Friday, November 18, 2022

Weekly Commentary: SBF, FTX and QE

An outlandish aberration, or a distressing sign of the times - and of what’s to come? Curious readers for centuries have been fascinated by the great 17th century Dutch Bubble. “At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled artisan.” Seems rather quaint when compared to today’s world of boundless digital tokens. The FTX collapse has been called crypto’s “Lehman Moment.” Odds favor the downfall having more in common with the March 2008 Bear Stearns implosion.

A $32 billion empire. The 30-year-old wunderkind Sam Bankman-Fried’s net worth estimated at $16 billion a couple short weeks ago (down from a $26bn peak). Sharing the stage with Bill Clinton and Tony Blair, in his signature attire - shorts, t-shirt and sneakers (hoodies so last cycle). The son of Stanford Law School professors, “SBF” graduated from MIT (physics). He founded his hedge fund trading firm, Alameda Research, at 25, after four years trading at Jane Street. Launched his crypto exchange, FTX, in May 2019.

As fate would have it, the Federal Reserve would restart QE a few months after FTX began operations. The cryptocurrency Bubble was then bestowed with the greatest windfall in the long history of manias and speculative excess: Covid-19. The Fed unleashed $5 TN of pandemic QE, with many additional Trillions from the global central bank community.

It’s worth noting that Bitcoin was trading at about $5,200 when SBF announced plans for FTX, down significantly from the December 2017 spike to $19,000. There’s no way the crypto Bubble inflates into such a global phenomenon, if not for the Trillions of central bank “money printing.”

November 17 – Financial Times (Kadhim Shubber, Joshua Oliver and Sujeet Indap): “The new chief executive of FTX, an insolvency professional who oversaw the liquidation of Enron, has said that the bankruptcy of the crypto group is the worst case of corporate failure he has seen in more than 40 years. John Ray III, who was appointed to run the FTX bankruptcy, said in a US court filing that he had never seen ‘such a complete failure of corporate controls and such a complete absence of trustworthy financial information’. Ray said he had found at FTX international, FTX US and Bankman-Fried’s Alameda Research trading company ‘compromised systems integrity’, ‘faulty regulatory oversight abroad’ and a ‘concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals’. The scathing filing in the federal bankruptcy court in Delaware painted a picture of severe mismanagement by Bankman-Fried at FTX, which raised billions of dollars from top-tier venture capital investors such as Sequoia, SoftBank and Temasek.”

“This situation is unprecedented.” From someone who would know, FTX at least in some respects makes even Enron accounting and corporate controls look wholesome. SBF doesn’t strike me as the Ken Lay, Jeffrey Skilling or Andrew Fastow type, which makes this financial fiasco all the more intriguing. It’s difficult to believe laws weren’t broken. Yet the more critical issue is the outrageousness of behavior that is these days accepted as within the realm of acceptable conduct.

FTX’s new CEO (John Ray III), with decades of experience, had never heard of the auditor who provided an opinion on the company’s international trading platform financials. When he went to the Prager Metis website, he learned the auditor was the “first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.” Sophisticated Wall Street firms invested and lent billions to FTX. One would think that if you choose to shower a young guy in shorts and a t-shirt with money, you’d at least demand audited financials from reputable CPAs in suits and ties.

Bankruptcy filings revealed Alameda had extended $4.1 billion of related-party personal loans, including $1 billion directly to SBF and another $2.3 billion to an entity majority owned by SBF (the remainder to three company executives). There are early reports of an $8 to $10 billion hole in FTX finances, with talk of customer balances being funneled to prop up the troubled hedge fund affiliate (Alameda). Other reporting has customer balances flowing directly to Alameda, completely bypassing FTX. SBF kept tweeting away, when he would have been better served holed up in his attorney’s office.

Corporate funds “were used to purchase homes and other personal items for employees and advisors.” There was talk early in the week of SBF’s $40 million Bahama’s penthouse hitting the market.

And from MarketWatch: “As of Thursday, [CEO] Ray made clear that while he now controls the various FTX trading and exchange platforms and Bankman-Fried’s crypto hedge fund Alameda Research, he’d ‘located and secured only a fraction of the digital assets’ he hoped to recover. In fact, Ray said only some $740 million of cryptocurrency had been secured in new cold wallets. Ray cited at least $372 million of unauthorized transfers that had taken place on the day FTX and Alameda filed for bankruptcy last week, and the ‘dilutive ‘minting’ of approximately $300 million in FTT tokens by an unauthorized source’ in the days after the filing. FTT tokens were created by FTX to facilitate trading on its exchange and made up a big chunk of Alameda’s assets.”

New tokens have been big business – monstrously big. Create a new token, distribute a small percentage to trade up in price on the crypto exchanges, and then impute the value of the entire big chunk of illiquid tokens based on the price of the trading ones. Use these prized tokens as collateral for loans, liquidity for new speculative assets, or to underpin crypto market prices.

And with your trading affiliate making an absolute killing levering in inflating tokens, why not offer favorable market-making terms to your exchange affiliate customers, boosting the appeal of this rapidly expanding business? While you’re at it, you might as well use some of this bonanza to fund crypto startups and ventures that will work to shore up your ecosystem/dynasty. Give generously to political campaigns and promote regulation, while showcasing enough altruism and charm to ensure you are perceived as “one of the good guys.”

And this game works miraculously, so long as crypto prices continue to inflate. But like much of contemporary finance, it doesn’t work in reverse. Deflating token prices rather quickly put the dynasty - the whole charade - in grave danger. Desperation and denial. We’ll fudge, but get everything ironed out as soon as token prices recover. Crisis of Confidence and Contagion.

Let there be no doubt, if you can create tokens valued in the billions out of thin air, you can go collarless, disregard sound accounting and control, retain your auditor from the metaverse, buy political influence and milk a million unsuspecting crypto speculators out of their savings. But please explain the genesis for such a carefree environment conducive to creating token prosperity out of nada?

The great crypto inflation is close enough to a direct offshoot of central bank QE. Both are black box money machines, where the reality of nil wealth creation is no match for the fantasy of prosperity for the taking. Central banks create their own new “tokens”, and these liabilities bolster the value of other financial tokens (assets) generally, while underpinning the market value of central bank assets and balance sheets (especially those levered in “tokens”).

We have often discussed how central bank liquidity/buying power inflates various price levels, certainly including crypto. But I also believe decades of central bank inflationism nurtured the late-cycle “money for nothing” zeitgeist that enveloped societies at home and abroad. You’re a chump if you are not making money (thousands to billions) creating or trading inflating “tokens” (crypto, stocks, bonds, options, ETFs, etc.)

FTX is but a microcosm. Zero rates and Trillions of QE – literally free “money” – created the most powerfully destructive financial incentives ever. And this was not the “old” days of egregiously playing fast and loose with the rules to accumulate millions. We’re talking incentives hyper-inflation. Things got so crazy that billions upon billions were just scattered about for the taking. Create tokens, leverage those tokens to speculate in tokens – and you’ve quickly joined the inflating ranks of the multi-billionaires.

