Saturday, March 16, 2024

Weekly Commentary: Failed

I often find my thoughts returning to the great German economist, Dr. Kurt Richebacher. This week, it was his analysis that inflation comes in various forms, with his argument that asset inflation was the most pernicious. It was such a minority view, seemingly unique. As he would explain, consumer price inflation is commonly recognized as destructive. Rising consumer prices will invariably upset the public, business community, politicians, and central bankers. Sure enough, there was overwhelming support for the Fed’s effort to rein in consumer price pressures.

Meanwhile, asset inflation is universally relished, viewed generally as validation of sound underlying fundamentals. There is no anti-asset inflation constituency to exert influence over policy. Especially these days, there is nothing to suggest the Fed would adopt tighter monetary policy to thwart assets inflation, speculation, and Bubbles. Indeed, at this late cycle stage, it’s assumed that supporting rising market prices is a primary responsibility of the Federal Reserve and global central bank community.

History teaches that the greatest crises unfold after the bursting of major asset and speculative Bubbles. The bursting mortgage finance Bubble and “great financial crisis” are not yet distant history. Even greater Credit and financial excess - and resulting deep structural maladjustment - were responsible for the Great Depression.

Another historic asset Bubble calamity is top of mind. The Bank of Japan (BOJ) meets next Tuesday. The market has a 56% probability of the BOJ boosting rates above zero, effectively ending the negative rate experiment with the first rate increase since 2007.

Japan’s deep structural issues can be traced directly back to the nation’s spectacular eighties asset Bubble. As is typically the case, Japanese asset inflation and speculative Bubbles unfolded in a low policy rate environment, with tame consumer price inflation having deluded central bankers into a false sense of prowess and control.

After twenty years of post-Bubble stagnation, the BOJ in 2013, under the leadership of Governor Haruhiko Kuroda (and Ben Bernanke prodding), adopted an experimental policy course of radical inflationism. Having ended 2012 at 158 TN yen, Bank of Japan assets inflated 379% to 759 TN yen, or $5.162 TN. If negative rates weren’t enough, the Kuroda BOJ also imposed a yield curve control (YCC) regime that pegged government bond yields to near zero percent.

March 15 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japan’s largest union group announced stronger-than-expected annual wage deals Friday, a result that will fuel already intense speculation that the central bank will next week raise interest rates for the first time since 2007. Rengo, a federation of unions, said its members have so far secured deals averaging 5.28%, a figure that far outpaces the initial 3.8% tally from a year ago — itself the biggest in 30 years. Many of Rengo’s affiliated groups had already announced agreements to hike wages by 5% or more.”

With 5% wage boost labor contracts and a yen near lows back to 1990, I guess Governor Kazuo Ueda can soon declare mission accomplished. Meanwhile, the Nikkei 225 Index has inflated about 50% since the end of 2022, trading to record highs for the first time since Bubble year 1989. Reminiscent of the late eighties, spectacular Tokyo condo price inflation has made housing unaffordable for most. The IIF places Japanese government debt at 230% of GDP.

It should be incontrovertible that central banks must remain conservative and principled institutions. Too much is at stake to ever play fast and loose. Major policy errors are not only destructive, they predictably lead to only more momentous blunders. Drifts or shifts into experimental and radical policymaking signal something has gone wrong. I’ve always had issues with the likes of Bernanke, Draghi, and Kuroda. They never seemed interested in exploring the root causes behind the bursting Bubbles that provoked their radical monetary inflationism.

Today, at manic peak Bubble bullishness, most everyone (if they were familiar with my analysis) would see my efforts as a comical fool’s errand. Lunatic fringe fear-mongering. Yet I remain convinced that inflationism is the fool’s errand. The inflation of non-productive “money” and Credit is definitely the problem, not the solution. Zero and negative rates, Trillions of “money printing,” and epic market manipulation only inflated history’s greatest Bubbles - while exacerbating epic global structural maladjustment. The scope of China’s policy failures is coming into clearer focus. The failure of BOJ’s foray into radical inflationism will be revealed as Japan begins a process of normalization fraught with peril.

Federal Reserve policymaking is these days celebrated as pure brilliance. They’ve reined in inflation, while asset prices have continued to rise. Stocks have surged to record highs, home price inflation has been ongoing, and corporate bond returns have been solid. The Fed has accomplished monetary tightening without imposing costs on labor or the economy. If it seems too good to be true…

The Fed has failed. This dreadful reality is masked by a facade forged from loose conditions, asset inflation, and speculative Bubbles. And this sounds so lunatic fringe for a simple reason: I don’t share today’s universal adoration for loose financial conditions.

Recalling William McChesney Martin’s great insight: “It’s the job of the Federal Reserve to take the punch bowl away before the party gets going.” There is profound wisdom in this witty quote, one whose resonance has diminished over the decades of central bank largesse. Get control early or face debilitating societal consequences.

To assert Fed failure today is to beckon for lunatic designation. But I’ve seen it all before. Mark my words: After the Bubble bursts, it will have been apparent to all.

