI Asia Pacific Index climbed as much as 5.1% on Friday… A gauge of Chinese stocks in Hong Kong surged more than 8%...”

November 11 – Bloomberg (Wei Zhou): “Chinese developer stocks surged on Friday, on track for a record weekly advance, thanks to fresh government support and renewed bets on an economic reopening to help stem the sector’s debt crisis. A Bloomberg Intelligence gauge of Chinese developers’ stocks jumped as much as 16% Friday, with Country Garden Holdings Co. extending gains to nearly 40% in Hong Kong.”

November 11 – Bloomberg (Sam Potter and Katie Greifeld): “Investors trying to gauge the strength of the risk-on shift that gripped markets Thursday should look no further than two of the biggest high-yield credit exchange-traded funds. As softer-than-anticipated inflation data sparked the best day for stocks in more than two years and sent around $13.4 billion into equity ETFs, products targeting junk bonds were seeing unprecedented demand.”

November 8 – Reuters (Gertrude Chavez-Dreyfuss): “The U.S. Federal Reserve's ongoing balance sheet drawdown has exacerbated low liquidity and high volatility in the $20-trillion U.S. Treasury debt market, raising questions on whether the Fed needs to re-think this strategy. Intended to drain stimulus pumped into the economy during the COVID-19 pandemic, the Fed's quantitative tightening (QT)… has been running for the last five months. The Fed's balance sheet though remains at a lofty $8.7 trillion, down modestly from a peak of nearly $9 trillion.”

November 8 – Wall Street Journal (Sam Goldfarb and Megumi Fujikawa): “Japan has been one of the world’s biggest buyers of U.S. Treasurys for years, helping to hold down borrowing costs for American businesses and consumers. Now that is changing. Signs are mounting that Japan’s government is selling short-term U.S. bonds, part of an effort to prop up its currency. At the same time, some Japanese institutional investors are racing to reduce their foreign bondholdings, including Treasurys. The shift is another example of inflation and rising rates altering investors’ long-held assumptions. The Federal Reserve’s interest-rate increases have weakened the yen and made it costlier for Japanese investors to hedge against currency fluctuations... As a result, instead of counting on Japanese investors’ demand for Treasurys, investors have become increasingly concerned about a potentially destabilizing shift in global capital flows.”

November 7 – Financial Times (Nicholas Megaw and Eric Platt): “Investors who poured money into funds aimed at protecting them from the sell-off in shares are finding many of the strategies have backfired, offering little or no safeguard from a drawdown that has sliced $13tn off the US stock market. Funds that focused on buying equity put options… have struggled to make gains even as the S&P 500 suffers its worst drawdown since the 2008 financial crisis. Those who prepared for violent swings by buying call options on the Cboe’s Vix index… have also been left wanting. A Cboe index that tracks a theoretical portfolio that buys both stocks within the S&P 500 and equity put options — known as the PPUT index — has fallen roughly 20% this year, not any better than the total return of the S&P 500.”

UK Crisis Watch:

November 6 – Reuters (Jaiveer Singh Shekhawat): “British finance minister Jeremy Hunt plans to set out on Nov. 17 up to 60 billion pounds ($67.82bn) of tax rises and spending cuts, including at least 35 billion pounds ($39.56bn) in cuts, the Guardian reported… Citing a Whitehall source, the newspaper said the figures remained estimates and subject to change, but that Hunt had told staff he was looking for at least 50-60 billion pounds' worth of measures in his autumn statement.”

November 8 – Reuters (Jamese Davey): “British grocery inflation hit 14.7% in October, another new record, and it is still too early to call the ceiling, market researcher Kantar said… It said UK consumers would face a 682-pound ($785) jump in their annual grocery bill if they continued to buy the same items. Prices were rising fastest in products such as margarine, milk and dog food. Kantar said 27% of UK households reported that they are struggling financially - double the proportion it recorded last November.”

Bursting Bubble and Mania Watch:

November 9 – Bloomberg (Tom Maloney): “Just weeks ago, Sam Bankman-Fried was considered crypto’s version of John Pierpont Morgan, willing to throw around his massive fortune to save the industry. The curly-haired 30-year-old known as SBF was everywhere, backing flailing projects including BlockFi, Voyager Digital and Celsius. From the Bahamas, he invested in Robinhood Markets Inc., raising speculation that he’d take over the trading app. And why not? Just last year he said that once his FTX was big enough, it could swallow CME Group Inc. or Goldman Sachs... And he looked poised to leverage his fortune — $26 billion at its peak — to shape the world, donating millions to Democrats and promising that one day he’d give it all away to political causes and charity. Now, the future of all of it is in doubt.”

November 11 – CNBC (Ari Levy and MacKenzie Sigalos): “A year ago this week, investors were describing bitcoin as the future of money and ethereum as the world’s most important developer tool. Non-fungible tokens were exploding, Coinbase was trading at a record and the NBA’s Miami Heat was just into its first full season in the newly renamed FTX Arena. As it turns out, that was peak crypto. In the 12 months since bitcoin topped out at over $68,000, the two largest digital currencies have lost three-quarters of their value, collapsing alongside the riskiest tech stocks. The industry, once valued at roughly $3 trillion, now sits at around $900 billion.”

November 10 – Bloomberg (Gillian Tan): “The crisis engulfing Sam Bankman-Fried’s is rapidly worsening, with the onetime crypto wunderkind warning of bankruptcy if his firm can’t secure funds to cover a shortfall of as much as $8 billion. Bankman-Fried informed investors of the gap on Wednesday, shortly before rival exchange Binance abruptly scrapped a takeover offer. He said needed $4 billion to remain solvent and is attempting to raise rescue financing in the form of debt, equity, or a combination of the two… ‘I f---ed up,’ Bankman-Fried told investors on the call… He said he would be ‘incredibly, unbelievably grateful’ if investors could help.’”