Of course, the enterprising will leap at such opportunities. Indeed, there’ll be frenzied leaping far and wide. And the leapers will become intoxicated by unfathomable wealth, lose all perspective, and succumb to some crazy immoral, unethical and legally-challenged activities. It’s like the past, just so, so much bigger. Systemic. In the grand scheme of things, crypto is just the fringe - little different than past fiascos. And things will be much worse than even the direst naysayers foretell. I worry about the entire financial structure.

Not much talk lately of the “macro-prudential” measures that were to safeguard financial stability as the Fed pursued zero rates and QE to bolster the economy. The infuriating aspect of this is that “macro-prudential” was clearly BS from the get-go. Zero rates and Trillions of QE unleashed history’s greatest bout of monetary disorder. Some of the costs of this fiasco have begun to be revealed.

While the crypto Bubble implodes, the “risk on” market rally is, understandably, making the Fed nervous.

November 17 – CNBC (Jeff Cox): “St. Louis Federal Reserve President James Bullard said… the central bank still has a lot of work to do before it brings inflation under control. A voting member on the rate-setting Federal Open Market Committee, Bullard delivered remarks centered on a rules-based approach to policymaking. Using standards set by Stanford economics professor John Taylor, Bullard insisted that the moves the Fed has made so far are insufficient. ‘Thus far, the change in the monetary policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023,’ he said. Even using assumptions he characterized as ‘generous’ regarding the progress the Fed has made so far in its inflation fight, he noted in a series of slides that ‘the policy rate is not yet in a zone that may be considered sufficiently restrictive.’ ‘To attain a sufficiently restrictive level, the policy rate will need to be increased further,’ he added…”

It's noteworthy that Bullard was one of the first Fed officials that had the markets thinking “pivot” following the UK’s brush with bond market collapse. The Fed is wishful thinking if it actually believes it can fine tune these markets. We’re in a highly-charged “risk on” v. “risk off” standoff. Instability and an Accident in the Making.

November 14 - Bloomberg (Lu Wang and Denitsa Tsekova): “Fast-money quants were effectively forced to buy an estimated $225 billion of stocks and bonds over just two trading sessions, as one of Wall Street’s hottest strategies in the great 2022 bear market shows signs of cracking. As cooling consumer price data sparked a cross-asset rally, trend-following traders were compelled to unwind short positions totaling about $150 billion in equities and $75 billion in fixed income on Thursday and Friday, JPMorgan… strategist Nikolaos Panigirtzoglou estimated.”

November 18 – MarketWatch (Joseph Adinolfi): “Equity options worth $2.1 trillion in notional value are set to expire on Friday in the latest monthly event where weekly and monthly options tied to single stocks, equity indexes and exchange-traded funds expire… Every month, a team of analysts from Goldman Sachs publishes a breakdown of the options that are expiring. And one of the most notable details from this month’s report is a chart showing how much trading has shifted to options contracts with 24 hours or less left before they expire. Trading in these types of options now represents 44% of all trading in options linked to the S&P 500 index. They now trade an average of $470 billion in notional value per day…”

It’s also worth noting that all the enthusiasm for China’s loosening of zero Covid now confronts the reality of surging Covid. China reported 24,473 new COVID infections Friday, the high since Shanghai’s massive April outbreak. Cases are spread out in cities across China.

November 15 – Associated Press: “China’s ruling party called for strict adherence to the hard-line ‘zero-COVID’ policy Tuesday in an apparent attempt to guide public perceptions after regulations were eased slightly in places. The People’s Daily, the Communist Party’s flagship newspaper, said in an editorial that China must ‘unswervingly implement’ the policy that requires mass obligatory testing and places millions under lockdown to try to eliminate the coronavirus from the nation of 1.4 billion people and the world’s second-largest economy.”

Holes are apparent in today’s bullish narrative.

For the Week:

The S&P500 dipped 0.7% (down 16.8% y-t-d), while the Dow was unchanged (down 7.1%). The Utilities increased 0.7% (down 5.6%). The Banks dropped 3.7% (down 19.9%), and the Broker/Dealers fell 2.7% (down 3.7%). The Transports lost 2.1% (down 13.5%). The S&P 400 Midcaps declined 0.8% (down 11.7%), and the small cap Russell 2000 fell 1.8% (down 17.6%). The Nasdaq100 declined 1.2% (down 28.4%). The Semiconductors dipped 1.1% (down 31.0%). The Biotechs slipped 0.8% (down 6.0%). With bullion down $21, the HUI gold equities index fell 3.2% (down 15.9%).

Three-month Treasury bill rates ended the week at 4.1325%. Two-year government yields jumped 20 bps to 4.54% (up 380bps y-t-d). Five-year T-note yields rose seven bps to 4.01% (up 275bps). Ten-year Treasury yields added two bps to 3.83% (up 232bps). Long bond yields fell nine bps to 3.93% (up 203bps). Benchmark Fannie Mae MBS yields increased three bps to 5.32% (up 325bps).

Greek 10-year yields dropped 27 bps to 4.25% (up 293bps y-t-d). Italian yields sank 31 bps to 3.90% (up 273bps). Spain's 10-year yields fell 19 bps to 3.01% (up 244bps). German bund yields declined 15 bps to 2.01% (up 219bps). French yields fell 19 bps to 2.48% (up 228bps). The French to German 10-year bond spread narrowed four to 47 bps. U.K. 10-year gilt yields dropped 12 bps to 3.24% (up 227bps). U.K.'s FTSE equities index rallied 0.9% (unchanged y-t-d).

Japan's Nikkei Equities Index declined 1.3% (down 3.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 gained 0.8% (down 7.1%). The German DAX equities index rose 1.5% (down 9.1%). Spain's IBEX 35 equities index increased 0.4% (down 6.7%). Italy's FTSE MIB index gained 0.9% (down 9.8%). EM equities were mostly lower. Brazil's Bovespa index dropped 3.0% (up 3.9%), and Mexico's Bolsa index slipped 0.7% (down 3.2%). South Korea's Kospi index fell 1.6% (down 17.9%). India's Sensex equities index slipped 0.2% (up 5.9%). China's Shanghai Exchange Index increased 0.3% (down 14.9%). Turkey's Borsa Istanbul National 100 index gained 1.6% (up 144%). Russia's MICEX equities index dipped 0.5% (down 41.7%).

Investment-grade bond funds posted outflows of $895 million, while junk bond funds reported inflows of $2.930 billion (from Lipper).

Federal Reserve Credit declined $13.5bn last week to $8.629 TN. Fed Credit was down $272bn from the June 22nd peak. Over the past 166 weeks, Fed Credit expanded $4.902 TN, or 132%. Fed Credit inflated $5.818 Trillion, or 207%, over the past 523 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.3bn to $3.308 TN - the low since June 2017. "Custody holdings" were down $160bn, or 4.6%, y-o-y.

Total money market fund assets added $3.0bn to $4.625 TN. Total money funds were up $47bn, or 1.0%, y-o-y.

Total Commercial Paper increased $8.0bn to $1.304 TN. CP was up $188bn, or 16.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates sank 52 bps to 6.56% (up 346bps y-o-y). Fifteen-year rates fell 40 bps to 5.98% (up 359bps). Five-year hybrid ARM rates collapsed 53 bps to 5.53% (up 304bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 6.85% (up 365bps).