The Fed has Failed thesis can be boiled down to a few key points. Our markets, financial system, and economy have been at extraordinary risk, acutely susceptible to late-cycle Credit excess, asset inflation, and extreme speculation. Yet the Fed is negligently impotent. Instead of “leaning against the wind” with tighter monetary policy, the Federal Reserve signaled a “dovish pivot” to rate cuts with highly speculative markets in the throes of blowoff excess.

In short, the Fed is today incapable of tightening financial conditions in an environment where tighter conditions are fundamental to monetary stability, sound assets markets, and stable price levels across the economy. And I am familiar with the arguments against tightening: it would further boost debt service costs and federal debt, harm market function, hit over-levered households and businesses, and unleash recessionary forces.

I certainly appreciate today’s late-cycle fragilities. Yet they are the inevitable consequence of years of monetary mismanagement. Perpetual loose conditions progressively subverted market discipline. Only the bond market could have forced a semblance of fiscal prudence out of Washington. Instead, years of artificially low rates and massive QE programs accommodated a drift toward reckless deficit spending. Despite booming markets and solid economic growth, intractable Washington profligacy will ensure a 2024 fiscal deficit of around 7% of GDP.

Tighter conditions would be problematic for highly levered bond markets. It would be painful for government, business, and household sectors. It would force much needed and inevitable deleveraging, in highly speculative markets and throughout the real economy. Unfortunately, pain would be inflicted upon over-levered speculators, business enterprises, and households.

A regretful amount of pain is the comeuppance for years of central bank subversion of market forces. Importantly, thwarting adjustment in a capitalistic system ensures greater future pain. As Dr. Richebacher used to say: there is no cure for a Bubble, only not to let it inflate. Years of accommodating and resuscitating Bubble excess got us to where we are today: a Fed that completely disavows responsibility for containing financial excess and Bubbles.

When I ponder the essence of the Fed’s failure, my thoughts return to analysis of the success of gold standard monetary regimes. An environment of relative stability was not simply the fruit of pegging the money supply to a somewhat fixed quantity of gold. Policy makers, bankers and industrialists were both committed to the system and understood that prudent behavior was fundamental to its sustainability.

Importantly, financial operators and speculators understood that policymakers would respond to fledgling excess with the resolve necessary to safeguard the stability of the monetary regime. This mindset and value system worked to restrain the self-reinforcing dynamics inherent to Credit and speculative excess. When things began to get overheated, players showed restraint with the knowledge that policymakers were prepared to impose painful tightening measures. The gold standard system had inherent mechanisms that disincentivized pro-Bubble behavior.

The contemporary central bank policy regime failed specifically because it incentivized myriad excesses. There is only upside for Washington politicians to spend lavishly and run up massive deficits. Businesses and households borrow irresponsibly, knowing that the Fed will ensure that the economy quickly recovers from any shock or downturn. Bankers and lenders lend aggressively, knowing the Fed (and GSEs) have their backs. Households speculate in stocks and options, confident that the Fed backstop ensures ever higher equities prices. 

Importantly, the enterprising leveraged speculating community pushes the envelope with leverage and risk-taking, enticed by incredible fortunes for the taking - and confident that the greater the degree of excess (and resulting fragility), the more zealously the Fed (and central bank community) will ensure liquid and inflating markets. In short, self-reinforcing Credit and speculative excess are powerfully incentivized, ensuring ever deeper financial and economic structural maladjustment.

It's a monetary regime doomed to fail. That policymakers resorted over the years to zero/negative rates, Trillions of “printing,” and egregious market interventions is at the heart of why my world view diverges so diametrically from others.

Two-year yields jumped 25 basis points this week. The market closed Friday pricing a 4.61% policy rate at the Fed’s December 18th meeting, up 23 bps on the week. This implies almost three rate cuts (72bps) by year-end, with the market now seeing only a 61% probability of a reduction by the June 12th FOMC meeting.

Basically, the market is aligned with the median three cuts signaled by the December “dot plot.” A new “Summary of Economic Projections” will be forthcoming Wednesday. And it’s becoming a habit. This week saw CPI and PPI reports with higher-than-expected inflation. One might expect some FOMC members to adjust inflation and growth expectations higher, while reducing the number of projected 2024 cuts.

March 11 – Reuters (Lewis Jackson and Stella Qiu): “JPMorgan… CEO Jamie Dimon… urged the Federal Reserve to wait until after June before cutting interest rates, arguing the central bank needs to shore up its inflation-fighting credibility. ‘I think they have to be data-dependent. If I were them, I would wait,’ Dimon said… ‘You can always cut it quickly and dramatically. Their credibility is a little bit at stake here. I would even wait past June and let it all sort it out.’ Dimon said the U.S. economy was doing so well it could almost be characterised as a boom, but cautioned against the wholesale embrace of the soft landing narrative by markets… Dimon said the surge in debt and equity markets since late 2023 had some bubble-like characteristics and linked it in part to the legacy of the pandemic-era fiscal and monetary stimulus, which was ‘still in the system, you can’t say that they’re gone’.”