November 9 – CNBC (Tanaya Macheel): “Cryptocurrencies extended their slide for a second day Wednesday as the market absorbed the potential collapse of popular crypto exchange FTX. Prices were pressured to start the day and plunged by late afternoon as Binance, the largest global exchange by volume, abandoned plans to acquire Sam Bankman-Fried’s FTX… Bitcoin fell 12%... to just under $16,000, hitting a low not seen since November 2020… It reached its all-time high of $68,982.20 one year ago Thursday. Meanwhile, ether tumbled 14%, to $1,128.87.”

November 9 – New York Times (Kevin Roose): “The crypto industry is known for dramatic twists, roller-coaster prices and fortunes that appear and disappear overnight. But even by crypto standards, what happened this week was bonkers. To non-crypto watchers, the news — the collapse of FTX, one of the largest cryptocurrency exchanges in the world — might sound boring or esoteric… But within the crypto world, it is already being referred to as the industry’s ‘Lehman moment’ — a reference to the 2008 collapse of Lehman Brothers, which set off a global financial panic… Indeed, FTX’s fall... may turn out to be the most gripping crypto narrative of the year, a ‘Succession’-level drama involving feuding billionaires, rumors of sabotage and high-stakes battles over the future of the industry.”

November 9 – Bloomberg (Joanna Ossinger): “Crypto markets face weeks of deleveraging in the fallout from the crisis at digital-asset exchange, a period of upheaval that could push Bitcoin down to $13,000, according to JPMorgan… A ‘cascade of margin calls’ is likely underway given the interplay between the exchange, its sister trading house Alameda Research and the rest of the crypto ecosystem, a team led by Nikolaos Panigirtzoglou wrote… ‘What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking’ in the crypto sphere, the team said…”

November 8 – Bloomberg (Justina Lee and Liz Capo McCormick): “Over the last decade, as rock-bottom interest rates depressed returns on fixed-income assets, the alchemists of Wall Street came up with a solution for investors who needed fatter yields: a whole series of complex products that spun extra basis points out of comatose markets. Now, amid the worst bond rout in at least five decades, firms have been scrambling to hedge their positions, piling into derivatives that benefit from higher volatility as they seek to limit the damage. In the process, they’re adding fuel to a fire that’s already sent one measure of rates volatility to near the highest level since the global financial crisis -- outpacing the violent swings in both stocks and currencies.”

November 8 – Wall Street Journal (Will Parker): “A major Chinese developer… disposed of the tallest rental apartment tower in downtown Los Angeles at a steep loss, the latest in a recent wave of Chinese investors unloading prized U.S. real-estate assets. The U.S. subsidiary of China’s Greenland Holding Group sold the 59-story apartment skyscraper for $504 million, according to the buyer, privately held apartment owner Northland. That sales amount was a record for a single rental property in Los Angeles, but it was still far less than Greenland had initially hoped to get for the building. Eighteen months ago, the asking price for the building was $695 million, which even at that price was less than what Greenland had paid in development costs…”

Ukraine War Watch:

November 6 – Associated Press (Sam Mednick): “The mayor of Kyiv, Ukraine’s capital, is warning residents that they must prepare for the worst this winter if Russia keeps striking the country’s energy infrastructure — and that means having no electricity, water or heat in the freezing cold cannot be ruled out. ‘We are doing everything to avoid this. But let’s be frank, our enemies are doing everything for the city to be without heat, without electricity, without water supply, in general, so we all die. And the future of the country and the future of each of us depends on how prepared we are for different situations,’ Mayor Vitali Klitschko told state media.”

November 8 – Financial Times (Roger Pardo-Maurer): “So far, Russia’s threats of escalation against Ukraine have been largely interpreted as a veiled reference to the use of traditional nuclear weapons. But there is another tool which Vladimir Putin may be considering: a tactical electromagnetic pulse, or EMP, strike. These weapons — designed to create a powerful pulse of energy which short-circuits electrical equipment such as computers, generators, satellites, radios, radar receivers and even traffic lights — could disable Ukraine’s military and civilian infrastructure at a stroke and leave the country without light, heat, communications or transport. EMP attacks have been amply explained, and even clamoured for, on Russian state TV talk shows. A Russian colonel has demonstrated on air, with maps and charts, how such a blast over the Baltic Sea might work. It may well be that Putin and his generals have been warning us about this possibility all along, with their enigmatic threats to unleash unspecified ‘military-technical measures’.”

U.S./Russia/China Watch:

November 8 – Reuters: “A leading ally of Russian President Vladimir Putin met Iran's President Ebrahim Raisi… on a trip to deepen trade and security cooperation, as Moscow looks to shore up its economy and bolster its war effort in Ukraine. Russian Security Council secretary Nikolai Patrushev's visit was a sign of Iran's growing importance as a supportive partner and weapons supplier… Russian state media said Patrushev discussed the situation in Ukraine and measures to combat ‘Western interference’ in both countries' internal affairs with his Iranian security counterpart Ali Shamkhani.”

November 10 – Bloomberg: “In the latest reflection of the Kremlin’s expanding war effort, bomb shelters across Russia are being brought back to life after more than three decades of neglect since the end of the Cold War. State workers are quietly checking basements and other protected facilities, repairing and cleaning installations not used since the Soviet era, according to people familiar... The moves are part of a broader push by authorities to make sure civil-defense infrastructure is ready in case of a wider conflict, people familiar with the situation said, speaking on condition of anonymity to discuss matters that aren’t public. The campaign hasn’t been officially announced…”

Economic War/Iron Curtain Watch:

November 8 – Bloomberg: “Freight volumes through some of Russia’s largest ports have cratered as a result of the European Union’s economic sanctions against Moscow. This year, the port of St. Petersburg — Russia’s primary gateway for trade with Europe — experienced an 85% drop in container throughput versus the previous year, according to Vincent Stamer, a researcher at the Kiel Institute for the World Economy. ‘There are barely any containers arriving at Russia’s formerly busiest port,’ Stamer said... ‘That’s because St. Petersburg is so exposed to European trade.’”