Currency Watch:

For the week, the U.S. Dollar Index added 0.6% to 106.93 (up 11.8% y-t-d). For the week on the upside, the New Zealand dollar increased 0.7%, the British pound 0.5% and the Mexican peso 0.3%. On the downside, the Norwegian krone declined 2.6%, the Swedish krona 2.4%, the South Korean won 1.6%, the Swiss franc 1.4%, the Japanese yen 1.1%, the Brazilian real 0.9%, the Canadian dollar 0.7%, the Australian dollar 0.5%, the Singapore dollar 0.3%, the euro 0.2% and the South African rand 0.1%. The Chinese (onshore) renminbi declined 0.32% versus the dollar (down 10.73% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 1.8% (up 15.8% y-t-d). Spot Gold declined 1.2% to $1,751 (down 4.3%). Silver dropped 3.5% to $20.942 (down 10.2%). WTI crude slid $8.88 to $80.08 (up 7%). Gasoline sank 7.2% (up 9%), while Natural Gas jumped 7.2% to $6.30 (up 69%). Copper dropped 7.0% (down 18%). Wheat gained 1.0% (up 7%), and Corn rallied 1.1% (up 13%). Bitcoin declined $180 this week, or 1.1%, to $16,630 (down 64%).

Market Instability Watch:

November 14 – Financial Times (Kate Duguid and Tommy Stubbington): “Buying and selling in the world’s biggest bond market is supposed to be easy. However, for most of this year, says Gregory Whiteley, a bond portfolio manager at DoubleLine Capital, it has been anything but straightforward. Whiteley says a trader used to be able to get hold of $400mn of US Treasury bonds — not an outsize quantity in this $24tn market — as a routine matter. But now that typically involves breaking up the order into smaller chunks; perhaps doing $100mn of the trade electronically, he explains, and then… to see if they can prise the rest of the debt from the hands of Wall Street’s trading desks over the course of a day. The US Treasury bond market suffered a huge scare at the start of the coronavirus pandemic… Now as the Federal Reserve battles to rein in inflation, a recession looms and most asset prices have faced a dramatic sell-off, the world’s most important bond market is creaking once again. Liquidity in the market — one crucial measure of how well it is functioning — is at its worst levels since March 2020…”

November 13 – Financial Times (Steve Johnson): “Investors have poured record sums into high-risk leveraged funds this year in spite of the collapse in financial markets. The funds, designed to magnify any market gains, also deepen any losses if asset prices fall… Globally, investors pumped a net $28.3bn into leveraged and inverse exchange traded funds in the first nine months of the year…, equivalent to 5.4% of all purchases of ETFs. This is more than double 2021’s full-year tally of $13.2bn, which accounted for just 1.1% of last year’s bumper ETF flows, and comfortably above the full-year record of $17bn set in 2008.”

November 15 – Bloomberg (Kyungji Cho): “Stress in South Korea’s credit market is showing few signs of easing despite the government unveiling financial support totaling more than 50 trillion won ($38bn) in the past few weeks to help stabilize it. Yields on three-month commercial paper, the type of security that triggered the trouble, extended their climb on Tuesday. They increased to a new 13-year high of 5.21%... The lack of a reversal in market conditions constitutes a challenge for Korean authorities, who’ve unveiled a bevy of measures in the past few weeks -- including a 50 trillion won aid package -- to stabilize the market after the developer of an amusement park triggered a surge in short-term funding costs by missing a payment on asset-backed commercial paper.”

November 16 – Bloomberg (Charles Daly): “The funding crunch afflicting Sweden’s leveraged property sector intensified late on Wednesday after a privately owned landlord signaled it needed more time to repay bonds that fall due next year. In what may be among the first instances of real-estate worries spilling over to the country’s bond market, little-known property developer Sehlhall Holding AB turned to its creditors to amend terms on its debt. With about $10 billion of bonds falling due next year amid a spike in borrowing costs, Sweden’s commercial real-estate firms are scrambling to avert a financing squeeze by resorting to asset sales, spin offs and bank loans.”

UK Crisis Watch:

November 17 – Reuters (David Milliken, Andy Bruce and William Schomberg): “Britain faces a record hit to living standards this year as surging inflation erodes incomes, the country's budget forecasters warned, after finance minister Jeremy Hunt announced more pain, with tax rises now and spending cuts further ahead. In a bid to restore Britain's fiscal reputation after the chaos caused by former prime minister Liz Truss's plans for sweeping tax cuts, Hunt outlined a budget programme on Thursday to save 55 billion pounds a year to fix the public finances. Almost half the belt-tightening is due to come from tax increases, prompting some protests from within Prime Minister Rishi Sunak's ruling Conservative Party…”

November 16 – Reuters (Andy Bruce and William Schomberg): “Surging household energy bills and food prices pushed British inflation to a 41-year high, data showed a day before finance minister Jeremy Hunt announces ‘tough but necessary’ tax hikes and spending cuts to control price growth. Consumer prices rose 11.1% in the 12 months to October, the most since October 1981 and a big jump from 10.1% in September…”

Bursting Bubble and Mania Watch:

November 16 – Reuters (Angus Berwick, Anirban Sen, Elizabeth Howcroft and Lawrence Delevingne): “As customers withdrew billions of dollars from crypto exchange FTX one frantic Sunday this month, founder Sam Bankman-Fried worked the phones in a futile bid to raise $7 billion in emergency funds. Hunkered in his Bahamas apartment, Bankman-Fried toiled through the night, calling some of the world's biggest investors, including Sequoia Capital, Apollo Global Management Inc and TPG Inc… Sequoia was among investors that lined up only months before to pump money into Bankman-Fried's empire. But not now. Sequoia was shocked at the amount of money Bankman-Fried needed to save FTX, according to the sources, while Apollo first asked for more information, only to later decline.”

November 16 – Associated Press (Ken Sweet and Thalia Beaty): “Just days after cryptocurrency’s third-largest exchange collapsed, the public is starting to get an idea of how messy FTX’s bankruptcy case could be. Other crypto firms are failing as a result of FTX’s unraveling, events reminiscent of the domino-like meltdowns of the 2008 financial crisis. Users remained frustratingly in the dark Tuesday about when they might get their funds back, if at all, directing much of their anger toward FTX’s founder and CEO, Sam Bankman-Fried. In a court filing, FTX’s lawyers said there were already more than 100,000 claims against the company and estimated that figure could grow to more than 1 million, most of them customers, once the case is complete. The court ordered FTX to provide at least a list of the company’s 50 biggest creditors by Nov. 18.”

November 14 – Reuters (Ann Maria Shibu and Jaiveer Singh Shekhawat): “FTX founder and former Chief Executive Sam Bankman-Fried said he expanded his business too fast and failed to notice signs of trouble at the exchange, whose downfall sent shock waves through the crypto industry… ‘Had I been a bit more concentrated on what I was doing, I would have been able to be more thorough,’ Bankman-Fried said…”

November 14 – Bloomberg (Sidhartha Shukla and Tanzeel Akhtar): “The spectacular collapse of 30-year-old Sam Bankman-Fried’s crypto empire has fueled a spike in outflows across global crypto exchanges. Users yanked a net $3.7 billion worth of Bitcoin and $2.5 billion of Ether in the week from Sunday, Nov. 6 to Sunday, Nov. 13, according to… CryptoQuant. They withdrew more than $2 billion worth of many of the largest stablecoins over the same timeframe, according to CryptoQuant…”

November 17 – Reuters (Manya Saini): “The full extent of the fallout on the crypto industry from the collapse of Sam Bankman-Fried's FTX was yet to come out, Coinbase Global Inc Chief Financial Officer Alesia Haas told the Wall Street Journal… ‘What we are seeing now is a fallout of FTX is becoming much more like the 2008 financial crisis where it's exposing poor credit practices and is exposing poor risk management,’ Haas told the WSJ… It will take a few days or weeks to understand the full contagion of the event, Haas added.”

November 16 – Bloomberg (Vildana Hajric): “The billionaire Winklevoss twins, owners of the Gemini crypto exchange, have always portrayed themselves as the grownups in the room. The ones who ordinary investors could trust. None of that is sparing a chunk of Gemini’s customers from the fallout triggered by FTX’s collapse, which risks taking down a big swath of the industry. The trouble stems from a product called Gemini Earn -- which lets investors accrue as much as 8% in interest by lending out their crypto, including Bitcoin, Ether or stablecoins pegged to the dollar. It’s a kind of product, widely used throughout crypto, that looks and feels very much like high-yield savings accounts, but with far fewer safeguards if things go wrong… On Wednesday, in response to Genesis suspending withdrawals amid FTX’s spreading contagion, Gemini also halted redemptions from its Earn product. That left in limbo a program that, according to a person familiar with the matter, has $700 million of customer money tied up in it.”

November 16 – Financial Times (Nikou Asgari and Philip Stafford): “Genesis, which plays a key role in digital asset fixed income markets, said its decision to suspend redemptions and new loan originations followed ‘abnormal withdrawal requests which have exceeded our current liquidity’. The troubles at Genesis are the latest sign that the failure of Bankman-Fried’s FTX crypto exchange and Alameda Research, his trading firm, is sending shockwaves across the crypto industry… Genesis allows clients to lend out their coins in exchange for yields of as much as 10%, while also providing similar services for groups including exchanges operator Gemini, which is run by twins Tyler and Cameron Winklevoss. Genesis also lends digital coins to institutions such as hedge funds and family offices. Genesis had $2.8bn of ‘active loans’ at the end of the third quarter of 2022…”

November 14 – Associated Press: “The top U.S. banking regulator at the Federal Reserve is urging Congress to pass legislation that would impose regulation on crypto currencies in the wake of the swift collapse last week of FTX, a leading crypto exchange. Michael Barr, the Fed's vice chair for supervision, said in prepared testimony… that ‘recent events in crypto ... have highlighted the risks to investors and consumers associated with new and novel asset classes and activities when not accompanied by strong guardrails.’”

November 15 – Reuters (Ann Saphir and Dan Burns): “Michael Barr, the Federal Reserve's top financial regulatory official… said he is concerned about risks from the non-bank sector, including cryptocurrencies, for which the U.S. central bank and other regulators have poor visibility. ‘We're concerned about the risks that we don't know about in the non-bank sector,’ Barr said… before the Senate Banking Committee. ‘That includes obviously crypto activity, but more broadly risks in parts of the financial system where we don't have good visibility, we don't have good transparency, we don't have good data. That can create risks that blow back to the financial system that we do regulate.’”

November 17 – Bloomberg (Romy Varghese): “California is likely to see a $25 billion deficit in its next fiscal year because of slumping revenue, the state’s nonpartisan budget adviser warned. It’s a stark turnaround from years of staggering surpluses. The Federal Reserve’s path of interest-rate increases have slowed the economy, resulting in lower stocks, falling home prices, and less demand for items such as cars, the state’s Legislative Analyst’s Office said in a report Wednesday. The drop in stocks likely has led to estimated income tax payments this year being ‘notably weaker’ than the previous year, it said.”

November 16 – Bloomberg (David Brooke): “Firms operating in the $1.3 trillion private credit market are getting more selective in what companies they lend to as managing loan books becomes more challenging and a potential recession draws closer, according to a Chicago-based investment bank. Buyout deal flow so far this year is down 35% compared with the same period last year, according to… Lincoln International LLC, as macroeconomic pressures result in a wider risk-off sentiment. The slowdown comes as the Federal Reserve continues to battle inflation, raising interest rates at a fast pace and causing some to fear a recession. Many lenders are moving toward higher quality assets in anticipation of a downturn…”

Ukraine War Watch:

November 15 – Reuters (Max Hunder, Pavel Polityuk and Dan Peleschuk): “Russia pounded cities and energy facilities across Ukraine on Tuesday, killing at least one person and causing widespread power outages in what Kyiv said was the heaviest wave of missile strikes in nearly nine months of war. Missiles rained down on cities including the capital Kyiv, Lviv and Rivne in the west, Kharkiv in the northeast, Kryvyi Rih and Poltava in the centre, Odesa and Mikolaiv in the south and Zhytomyr in the north… Power was knocked out in areas of several cities including Kyiv, Lviv and Kharkiv, and the national grid operator announced emergency electricity outages in northern and central regions, and in Kyiv.”

November 17 – Reuters (Pavel Polityuk): “Russia pounded Ukrainian energy facilities and a huge rocket booster factory… in a new wave of missile strikes that Ukrainian officials denounced as terrorism. Explosions echoed though cities including the southern port of Odesa, the capital Kyiv, the central city of Dnipro and the southeastern region of Zaporizhzhia where officials said two people were killed.”

U.S./Russia/China Watch:

November 14 – Washington Post (Ellen Nakashima): “Mindful of lessons learned from Russia’s invasion of Ukraine, Congress is pushing to arm and train Taiwan in advance of any potential military attack by China, but whether the aid materializes could depend on President Biden himself. Deliberations on an unprecedented package of billions of dollars in military assistance to the self-governing island democracy come as Biden and Chinese leader Xi Jinping meet in Bali on Monday, with maintaining peace and stability in the Taiwan Strait a top item of discussion.”

Inflation Watch:

November 15 – CNBC (Jeff Cox): “Wholesale prices increased less than expected in October, adding to hopes that inflation is on the wane… The produce price index, a measure of the prices that companies get for finished goods in the marketplace, rose 0.2% for the month, against… estimates for a 0.4% increase… On a year-over-year basis, PPI rose 8% compared to an 8.4% increase in September and off the all-time peak of 11.7% hit in March… Excluding food, energy and trade services, the index also rose 0.2% on the month and 5.4% on the year.”

November 17 – Reuters (Howard Schneider): “Let the sticker shock begin: The upcoming U.S. Thanksgiving holiday, a time when families and friends typically celebrate with groaning sideboards, a stuffed turkey, and a more-is-better-than-less attitude, is going to cost roughly 20% more than last year, according to estimates compiled by the American Farm Bureau Federation in an annual survey of grocery prices. Blame it on the weather, Russia's invasion of Ukraine or corporations' drive to maximize profits, all of which have had a hand in rising food prices, but this year's jump is the largest since the Farm Bureau's first Thanksgiving dinner cost survey in 1986.”