November 7 – Financial Times (Valentina Romei and Martin Arnold): “China has become Russia’s main trading partner as imports from the EU contracted sharply following sanctions... The Germany-based Kiel Institute for the World Economy calculated that in June, July and August, Russia’s goods imports were 24% lower than for the same period last year… The fall was driven by contracting trade with the EU, down 43% as a result of tough Brussels sanctions targeting the Russian economy, while Russian trade with China increased 23%, making the world’s second-largest economy Russia’s top trading partner.”

November 7 – Reuters (Ben Blanchard and Eduardo Baptista): “A British minister will visit Taiwan this week for trade talks and meet President Tsai Ing-wen…, drawing an angry reaction from Beijing to the latest high-level engagement between a Western government and the island… Britain's Department for International Trade said Greg Hands, minister of state for trade and also a member of parliament, would meet Tsai and co-host the 25th annual UK-Taiwan Trade Talks... ‘Visiting Taiwan in person is a clear signal of the UK's commitment to boosting UK-Taiwan trade ties. Like the UK, Taiwan is a champion of free and fair trade underpinned by a rules-based global trading system,’ his office said…”

November 10 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “The US has warned European countries that a conflict over Taiwan would trigger a huge global economic shock, in an effort to step up contingency planning amid rising concern about military action in the Indo-Pacific. The state department has shared research with partners and allies that estimates that a Chinese blockade of Taiwan would spark $2.5tn in annual economic losses… The stark warning has been shared with European Commission and European government officials, as the US and partners begin to think about how they could use sanctions against China over any military action against Taiwan.”

November 8 – Financial Times (Guy Chazan, Sam Jones and Yuan Yang): “Germany’s economy minister said… he was looking at ways to tighten restrictions on non-European investment in the country’s critical infrastructure as Berlin moved to block the sale of a chip factory to a Chinese-owned company. The German government is expected to formally bar the sale of Dortmund-based Elmos’s semiconductor plant to China-owned Silex Microsystems… The blocking of the sale comes just days after Olaf Scholz made his first visit as chancellor to Beijing and highlights increasing concerns over the security of western semiconductor technology and supply chains.”

November 8 – Wall Street Journal (Austin Ramzy): “Xi Jinping emerged from a Communist Party congress with more power than any Chinese leader in a generation. Now, he’s turning his focus to shoring up foreign ties as he steels the country for heightened competition with the U.S. Leaders from Vietnam, Pakistan, Tanzania and Germany all traveled to Beijing last week to see Mr. Xi—resulting in more face-to-face meetings with foreign dignitaries than the Chinese leader has had in the nearly two years between the early days of the pandemic and the Beijing Winter Olympics in February.”

November 5 – Bloomberg (Arsalan Shahla): “The Iranian rial fell to its lowest level ever recorded in the country’s unregulated, open market on Saturday as protests against the government continued and hopes of reviving the nuclear deal remained slim. The rial slumped to an average of 363,500 to the US dollar… The rial has lost more than 40% against the dollar since August 2021…”

Inflation Watch:

November 10 – Bloomberg (Reade Pickert): “US inflation cooled in October by more than forecast, offering hope that the fastest price increases in decades are ebbing and giving Federal Reserve officials room to slow down their steep interest-rate hikes. The consumer price index was up 7.7% from a year earlier, the smallest annual advance since the start of the year and down from 8.2% in September… Core prices… are regarded as a better underlying indicator of inflation, advanced 6.3%, pulling back from a 40-year high. The core consumer price index increased 0.3% from the prior month, while the overall CPI advanced 0.4%. Both increases as well as the monthly rises were below the median economist estimates.”

November 8 – Bloomberg (Jenny Surane and Paige Smith): “US credit-card balances surged to a record in the third quarter as banks bet that consumers with less-than-stellar credit will be able to handle more debt. Balances soared 19% to $866 billion, with average credit lines also climbing to an all-time high, according to… TransUnion. The jump came after card originations to subprime consumers climbed more than 12% in the previous three-month period. ‘In this inflationary environment, consumers are increasingly turning to credit,’ Paul Siegfried, senior vice president and credit-card business leader at TransUnion, said… ‘This is particularly true among the subprime segment of consumers.’”

November 7 – Bloomberg (Gerson Freitas Jr, Naureen Malik and Chunzi Xu): “In the most densely populated corner of the US, temperatures are about to drop after a stretch of unusually warm weather. And the signs of a winter crisis are already multiplying. Heating oil delivered to New York is the priciest ever. Retailers in Connecticut are rationing it to prevent panic buying. New England’s stockpiles of diesel and heating oil… are a third of normal levels. Natural gas inventories are also below average. A Massachusetts-based utility is imploring President Joe Biden to prepare emergency measures to prevent a gas shortage. Add some cold to the mix, and in the best-case scenario, Northeast consumers will shoulder the highest energy bills in decades this winter.”

November 8 – Wall Street Journal (Leslie Scism): “Hurricane season is nearly over, though one more storm is potentially heading for Florida. For insurers, the worries won’t end on Nov. 30. Insurers are in the middle of negotiations with reinsurers, which are trying to boost rates by 10% to 30%... It is too soon to know if the reinsurers will get what they want… Insurers have already been boosting premium rates on their business, homeowner and auto policies to deal with higher costs due largely to inflation.”

Biden Administration Watch:

November 10 – Reuters (Tim Reid and Joseph Ax): “Two days after Americans went to the polls, the political world remained on tenterhooks on Thursday, with both chambers of the U.S. Congress up for grabs as election officials painstakingly tallied hundreds of thousands of votes in a process that could take days to resolve. Republicans have secured at least 211 House of Representatives seats, Edison Research projected, just seven shy of the 218 needed to seize control from Democrats and put an end to President Joe Biden's legislative ambitions. But 27 races are yet to be determined, including 16 of the most competitive based on a Reuters compilation of the leading nonpartisan forecasters. The fate of the Senate, meanwhile, rests with a trio of fiercely contested states. Either party can win a majority by sweeping the races in Nevada and Arizona, where counting late-arriving ballots is expected to last several more days.”

November 9 – Reuters (Howard Schneider): “Potential Republican control of at least one chamber of the U.S. Congress sets the stage for economically risky battles in 2023 over federal spending limits and the government's response should a recession develop. Results of Tuesday's election remain uncertain, with President Joe Biden's Democratic Party performing better than expected and potentially in position to retain control of the Senate. The Republican Party had a better chance winning a majority in the House of Representatives, and if that happens, it would likely complicate and temper Biden's economic plans for his second two years in office - a time during which the economy will likely still be undergoing an inflation shock and adjusting to the rising interest rates imposed by the Federal Reserve to control it.”

Federal Reserve Watch:

November 10 – Bloomberg (Catarina Saraiva, Craig Torres and Steve Matthews): “The Federal Reserve looked closer to moderating aggressive interest-rate increases after welcome news on inflation, with four officials backing a downshift even as they stressed that monetary policy needs to stay tight. ‘While I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy,’ Dallas Fed President Lorie Logan told a conference… ‘This morning’s CPI data were a welcome relief, but there is still a long way to go,’ Logan said. Not only is inflation far above the Fed’s 2% target, ‘but with aggregate demand continuing to outstrip supply, inflation has repeatedly come in higher than forecasters expected.’”

November 10 – Bloomberg (Catarina Saraiva, Craig Torres and Steve Matthews): “Federal Reserve Bank of Cleveland President Loretta Mester said while she was encouraged by October’s better-than-expected inflation report, she remains more concerned the central bank could fail to sufficiently tighten monetary policy. ‘Given that inflation has consistently proven to be more persistent than expected and there are significant costs of continued high inflation, I currently view the larger risks as coming from tightening too little,’ Mester said…”

November 9 – Reuters (Ann Saphir): “Minneapolis Federal Reserve Bank President Neel Kashkari… said it's ‘entirely premature’ to discuss any pivot away from the Fed’s current policy tightening, even as he appeared to endorse the possibility of adjusting the size of future rate hikes. ‘I think we are on a good path right now: I think we are united in our commitment to getting inflation back down to 2%,’ Kashkari said…”

November 10 – Bloomberg (Craig Torres): “Federal Reserve Bank of Philadelphia President Patrick Harker said he expects the central bank to slow the pace of interest-rate hikes in upcoming months as US monetary policy approaches restrictive levels. ‘In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance,’ Harker said… ‘But I want to be clear: A rate hike of 50 bps would still besignificant.’”

November 9 – Reuters (Howard Schneider): “The U.S. is likely at the ‘back end’ of the current inflation surge though it remained unclear how long it may take the rate of price increases to decline to the Fed's 2% target, Richmond Federal Reserve president Thomas Barkin said… ‘My personal hypothesis is that we are on the back end’ of the surge that has pushed consumer price increases to a 40-year high, Barkin said. How high the Fed needs to raise interest rates to fix the problem is ‘highly related to how malleable you think inflation is going to be’ to things like improvements in supply chains or other factors, Barkin said, ‘That is a question we are trying to figure out.’”

U.S. Bubble Watch:

November 11 – Bloomberg (Augusta Saraiva): “US consumer inflation expectations in the short and long run increased in early November, while sentiment retreated to a four-month low amid rising borrowing costs. Consumers expect prices will climb at an annual rate of 3% over the next five to 10 years, up from 2.9% in October and the highest in five months, the University of Michigan’s preliminary November survey showed... They see costs rising 5.1% over the next year, compared to last month’s 5%. The sentiment index dropped to 54.7, worse than all forecasts…, from 59.9 in October. ‘Continued uncertainty over inflation expectations suggests that such entrenchment in the future is still possible,’ Joanne Hsu, director of the survey, said…”

November 9 – Bloomberg (Lizzie Kane): “First-time buyers are spending far more than recommended on mortgage payments after borrowing costs in the US surged. Those consumers typically spent 37.8% of their income on mortgage payments in the third quarter, up from 36.8% in the prior period, the National Association of Realtors said... The group said the payments are considered unaffordable if the monthly bill… is more than 25% of a family’s income. Potential buyers are facing an affordability crunch as mortgage rates have more than doubled this year… Now, the monthly mortgage bill on a typical existing single-family home with a 20% down payment totals $1,840, about $614 more than a year ago.”

November 9 – Bloomberg (Molly Smith): “US mortgage rates resumed an upward trend last week toward a two-decade high, pointing to further weakness in housing demand… The contract rate on a 30-year fixed mortgage increased to 7.14% in the week ended Nov. 4, near the highest since 2001… The overall measure of applications, which includes refinancing, slipped and is the weakest since 1997. An index of refinancing activity fell to a 22-year low.”

November 10 – Wall Street Journal (Nicole Friedman): “U.S. home-price growth slowed sharply in the third quarter, the National Association of Realtors said…, as home-buying affordability remained near its lowest level in decades. Nationwide, the median sales price of an existing single-family home last quarter was up 8.6% from a year earlier to $398,500, according to NAR, a slowdown from the second quarter’s 14.2% pace.”