November 15 – Bloomberg (Skylar Woodhouse): “New York City cab riders will see a 23% increase in metered fares, the first hike since 2012, following a Tuesday vote from the city’s Taxi and Limousine Commission. Passengers will also face an increase in rush hour and overnight surcharges, and airport flat rates… The increases will also affect per-mile and per-minute rates for Uber Technologies Inc. and Lyft Inc. and are expected to go into effect before year-end, the TLC said.”

Biden Administration Watch:

November 14 – Financial Times (Mercedes Ruehl, Tom Mitchell and Demetri Sevastopulo): “Joe Biden and Xi Jinping used their first in-person meeting as leaders to signal a desire to improve US-China ties after relations between the two powers plunged to a multi-decade low. With Taiwan tensions hanging over the meeting, the leaders agreed that senior officials would ‘maintain communication’ on a range of global issues, including climate change, economic stability and food security, a White House readout of the meeting said. The US president later said that Antony Blinken, secretary of state, would visit China for further talks.”

Federal Reserve Watch:

November 16 – Bloomberg (Matthew Boesler): “The Federal Reserve should stay focused on its economic goals and avoid incorporating financial stability risks into its deliberations as it raises interest rates, New York Fed President John Williams said. ‘Using monetary policy to mitigate financial stability vulnerabilities can lead to unfavorable outcomes for the economy,’ Williams said… ‘Monetary policy should not try to be a jack of all trades and a master of none.’ The remarks, coming from a top Fed official amid heightened volatility in financial markets, underscored the central bank’s resolve to keep monetary policy tight enough to slow the economy and bring inflation down from the four-decade highs reached this year.”

November 16 – Reuters (Michael S. Derby): “New York Federal Reserve President John Williams said… he still believes monetary policy is not the best tool to address financial stability risks, and that policymakers instead should take action to boost the resilience of things like the U.S. Treasury market. ‘For monetary policy to be most effective, financial markets must function properly,’ Williams said… ‘Using monetary policy to mitigate financial stability vulnerabilities can lead to unfavorable outcomes for the economy,’ Williams said, adding that ‘monetary policy should not try to be a jack of all trades and a master of none.’”

November 13 – Financial Times (Cobly Smith): “The US central bank is entering a new phase of policy tightening that will be harder to navigate, a top official has warned, as pressure builds on the Federal Reserve to temper what has become one of its most aggressive campaigns to raise interest rates in decades. ‘This next phase of policymaking is much more difficult, because you have to be mindful of so many things,’ Mary Daly, president of the San Francisco branch told the Financial Times. ‘You have to be mindful of the cumulative tightening that’s already in the system. You have to be mindful of the lags in monetary policy. You have to be mindful of the risks that are all throughout the global economy and the tremendous uncertainty that we have even about what the evolution of inflation is going to be.’”

November 16 – Bloomberg (Jonnelle Marte, Catarina Saraiva and Matthew Boesler): “Federal Reserve officials backed expectations they will moderate interest-rate increases to 50 bps next month, while stressing the need to keep hiking into 2023… ‘The data of the past few weeks have made me more comfortable considering stepping down to a 50 bps hike,’ Waller said… ‘But I won’t be making a judgment about that until I see more data.’”

November 16 – Reuters (Ann Saphir): “San Francisco Federal Reserve Bank President Mary Daly… said the U.S. central bank's policy rate could end up in the 4.75%-5.25% range, high enough to squeeze inflation from the economy but not so high as to trigger a severe recession. ‘We are ... tightening into a strong economy, and I’m still optimistic we can bring this down so that Americans don’t feel we’ve solved one bad problem and put them in a much worse one,’ Daly said…”

U.S. Bubble Watch:

November 15 – Bloomberg (Alex Tanzi and Jonnelle Marte): “US household debt climbed at the fastest annual pace since 2008 in the third quarter, with credit-card balances surging even as the interest rates that lenders charge to consumers hit a multi-decade high. Households added $351 billion in overall debt last quarter, taking the total to $16.5 trillion… That’s an increase of 8.3% from a year earlier, the most since a 9.1% jump in the first quarter of 2008… Most of the latest increase came in mortgage debt, by far the biggest liability on household balance sheets. It rose by $282 billion in the third quarter, and by $1 trillion from a year earlier, to $11.7 trillion. Mortgage and home-equity debt combined are up by $2 trillion since the pandemic began.”

November 16 – Bloomberg (Molly Smith): “Consumer spending is proving largely resilient in the face of high inflation and steep interest-rate hikes from the Federal Reserve that are dealing a sizable blow to housing and squelching manufacturing. Retail sales -- a measure of household spending that is the powerhouse of the nation’s economy -- charged ahead in October with the biggest gain in eight months… The Atlanta Fed’s GDPNow forecast for fourth-quarter growth moved up to 4.4% from a previous estimate of 4% after the stronger retail sales report.”

November 17 – Associated Press: “The U.S. job market remains healthy as fewer Americans applied for unemployment benefits last week… Applications for jobless claims for the week ending Nov. 12 fell by 4,000 to 222,000 from 226,000 the previous week… The four-week moving average rose by 2,000 to 221,000. The total number of Americans collecting unemployment aid rose by 13,000 to 1.51 million for the week ending Nov. 5. a seven-month high…”

November 16 – Associated Press: “Americans stepped up their spending at retailers, restaurants, and auto dealers last month, a sign of consumer resilience as the holiday shopping season begins… The government said… retail sales rose 1.3% in October from September, up from a flat reading in September from August. The increase was led by car sales and higher gas prices. Still, excluding autos and gas, retail spending rose a solid 0.9% last month. Strong auto sales may have been supercharged by the arrival of Hurricane Ian in late September, which destroyed up to 70,000 vehicles…”

November 16 – Reuters (Deborah Sophia, Akash Sriram and Granth Vanaik): “Corporate America is making deep cuts to its employee base as part of its restructuring efforts to navigate a potential downturn in the economy from the U.S. Federal Reserve's war on inflation. Job cuts announced by U.S.-based employers jumped 13% to 33,843 in October, the highest since February 2021…”

November 17 – Reuters: “U.S. homebuilding fell sharply in October, with single-family projects dropping to the lowest level in nearly 2-1/2 years… Housing starts decreased 4.2% to a seasonally adjusted annual rate of 1.425 million units last month… Data for September was revised higher to a rate of 1.488 million units from the previously reported 1.439 million units… Single-family housing starts, which account for the biggest share of homebuilding, tumbled 6.1% to a rate of 855,000 units, the lowest level since May 2020. Single-family homebuilding declined in all four regions.”

November 16 – Bloomberg (Augusta Saraiva): “US homebuilder sentiment weakened in November by more than forecast, hitting the lowest level in a decade when excluding the immediate onset of the pandemic. The National Association of Home Builders/Wells Fargo gauge decreased 5 points to 33 this month… Sentiment has fallen every month this year, extending what was already the longest stretch of declines in data back to 1985… A measure of future sales slid 4 points to 31, the lowest in a decade, while indexes of current sales and prospective buyer traffic weakened to the softest levels since April 2020.”

November 15 – Bloomberg (Catarina Saraiva): “US house prices could tumble as much as 20% in the wake of the surge in mortgage rates, according to… the Federal Reserve Bank of Dallas. House prices, adjusted for inflation, soared during the pandemic by the most since the 1970s, analysis by Dallas Fed economist Enrique Martinez-Garcia showed. A ‘pessimistic’ scenario where prices now retreat by 15% to 20% could subtract 0.5% to 0.7% from inflation-adjusted consumer spending, he wrote in a blog post… ‘Such a negative wealth effect on aggregate demand would further restrain housing demand, deepening the price correction and setting in motion a negative feedback loop,’ Martinez-Garcia wrote…”

November 14 – New York Times (Karen Weise): “Amazon plans to lay off approximately 10,000 people in corporate and technology jobs starting as soon as this week…, in what would be the largest job cuts in the company’s history. The cuts will focus on Amazon’s devices organization, including the voice assistant Alexa, as well as at its retail division and in human resources, said the people, who spoke on condition of anonymity because they were not authorized to speak publicly.”

November 16 – Reuters (Uday Sampath Kumar): “Target Corp forecast a surprise drop in holiday-quarter sales on Wednesday, blaming surging inflation and ‘dramatic changes’ in consumer spending for a drop in demand for everything from toys to electronics. Shares of the big-box retailer fell more than 17% in early trading after it also said an early start to holiday season promotions and shoppers holding back for steeper discounts cut its third-quarter profit by half.”

November 15 – Bloomberg (Katherine Doherty): “Bonus season is looking grim on Wall Street, with year-end incentive pools expected to drop sharply across the finance industry amid a pullback in mergers and acquisitions, persistent inflation and the threat of a potential recession. Bankers advising on M&A are likely to see their bonuses decline as much as 20% this year, while their counterparts in underwriting will probably have the largest drop, with their incentive pay plunging as much as a 45%, according to… compensation consultant Johnson Associates Inc.”

China Watch:

November 17 – Bloomberg: “Chinese regulators asked banks to report on their ability to meet short-term obligations after a rapid selloff in bonds triggered a flood of investor withdrawals from fixed-income products, according to people familiar... The unscheduled regulatory queries coincided with the biggest decline in China’s short-term government bonds since mid-2020.”

November 16 – Bloomberg: “The People’s Bank of China warned inflation may accelerate as overall demand in the economy picks up, suggesting the scope for further monetary policy easing may be limited. The central bank ‘will pay serious attention to the underlying possibility of rising inflation, especially changes in the demand side,’ it said in its quarterly monetary policy report... At the same time, the PBOC said it will increase support for the economy and keep liquidity reasonably ample. Analysts said the comments suggest the central bank could be shifting its focus to preventing economic risks and may refrain from adding more stimulus.”

November 17 – Bloomberg: “China’s 84.2 trillion yuan ($11.8 trillion) local credit market has been rocked this week by an unprecedented selloff amplified by low liquidity. Corporate bond yields largely extended increases Thursday, traders said, after the rates on three-year AAA rated company notes jumped a record 37 bps this week through Wednesday. That had pushed spreads over government debt up 19 bps this week, the worst blowout since July 2020. The selloff started in sovereign bonds before spreading. The moves are shining fresh light on a longstanding risk in global financial markets: how pockets of low liquidity can set the stage for unexpected and rapid moves.”

November 16 – Bloomberg: “Things are finally looking up for China’s economy, and with that traders are ditching government bonds for riskier bets. Yields on benchmark 10-year debt jumped as much as four bps to 2.85% on Wednesday, the highest since December. This follows their biggest rout since late 2016 on Monday, with a rise in interbank rates adding to the drag on the market. Investors also sold corporate bonds.”

November 16 – Bloomberg: “Global investors reduced their holdings of China bonds in the onshore market for a ninth-month running in October amid concerns over policy uncertainty spurred by President Xi Jinping’s consolidation of power. The amount of Chinese bonds held by foreign investors in the interbank market declined by 26.5 billion yuan ($3.8bn) in October, after a drop of 70.7 billion yuan in the previous month… That brings bond outflows in the first 10 months of the year to 625 billion yuan.”

November 17 – Bloomberg: “China’s daily Covid cases surged again as top cities struggle to get persistent outbreaks under control without deploying the one-size-fits-all Covid Zero restrictions that Beijing has said must be avoided. Nationwide, there were 23,132 new cases for Wednesday, the highest since April and nearing the all-time high reached during the worst of Shanghai’s massive outbreak earlier this year. The surge is driven mostly by infections in some of the country’s most significant cities. The southern hub of Guangzhou reported a record 8,761 infections… China’s daily infections have more than doubled since Friday, when Beijing announced a raft of changes to its zero-tolerance strategy…”

November 14 – Bloomberg: “China’s economic activity weakened in October, putting pressure on Beijing to ramp up support… Retail sales contracted 0.5% in October from a year earlier -- the first decline since May and worse than economists’ expectations for 0.7% growth. Industrial output growth weakened, property investment continued to contract and the jobless rate remained high.”

November 14 – Reuters (Liangping Gao and Ryan Woo): “China's property investment fell at a faster pace during January-October, declining 8.8% from a year earlier after slumping 8.0% in the first nine months of the year. Property sales by floor area dropped 22.3% during January-October from the same period a year earlier, compared with the 22.2% plunge in the first nine months of the year… New construction starts measured by floor area fell 37.8% year-on-year in the first 10 months of the year, a slightly smaller decline than the 38% drop in the first nine months period.”

November 15 – Reuters (Liangping Gao, Ella Cao and Ryan Woo): “China's new home prices fell at their fastest pace in over seven years in October, weighed down by COVID-19 curbs and industry-wide problems, reflecting a deepening contraction that prompted authorities to ramp up support for the sector in recent days. New home prices slumped 1.6% year-on-year after a 1.5% fall in September… That was the biggest annual drop since August 2015 and the sixth month of contraction.”

November 15 – Bloomberg: “Chinese developer shares tumbled after Agile Group Holdings Ltd. became the second real estate company in as many days to announce capital raising plans. Agile said it will sell stock at an 18% discount to raise HK$783 million ($100 million) via a top-up placement. Country Garden Holdings Co. on Tuesday said it will raise HK$3.9 billion, also with a 18% discount. A Bloomberg Intelligence equities gauge of Chinese builders slumped as much as 8.9% on Wednesday, with Agile falling 25%. Developers are capitalizing on an earlier rally in their shares after authorities took steps to ease a credit crunch in the industry and speculation grew the country will relax its Covid policies.”

November 14 – Bloomberg: “China sought to maintain ample cash levels in its financial system with liquidity tools of different maturities, helping halt the worst government bond selloff in six years. The liquidity infusion this month, which was done with a combination of short-, medium- and long-term tools, exceeded the 1 trillion yuan maturity, according to the People’s Bank of China. That coupled with the release of worse-than-expected economic data helped cap the spike in the benchmark bond yield.”