November 7 – CNBC (Diana Olick): “Rising mortgage rates, high home prices and uncertainty in the overall economy have Americans feeling more pessimistic about the state of the housing market. In October, just 16% of consumers said they thought now is a good time to buy a home, according to a monthly survey by Fannie Mae. That is the lowest share since the survey began in 2011… Fannie Mae’s survey looks not just at buying and selling but tests sentiment about home prices, mortgage rates and the job market. It combines them all into one number, which also fell for the eighth straight month and now sits at a new low.”

November 7 – Bloomberg (Reade Pickert): “US consumer borrowing rose in September by less than expected… Total credit increased $25 billion from the prior month, Federal Reserve figures showed… The median forecast… called for a $30 billion advance. Revolving credit outstanding, which includes credit cards, rose $8.3 billion, the smallest increase in four months. Non-revolving credit, such as loans for school tuition and vehicle purchases, increased $16.7 billion, the most in three months.”

November 8 – CNBC (Phil LeBeau): “With inflation cutting into the budgets of Americans, a growing percentage of people with auto loans are struggling to make their monthly payments. TransUnion, which tracks more than 81 million auto loans in the U.S., said… the percentage of loans that are at least 60 days delinquent hit 1.65% in the third quarter, the highest rate for 60-day delinquencies in more than a decade… In September, the average transaction price for a new vehicle was $47,138, up almost $2,600 compared with the year-earlier period… The average price paid for a used vehicle was $30,566, a jump of almost $2,500 from September 2021.”

November 8 – Reuters (Lindsay Dunsmuir): “U.S. small-business confidence edged down in October as stubbornly high inflation weighed on sentiment and more owners forecast a deteriorating outlook for the economy… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 0.8 point to 91.3 last month to the lowest level since July… Thirty-three percent of owners reported that inflation was the single most important issue in operating their business, up three points from September and four points below July's reading, which was the highest share since the fourth quarter of 1979.”

November 8 – CNBC (Diana Olick): “The historic run-up in home prices during the first two years of the pandemic gave homeowners record amounts of new home equity. Since May, however, about $1.5 trillion of that has vanished, according to Black Knight… The average borrower has lost $30,000 in equity. Homeowner equity peaked at $17.6 trillion collectively last May, after home prices jumped 45% since the start of the pandemic. At the end of September, prices were still up 41%, and equity was still quite strong. Borrowers who bought their homes before the pandemic collectively have $5 trillion more than they did before the pandemic hit. That translates to a gain of $92,000 more equity per borrower than in February of 2020.”

November 10 – Bloomberg (David Brooke): “New players raising money for private credit funds face a tough battle for market share, and are often focusing on small niche areas instead of fighting for the biggest deals. Big-name asset managers have an outsized proportion of the capital in the $1.3 trillion private credit industry because they’ve been managing funds in the space for years. That gives them an edge in developing relationships with private-equity firms, a key way to find loans to invest in. This risk isn’t stopping the relative newbies. It’s too hard to pass up the opportunity to offer loans on far better terms than just a few years ago, as higher interest rates tilts the balance of power shifts back to credit providers.”

Fixed Income Watch:

November 6 – Wall Street Journal (Matt Wirz): “It is quiet on Wall Street. Too quiet. Autumn is usually one of the busiest times of the year in finance but new stock sales, debt raises and corporate mergers all slowed to a trickle in recent weeks. The supply of cash that fuels such deals is evaporating and the slowdown likely is here to stay, bankers, investors and corporate lawyers say. Markets are stalling because the price of borrowed money is spiking… The policy has yet to damp consumer spending. But it is punishing U.S. companies that have accumulated a debt mountain exceeding $10 trillion, much of it in the past decade when the Fed kept interest rates near zero. North American companies will have to come up with at least $155 billion in 2022 and 2023 to cover rising interest expenses…”

November 7 – Bloomberg (Paula Seligson): “Equity Residential, one of the biggest apartment landlords in the US, normally finds refinancing its bank loans to be easy. This year, it was a longer journey. For the company’s $2.5 billion backup line of credit known as a revolver, lenders have historically treated the process like a formality or an administrative task, Chief Financial Officer Robert Garechana said… This time, there were many more discussions, often focusing on what business banks would get from the company in return, he said.”

November 10 – Bloomberg (Hadriana Lowenkron and Steven Church): “Chester, Pennsylvania, a city just outside of Philadelphia that’s been contending with financial distress for decades, filed for bankruptcy protection because of a massive debt to its employee pension funds.”

China Watch:

November 17 – Bloomberg (Myungshin Cho): “China’s total debt as a percentage of gross domestic product climbed to new record high of 272.1% in the third quarter, surpassing the previous record of 271% just a quarter ago… The country’s macro leverage ratio -- the percentage of debt in households, non-financial enterprises and governments to total GDP -- rose by more than a full percentage point from the previous quarter.”

November 8 – Financial Times (Primrose Riordan, Chan Ho-him, Qianer Liu and Gloria Li): “Jimmy sat on the dusty floor of his Guangdong mill chasing down the money he was still owed. His workers had been paid off, the machinery sold and even the office furniture removed after he shut the factory’s doors in October for the last time. ‘The decline in orders and the constant lockdowns were all reasons why I wanted to close the factory… But most of all, it felt like there was no hope. There was no sign of a rebound.’ Factory managers in southern China are reporting a fall in orders in October of as much as 50% on the back of full inventories in the US and Europe, deepening the gloomy outlook...”

November 11 – Bloomberg: “China reduced the amount of time travelers and close contacts of virus cases must spend in quarantine, and pulled back on testing, in a significant calibration of the Covid Zero policy that has upended the world’s second-largest economy and raised public ire. The changes, detailed in a 20-point playbook for officials, seem aimed at both reducing the country’s global isolation and easing the impact of virus mitigation measures on the ground. One of the most notable shifts will see the time travelers into China are required to spend in quarantine cut to five days in a hotel or government facility, followed by three days confined to home…”

November 10 – Bloomberg: “China’s top leaders reinforced the need to stick with the contentious Covid Zero policy, while urging officials to be more targeted with their restrictions so as to avoid damage to the economy. In a meeting of the new Politburo Standing Committee chaired by President Xi Jinping, the members… called for ‘more decisive’ measures to curb the spread of the virus so as to resume normal life and production as soon as possible, according to the Xinhua News Agency. The Covid situation ‘remains severe’ as cases keep emerging, they said.”