November 13 – Financial Times (Cheng Leng): “China’s central bank will extend a year-end deadline for lenders to cap their ratio of property sector loans, one of the strongest moves yet by Beijing to relieve pressure from the credit crunch roiling China’s real estate sector. The People’s Bank of China’s extension of the ‘collective management system for real estate loans’ has the potential to affect 26% of China’s total banking loans, giving lenders and cash-strapped real estate developers breathing space as they fight to survive a historic property sector downturn.”

November 14 – Bloomberg: “China gave embattled real-estate developers a boost Monday by allowing them access to more money held in pre-sale accounts, the biggest source of funds for the cash-strapped builders. China will give ‘quality’ property developers access to as much as 30% of the pre-sale funds with letters of guarantee from banks, according to a statement posted on the banking and insurance regulator’s website. The funds are money that home buyers have paid to developers in advance…”

November 13 – Reuters (Liangping Gao and Ryan Woo): “Chinese regulators have told financial institutions to extend more support to property developers to shore up the country's struggling real estate sector… A notice to the institutions from the People's Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) outlined 16 steps to support the industry, including loan repayment extensions, in a major push to ease the deep liquidity crunch which has plagued the property sector since mid-2020.”

November 15 – BBC (Stephen McDonell): “Crowds of residents in southern China's industrial metropolis Guangzhou have escaped a compulsory lockdown and clashed with police, as anger at strict coronavirus curbs boiled over. Dramatic footage shows some tearing down Covid control barriers. Riot teams have now been deployed in the area. It follows Guangzhou's worst Covid outbreak since the pandemic began. Amid bad economic figures, China's zero Covid policy is under enormous strain. Tensions had been building in the city's Haizhu District, which is under stay-at-home orders. The area is home to many poorer itinerant labourers. They have complained of not being paid if they are unable to turn up for work, and of food shortages and skyrocketing prices... For several nights, they'd been tussling with the white-clad Covid prevention enforcement officials, and then overnight on Monday the anger suddenly exploded onto the streets of Guangzhou with a mass act of defiance.”

November 14 – Bloomberg: “Senior executives across China’s $58 trillion financial system are facing additional pay cuts as firms from investment banks to mutual funds weigh options to comply with President Xi Jinping’s ‘common prosperity’ drive. At least four of the biggest state-controlled securities firms and asset managers are drafting plans to narrow the compensation gap between senior and junior staff, according to people familiar… Some may submit proposals to regulators in the next few months, the people said.”

November 12 – Financial Times (Edward White, Mercedes Ruehl and Arjun Neil Alim): “For Isaac, a Chinese business consultant in his late 20s, Xi Jinping’s stunning consolidation of power at last month’s Communist party congress was the final straw. The graduate of a top Beijing university… is hunting for work in the Middle East. As with most of his generation, he is an only child. His parents are ‘too old’ to leave with him, but they are happy he got out at the end of summer. ‘If there is hope of change [after Xi] I’ll consider going back,’ he said. ‘Until then, I’m seeking opportunities in other countries.’ Isaac is among a flock of wealthy Chinese taking flight from the world’s most populous country just as Xi embarks on an unprecedented third five-year term in power. Some of those leaving have cited the difficult business environment, others fear the direction of future government policy.”

Central Banker Watch:

November 14 – Financial Times (Valentina Romei): “Central bankers are to shift towards a more gradual monetary tightening, economists predict, as recent ‘jumbo’ rate moves show signs of taming inflation and officials acknowledge the growing threat of recession. After central banks’ last meetings and a cooling in US inflation to 7.7% in October from 8.2% in September, markets are pricing in a greater probability of 50 bps rather than 75bp rises in the banks’ next announcements, and smaller rate rises continuing into next year. The US Federal Reserve, European Central Bank and Bank of England had given a ‘clear signal’ that ‘we’re coming towards a period of slower tightening, mirroring what we’ve seen from Australia, Canada and Norway’, said James Pomeroy, an economist at HSBC.”

November 15 – Bloomberg (Alexander Weber): “The European Central Bank warned of rising stability risks for everyone from lenders to governments and households as the economic outlook darkens and officials battle record inflation. The cost-of-living squeeze is hurting people’s ability to service debts, while Europe’s worsening growth prospects threaten corporate profits, the ECB said… It also flagged potential dangers to public finances as governments borrow to cushion the impact of the energy crisis, further downward pressure on equities and said house prices may be peaking after a yearslong advance. ‘People and firms are already feeling the impact of rising inflation and the slowdown in economic activity,’ ECB Vice President Luis de Guindos said... ‘Our assessment is that risks to financial stability have increased, while a technical recession in the euro area has become more likely.’”

Global Bubble Watch:

November 12 – Financial Times (Richard Waters): “If Wall Street had any doubts about the speed with which the chip industry’s boom has turned to bust, unexpectedly gloomy financial forecasts from companies like mobile chipmaker Qualcomm should have put them to rest. ‘It’s kind of an unprecedented change over a short period of time,’ Akash Palkhiwala, the company’s chief financial officer told analysts... ‘We went from a period of supply shortages to demand declines.’ Qualcomm has sliced 25% from its revenue guidance for the current quarter as weaker consumer spending hit smartphone sales. The forecast came as some of the leading chipmakers issued surprisingly weak sales and profit projections and signalled a round of job cuts ahead.”

November 16 – Reuters (Eva Mathews and Aditya Soni): “Micron Technology Inc said… it would reduce memory chip supply and make more cuts to its capital spending plan, as the semiconductor firm struggles to clear excess inventory due to a slump in demand… Micron was the first major chipmaker to sound an alarm about falling demand for personal computers and smartphones earlier this year in the face of decades-high inflation.”

November 15 – Reuters (Cynthia Kim and Jihoon Lee): “South Korea's housing prices fell at the sharpest rate in at least 19 years in October, adding to expectations the nation's central bank will slow its pace of interest rate hikes in the coming weeks. South Korea's apartment prices nationwide fell 1.20% in October from a month earlier…, the biggest monthly drop since the data series began in Nov. 2003…”

November 18 – Bloomberg (Harry Suhartono): “One of Indonesia’s major real-estate companies is adding to broader concerns that more Asian property developers will struggle to repay debt. The firm, which runs an industrial complex east of Jakarta about the size of Manhattan, is seeking approval from investors by Dec. 7 to exchange most of its $300 million 2023 bond for longer-maturity debt.”

November 14 – Reuters (Lucy Craymer): “The New Zealand house price index saw its largest drop in 30 years last month and sales activity was particularly soft, fuelling expectations that prices might fall further than many economists had previously forecast. The house price index, which measures changes in house prices on a like for like basis, fell for the 11th consecutive month and is now down 10.9% on October last year… The median house price was down 7.9% on October last year.”