November 6 – Financial Times (Cheng Leng): “Beijing has quashed hopes for an immediate easing of the country’s rigid zero-Covid restrictions, setting China-linked shares up for more volatile trading on Monday, analysts said. China’s National Health Commission reiterated the country’s commitment to eliminating Covid-19… and warned that the situation was set to become even ‘more severe and complex’ as the country entered the winter flu season. ‘Practice has proved that our pandemic prevention and control strategy . . . [is] completely correct, and such measures are proven the most economical and effective,’ said Hu Xiang, an official with the NHC.”

November 11 – Bloomberg: “China’s daily infection rate exceeded 10,000 for the first time since April, with Beijing’s cases at the highest level in more than a year… The capital reported 114 new cases for Thursday… Nationwide, there were 10,243 new infections, the highest since April 28.”

November 9 – CNN (Nectar Gan): “China’s southern metropolis of Guangzhou has locked down a third district, as authorities rush to stamp out a widening Covid outbreak and avoid activating the kind of citywide lockdown that devastated Shanghai earlier this year. Guangzhou reported 2,637 local infections on Tuesday… The city of 19 million has become the epicenter of China’s latest Covid outbreak, logging more than 1,000 new cases – a relatively high figure by the country’s zero-Covid standards – for four straight days.”

November 8 – Reuters (Liangping Gao and Liz Lee): “China's factory gate prices for October dropped for the first time since December 2020, and consumer inflation moderated, underlining faltering domestic demand as strict COVID curbs, a property slump and global recession risks hammered the economy… The producer price index (PPI) fell 1.3% year-on-year, reversing from a 0.9% gain a month earlier…, and compared with a forecast of a 1.5% contraction…”

November 11 – Bloomberg: “Chinese regulators told the nation’s second-tier banks to dole out another 400 billion yuan ($56bn) of financing for the property sector in the final two months of the year, adding to a raft of support measures that have stoked recent gains in the beleaguered industry’s stocks and bonds. The money -- in the form of loans, mortgages and bond investments -- adds to the $85 billion of net financing that the country’s six largest lenders were told to extend in September, people familiar with the matter said…”

November 9 – Bloomberg: “China’s deepening property crisis is piling pressure on a $1.6 trillion corner of the country’s onshore bond market, as cities and local administrations step in as white knights to bail out troubled developers in a state-backed bid to aid the sector. After replacing builders as the biggest buyers of land earlier this year, the nation’s so-called local government financing vehicles, or LGFVs, have now become the main purchasers of half-finished projects of defaulters including China Evergrande Group. Their increasing involvement in real estate has analysts raising red flags.”

November 8 – Bloomberg (Ailing Tan): “The amount of dollar bonds from Chinese issuers yielding more than 15% has totaled $74.6 billion… Nearly 79% amount from 188 bonds with such yield were issued by real estate firms. Country Garden Holdings Co Ltd topped all issuers with 16 bonds on the list…”

November 7 – New York Times (Li Yuan): “For decades, China’s business class had an unspoken contract with the Communist Party: Let us make money and we’ll turn a blind eye to how you use your power. Like most Chinese people, they bought into the party’s argument that its one-party rule provides more efficient governance. Now, the tacit agreement that entrepreneurs had come to count on is dissolving in front of their eyes. China’s leader, Xi Jinping, used an important Communist Party congress last month to establish near-absolute power and make it clear that security will trump the economy as the nation’s priority. ‘My last lingering hope was dashed,’ said the founder of an asset management firm in the southern city of Shenzhen who contacted me hours after the congress ended. ‘Totally finished, completely lost control and absolutely terrifying,’ a tech entrepreneur in Beijing texted me after seeing the party’s new leadership lineup, which is packed with Mr. Xi’s acolytes.”

November 10 – Financial Times (William Langley): “The wealth of China’s 100 richest people shrank by more than a third in 2022, as Beijing’s zero-Covid policy, faltering economic growth and a push for ‘common prosperity’ dented valuations of top companies and ate into private wealth. The fortunes of the country’s wealthiest tycoons fell 39% to $907.1bn from $1.48tn last year… It was the biggest decline since the publication started compiling its China’s 100 Richest list more than 20 years ago.”

November 7 – Reuters (Brenda Goh): “China's super-rich saw their wealth tumble by the most in over two decades this year, as the Russia-Ukraine war, Beijing's zero-COVID measures and falling mainland and Hong Kong stock markets pummelled fortunes, an annual rich list said… The Hurun Rich list, which ranks China's wealthiest people with a minimum net worth of 5 billion yuan ($692 million), said only 1,305 people made the mark this year, down 11% from last year. Their total wealth was $3.5 trillion, down 18%.”

November 7 – Bloomberg (Shawna Kwan): “The slump in Hong Kong’s property market is accelerating as borrowing costs rise. The Centaline gauge of secondary home prices fell 2% in the week ending Oct. 30 from the previous week, the most since March 2016… The drop took the index to its lowest level since December 2017. Hong Kong property was among the biggest beneficiaries of low global interest rates, with the Centaline gauge surging more than 500% from its 2003 low to last year’s high.”