Europe Watch:

November 16 – Financial Times (Martin Arnold): “A toxic combination of recession, soaring inflation, rising funding costs and lower liquidity is threatening to trigger financial market turmoil in the euro area, the European Central Bank has warned. Luis de Guindos, ECB vice-president, called for banks to take more provisions for bad loans, urged global regulators to make investment funds hold more liquid assets and said the central bank should be prudent in starting to shrink its €5tn bond stockpile next year. The ECB’s twice-yearly financial stability review said high inflation, a growing likelihood of a recession and rising financing costs ‘pose increasing challenges’ for indebted households, businesses and governments and could produce more bankruptcies and financial market volatility. ‘All of these vulnerabilities could unfold simultaneously, potentially reinforcing one another,’ the report added.”

November 15 – Reuters (Lawrence White): “Europe's banks risk a significant hit to their profits if house prices across the region begin to slide, regulators and ratings agencies have warned. While banks' robust balance sheets mean declining house prices are unlikely to pose a systemic risk, the scale of lenders' exposure to the property sector means they could face a hit to earnings, S&P Global Ratings said… Home loans typically account for between 30% and 50% of European banks' total customer loans, the ratings agency said, adding more cash would likely have to be set aside by lenders for potential defaults as economic conditions worsen.”

November 14 – Reuters (Tom Sims, Marta Orosz and John O'Donnell): “German authorities are stepping up preparations for emergency cash deliveries in case of a blackout to keep the economy running, four people involved said, as the nation braces for possible power cuts arising from the war in Ukraine. The plans include the Bundesbank, Germany's central bank, hoarding extra billions to cope with a surge in demand, and possible limits on withdrawals, one of the people said.”

EM Crisis Watch:

November 18 – Reuters (Marcela Ayres and Bernardo Caram): “Brazil's incoming government effort to exempt nearly 200 billion reais ($37bn) of spending from a constitutional budget cap could push public debt to record levels and force a monetary policy shift, warned economists and investors. The proposal now under consideration in Congress has stoked concerns about President-elect Luiz Inacio Lula da Silva's policies, divided his transition team and triggered a sharp sell-off in financial markets.”

Japan Watch:

November 16 – Reuters (Leika Kihara): “Central banks must remove emergency support measures once financial crises are over to avoid causing moral hazard in the market, former Bank of Japan (BOJ) deputy governor Hiroshi Nakaso said… Nakaso, who is considered one of the top candidates to become next BOJ governor, also said that once an economy was running below potential capacity, a central bank could more easily normalise ultra-loose monetary policy. Investors had come to assume that central banks would always come to the rescue when financial markets destabilised because of the massive monetary support deployed during the COVID-19 crisis, Nakaso said. ‘This moral hazard must be removed once the crisis is over, though this is easier said than done because it's a contradictory issue,’ Nakaso said… ‘Crisis management is like creating ... artificial moral hazard,’ he said. ‘It shouldn't stay forever.’”

November 18 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japan’s inflation hit its fastest clip in 40 years in October, an outcome that further stretches the credibility of the central bank’s view that continued stimulus is needed to secure stable price growth. Consumer prices excluding fresh food climbed 3.6% in October from a year ago… The reading outpaced a 3.5% forecast… and marks the fastest price growth since 1982. Core inflation has now exceeded the Bank of Japan’s 2% price target for seven straight months, with the yen’s historic fall amplifying the trend.”

November 14 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japan’s economy unexpectedly shrank in the three months through September as the yen’s historic slide battered growth momentum, leaving the country’s recovery from the pandemic in a vulnerable spot amid mounting fears of a global slowdown. Gross domestic product contracted at an annualized pace of 1.2% in the third quarter, slipping into reverse for the first time since last year as weakness in the currency inflated the country’s import bill…”

November 16 – Bloomberg (Erica Yokoyama and Tomoko Sato): “Japan’s trade deficit widened in October, as the country’s import bill continued to rocket upward, fueled by a historic slide in the yen that has already helped push the economy back into reverse. The trade gap grew to 2.16 trillion yen ($15.5bn) from 2.09 trillion yen… The balance has now been negative for 15 straight months, the longest streak since 2015. Economists had expected a 1.62 trillion yen deficit. Imports grew at the fastest pace since 1980 as the yen inflated already elevated commodity prices. The 53.5% gain was led by buying of crude oil, liquid natural gas, and coal.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 16 – New York Times (Christopher Flavelle): “The rising toll of climate change across the United States has been measured in lives lost, buildings destroyed and dollars spent on recovery. But a report released on Wednesday uses a different measure: Which parts of the country have suffered the greatest number of federally declared disasters? That designation is reserved for disasters so severe, they overwhelm the ability of state and local officials to respond… From 2011 to the end of last year, 90 % of U.S. counties have experienced a flood, hurricane, wildfire or other calamity serious enough to receive a federal disaster declaration…, and more than 700 counties suffered five or more such disasters. During that same period, 29 states had, on average, at least one federally declared disaster a year somewhere within their borders. Five states have experienced at least 20 disasters since 2011.”

November 14 – Bloomberg (Ronojoy Mazumdar and Matthew Burgess): “Rising global borrowing costs are denting the finances of some of the most climate-vulnerable countries right when they most need money to fight the devastating impacts of global warming. It’s a convergence of events that risks pushing developing nations into a ‘debt trap,’ according to Prime Minister Shehbaz Sharif of Pakistan, who addressed world leaders at the COP27 climate talks in Egypt last week. Countries that borrowed heavily when interest rates were low are now struggling to fund projects that would make them more resilient to extreme weather, leaving them vulnerable to even higher borrowing costs in the future.”

Geopolitical Watch:

November 16 – Reuters (Ananda Teresia and Stanley Widianto): “The Group of 20 (G20) unanimously adopted a declaration… saying most members condemned the war in Ukraine, but the document at the end of their summit acknowledged some countries saw the conflict differently. The leaders of the world's biggest economies also agreed to pace interest rate rises carefully to avoid spillovers and warned of ‘increased volatility’ in currency moves. But it was the Ukraine conflict… that dominated the two-day summit on the Indonesian island of Bali. ‘Most members strongly condemned the war in Ukraine,’ the leaders said in their declaration, signalling that Russia, which is a member of G20, opposed the wording. The declaration recognised that ‘there were other views and different assessments of the situation and sanctions’ but three diplomats said it was unanimously adopted.”

November 17 – Reuters (Hyonhee Shin): “North Korea fired a ballistic missile… as it warned of ‘fiercer military responses’ to U.S. efforts to boost its security presence in the region with its allies, saying Washington is taking a ‘gamble it will regret.’ North Korea has conducted a record number of such tests this year, and also fired hundreds of artillery shells into the sea more recently as South Korea and the United States staged exercises, some of which involved Japan.”

November 13 – Reuters (Ju-min Park and Leika Kihara): “Japanese Prime Minister Fumio Kishida told Asian leaders… that China is continuously and increasingly taking actions that infringe on Japan's sovereignty and escalate tensions in the region. Addressing the East Asia Summit in Cambodia, Kishida said ensuring peace and stability in the Taiwan Strait was important for regional security, voicing ‘serious concern’ over the human rights situation of the Uyghur people… ‘There has been continued, increasing actions by China in the East China Sea that violate Japan's sovereignty. China also continues to take actions that heighten regional tension in the South China Sea,’ Kishida told the meeting…”