Central Banker Watch:

November 8 – Financial Times (Martin Arnold): “Senior European Central Bank policymakers have said they expect interest rates to rise beyond the point at which they constrain demand and weaken growth to bring down inflation, rebuffing criticism from eurozone politicians of moves to tighten monetary policy. The comments from several members of the ECB’s rate-setting governing council push back against the idea it could do a ‘dovish pivot’ and stop raising rates soon… German central bank boss Joachim Nagel said… that he would do all he could to ensure that the ECB would ‘press ahead with monetary policy normalisation with determination — even if our measures dampen economic growth’.”

November 8 – Financial Times (Delphine Strauss and Chris Giles): “The Bank of England’s chief economist has admitted that the central bank’s decisions to prolong quantitative easing in the coronavirus pandemic may have contributed to the past year’s surge in inflation. Giving evidence to the House of Lords’ economic affairs committee…, Huw Pill said the UK’s double-digit inflation largely resulted from the increase in wholesale gas prices in Europe… But he added that decisions taken by the BoE before he joined its Monetary Policy Committee — including repeated rounds of quantitative easing over the course of the pandemic — could have worsened the central bank’s overshoot of its 2% target.”

Global Bubble Watch:

November 10 – Financial Times (Song Jung-a and Christian Davies): “South Korean companies are struggling to refinance maturing debts after a sell-off was triggered by the default of a Legoland theme park developer and the announcement by a midsized insurer that it would not exercise a call option on its perpetual notes. Yields on top-rated five-year Korean corporate debt have surged 157 bps in the three months through October — the worst spike on record… The country’s offshore bonds, seen as a relatively safe bet in the region, are seeing spreads widen, while the cost to insure five-year sovereign debt against default has almost doubled since mid-September.”

November 9 – Bloomberg (Lorretta Chen and Ameya Karve): “The bonds may be ‘perpetual,’ but the headaches they caused in Asia in early November were immediate: An obscure South Korean insurer bucked convention by initially opting not to pay investors back, in a wakeup call that a wave of firms could follow suit. That sent prices on many ‘perps’ tumbling by a record. Signs that the Federal Reserve would guide interest rates even higher than expected worsened the rout. The turmoil was a reminder to global investors that securities that are unremarkable parts of the financial plumbing in normal times can present unexpected risks when pressures build.”

November 9 – Bloomberg (Harry Suhartono): “The bonds of Indonesian property companies are slumping, adding to signs of property debt distress that’s been deepening in China, South Korea and Vietnam. Agung Podomoro’s 2024 dollar bond extended extended a slump this week, declining by 6.7 cents in what’s poised to be the worst fall since July 2021. That brings the notes to a record low of 37 cents on the dollar… The mounting strains come as property firms in more countries grapple with slower sales and higher borrowing costs.”

November 6 – Wall Street Journal (James Glynn): “Australia, New Zealand and Canada are home to three of the biggest property booms in recent history, having survived the global financial crisis, recession and Covid-19 pandemic. They might have finally met their match, however, at the hands of an unprecedented pace of global monetary tightening. While home prices have been strong around the world for decades, these three stand out… Since 1990, home prices in Australia, New Zealand and Canada are up 532%, 602% and 331%, respectively, compared with 289% for the U.S., according to… Oxford Economics.”

Europe Watch:

November 6 – Reuters (Gergely Szakacs and Anna Wlodarczak-semczuk): “While inflation in western Europe is largely expected to be tamed within a year, there is a growing sense that in central Europe runaway prices will be around for much longer. Central and eastern Europe have for months been at the forefront of the inflation battle… The latest inflation readings in the region ranged from nearly 16% in Romania to just over 20% in Hungary, way above central bank target bands ranging from 1% to 4%.”

November 8 – Associated Press (Elena Becatoros): “Workers walked off the job in Greece and Belgium on Wednesday during nationwide strikes against increasing consumer prices, disrupting transportation, forcing flight cancellations and shutting down public services in the latest European protests over the rising cost of living. In Greece… thousands of protesters marched through the streets of Athens and the northern city of Thessaloniki. Brief clashes broke out at the end of demonstrations in both cities…”

EM Crisis Watch:

November 8 – Bloomberg (Marc Jones): “China's property crisis and the West's sanctions on Russia will drive a respective 20% and 66% of these two countries' ‘junk-rated’ companies into default next year, analysts at JPMorgan have estimated. Their woes will also mean emerging markets overall will see a more than 10% ‘high-yield’ corporate default rate for another year… ‘We expect another high default year in 2023 focused on specific segments,’ JPMorgan's analysts said in a research note… that describes China and Russia as the ‘trouble spots’.”

November 7 – Bloomberg (Stephen Stapczynski, Anna Shiryaevskaya, and Faseeh Mangi): “Bills will be high, but Europe will survive the winter: It’s bought enough oil and gas to get through the heating seasons. Much deeper costs will be borne by the world’s poorest countries, which have been shut out of the natural gas market by Europe’s suddenly ravenous demand. It’s left emerging market countries unable to meet today’s needs or tomorrow’s, and the most likely consequences — factory shutdowns, more frequent and longer-lasting power shortages, the foment of social unrest — could stretch into the next decade. ‘Energy security concerns in Europe are driving energy poverty in the emerging world,’ said Saul Kavonic, an energy analyst at Credit Suisse Group AG. ‘Europe is sucking gas away from other countries whatever the cost.’”

Japan Watch:

November 9 – Reuters (Leika Kihara): “Bank of Japan (BOJ) Governor Haruhiko Kuroda said… any future debate on an exit from ultra-loose monetary policy will centre on the pace of increase in short-term interest rates and adjustments in the bank's massive balance sheet. Kuroda brushed aside the chance of a near-term interest rate hike, stressing that the BOJ must continue to underpin a fragile economic recovery with loose monetary policy.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 6 – Bloomberg (Laura Millan Lombrana): “A catastrophic acceleration in global warming unleashed ‘climate chaos’ across the planet this year — a signal that the window to act is closing, the UN warned… Global temperatures in 2022 are likely to end about 1.15C above the average in pre-industrial times, making it the fifth or sixth hottest year on record, according to the… UN’s World Meteorological Organization. High heat levels in 2022 were particularly worrying as they happened under the second consecutive year of La Niña conditions, which tend to help keep temperatures low. ‘The latest State of the Global Climate report is a chronicle of climate chaos,’ UN Secretary General António Guterres said… ‘Change is happening with catastrophic speed, devastating lives and livelihoods on every continent.’”

November 7 – Reuters (William James, Valerie Volcovici and Simon Jessop): “World leaders and diplomats framed the fight against global warming as a battle for human survival during opening speeches at the COP27 climate summit in Egypt…, with the head of the United Nations declaring a lack of progress so far had the world speeding down a ‘highway to hell’. The stark messages, echoed by the heads of African, European and Middle Eastern nations alike, set an urgent tone as governments began two weeks of talks… to figure out how to avert the worst of climate change. ‘Humanity has a choice: cooperate or perish,’ U.N. Secretary General Antonio Guterres told delegates, urging them to accelerate the transition from fossil fuels and speed funding to poorer countries…”

November 10 – Financial Times (Leslie Hook): “Global carbon dioxide emissions will hit a record high this year, in spite of a drop in China’s emissions, as the world increased its coal use and economic activity continued to pick up post-coronavirus. Carbon dioxide emissions from energy will rise 1% to reach 37.5bn tonnes in 2022 — with the biggest increases coming from India and the US, according to… the Global Carbon Project, a coalition of international climate science bodies.”

November 7 – Wall Street Journal (Eric Niiler): “The last eight years have each been warmer than all years before that period on record, according to a report by the World Meteorological Organization… The WMO, which is a branch of the U.N., combined multiple scientific studies to compare temperatures since record-keeping began in the late 19th century. The group also reported that the rate of sea-level rise has doubled since satellite measurements began in 1993. European glaciers are expected to suffer a record melt in 2022. Greenland’s ice sheet experienced rainfall, rather than snow, for the first time in September.”

November 10 – Reuters (Nancy Lapid): “The risk of death, hospitalization and serious health issues from COVID-19 jumps significantly with reinfection compared with a first bout with the virus, regardless of vaccination status, a study… suggests. ‘Reinfection with COVID-19 increases the risk of both acute outcomes and long COVID,’ said Dr. Ziyad Al-Aly of Washington University School of Medicine in St. Louis. ‘This was evident in unvaccinated, vaccinated and boosted people’… Reinfected patients had a more than doubled risk of death and a more than tripled risk of hospitalization compared with those who were infected with COVID just once. They also had elevated risks for problems with lungs, heart, blood, kidneys, diabetes, mental health, bones and muscles, and neurological disorders, according to a report published in Nature Medicine.”

Leveraged Speculation Watch:

November 7 – Financial Times (Antoine Gara): “Losses at Tiger Global Management continued to mount in October after the… hedge fund was buffeted by the whipsawing value of technology stocks in the US and a sell-off in China. The firm’s flagship hedge fund lost 5.4% in October, taking losses this year to a new low of 54.7%... A ‘crossover’ fund that mixes publicly traded technology holdings without any hedges and Tiger’s private equity investments fell 4% in October, putting year-to-date losses at 44%, another new low…”

Geopolitical Watch:

November 7 – Reuters (Hyonhee Shin and Josh Smith): “North Korea said… its recent missile launches were simulated strikes on South Korea and the United States as the two countries held a ‘dangerous war drill’, while the South said it had recovered parts of a North Korean missile near its coast. Last week, North Korea test-fired multiple missiles, including a possible failed intercontinental ballistic missile (ICBM), and hundreds of artillery shells into the sea, as South Korea and the United States carried out six-day air drills that ended on Saturday.”

November 6 – Bloomberg (Hal Brands): “If China were to attack Taiwan, it wouldn’t just have to face a hostile superpower. It would also likely have to confront its longstanding regional rival, Japan. For centuries, Japan and China have vied for hegemony in East Asia; at times, they have threatened each other’s survival. Today, as I found from three days of meetings with Japanese officials and analysts in Tokyo, the threat of Chinese aggression is producing a quiet revolution in Japanese statecraft — and pushing the nation to get ready for a fight. For the US, China is a dangerous but distant challenge. For Japan, China is the existential danger next door. Years before American leaders were proclaiming the return of great-power rivalry, Japanese officials were warning that Beijing was up to no good. As China’s capabilities become more formidable and its conduct in the Taiwan Strait more menacing, Tokyo’s concerns grew more acute.”

November 6 – Reuters (Parisa Hafezi): “Hardline Iranian lawmakers urged the judiciary on Sunday to ‘deal decisively’ with perpetrators of unrest, as the Islamic Republic struggles to suppress the biggest show of dissent in years. Widespread anti-government demonstrations erupted in September after the death of young Kurdish Iranian woman Mahsa Amini, who had been detained by morality police for allegedly flouting the strict dress code imposed on women.”

Friday Afternoon Link

[Reuters] S&P 500, Nasdaq extend gains on Fed slowdown bets

[Yahoo/Bloomberg] Crypto Markets Buckle as FTX Bankruptcy Spurs Search for Casualties

[Reuters] Crypto stocks slide as FTX prepares for bankruptcy proceedings

[Yahoo/Bloomberg] Bankman-Fried Resigns From FTX, Puts Empire in Bankruptcy

[Reuters] FTX files U.S. bankruptcy proceedings, CEO exits

[Yahoo Finance] The chances of a messy debt ceiling fight have gone up because of midterms

[Reuters] Ukrainian troops met with joy in Kherson as Russia abandons biggest prize

[WSJ] FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall

[FT] Sam Bankman-Fried’s $32bn FTX crypto empire files for bankruptcy