March 12 – Bloomberg (Katherine Doherty): “Citadel founder Ken Griffin said the Federal Reserve should move slowly in lowering interest rates to avoid the possibility of having to reverse course later. ‘Pausing and then changing direction back toward higher rates quickly, that would, in my opinion, be the most devastating course of action to pursue,’ Griffin said… at the Futures Industry Association conference... ‘So I think they’re going to be a bit slower than people were expecting.’”

We’ll pay close attention to Jamie Dimon and Ken Griffin. They are two of this extraordinary era’s preeminent financial operators, successfully performing their financial alchemy from the most advantageous of catbird seats. I suspect they’re concerned that things could become unhinged with rate cuts. The Fed’s credibility is at stake.

Powell’s press conference should be interesting. It would be appropriate for “Balanced Powell” to rectify his recent dovish lean. Stocks and bonds appear increasingly vulnerable. The holes in the bullish narrative are increasingly difficult to deny. Curious to see commodities start to perk up. And didn’t Nasdaq trade to highs around the March 2000 quarterly options expiration, a record high that held for 15 years.

For the Week:

The S&P500 (up 7.3% y-t-d) and Dow (up 2.7%) were little changed. The Utilities declined 0.4% (down 0.1%). The Banks fell 1.2% (up 2.1%), while the Broker/Dealers added 0.5% (up 6.1%). The Transports fell 1.4% (down 2.5%). The S&P 400 Midcaps retreated 1.0% (up 5.1%), and the small cap Russell 2000 dropped 2.1% (up 0.6%). The Nasdaq100 lost 1.2% (up 5.8%). The Semiconductors sank 4.0% (up 13.9%). The Biotechs dropped 2.3% (down 3.9%). While bullion retreated $23, the HUI gold index advanced 1.8% (down 4.4%).

Three-month Treasury bill rates ended the week at 5.22%. Two-year government yields jumped 25 bps this week to 4.73% (up 48bps y-t-d). Five-year T-note yields surged 28 bps to 4.33% (up 48bps). Ten-year Treasury yields rose 23 bps to 4.31% (up 43bps). Long bond yields jumped 18 bps to 4.43% (up 40bps). Benchmark Fannie Mae MBS yields surged 32 bps to 5.82% (up 55bps).

Italian yields gained 12 bps to 3.70% (unchanged y-t-d). Greek 10-year yields rose 15 bps to 3.42% (up 37bps). Spain's 10-year yields jumped 16 bps to 3.24% (up 25bps). German bund yields surged 18 bps to 2.44% (up 42bps). French yields gained 16 bps to 2.88% (up 32bps). The French to German 10-year bond spread narrowed two to 44 bps. U.K. 10-year gilt yields jumped 13 bps to 4.10% (up 57bps). U.K.'s FTSE equities index gained 0.9% (down 0.1% y-t-d).

Japan's Nikkei Equities Index dropped 2.5% (up 15.7% y-t-d). Japanese 10-year "JGB" yields gained five bps to 0.79% (up 14bps y-t-d). France's CAC40 rose 1.7% (up 8.2%). The German DAX equities index increased 0.7% (up 7.1%). Spain's IBEX 35 equities index surged 2.8% (up 4.9%). Italy's FTSE MIB index added 1.6% (up 11.8%). EM equities were mixed. Brazil's Bovespa index slipped 0.4% (down 5.6%), while Mexico's Bolsa index rallied 2.2% (down 2.2%). South Korea's Kospi index declined 0.5% (up 0.4%). India's Sensex equities index slumped 2.0% (up 0.6%). China's Shanghai Exchange Index increased 0.3% (up 2.7%). Turkey's Borsa Istanbul National 100 index sank 3.6% (up 18.2%). Russia's MICEX equities index dipped 0.5% (up 6.5%).

Federal Reserve Credit increased $4.5bn last week to $7.505 TN. Fed Credit was down $1.384 TN from the June 22nd, 2022, peak. Over the past 235 weeks, Fed Credit expanded $3.779 TN, or 101%. Fed Credit inflated $4.695 TN, or 167%, over the past 592 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.8bn last week to $3.348 TN. "Custody holdings" were down $14.4 billion y-o-y, or 0.4%.

Total money market fund assets jumped $31.3bn to a record $6.108 TN. Money funds were up $1.215 TN, or 24.8%, y-o-y.

Total Commercial Paper surged $27.0bn to a 13-month high $1.293 TN. CP was up $130bn, or 11.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 16 bps to 6.74% (up 23bps y-o-y). Fifteen-year rates declined six bps to 6.16% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to a six-week low 7.10% (up 14bps).

Currency Watch:

For the week, the U.S. Dollar Index recovered 0.7% to 103.43 (up 2.1% y-t-d). For the week on the upside, the Mexican peso increased 0.6%. On the downside, the Norwegian krone declined 1.8%, the New Zealand dollar 1.5%, the Swedish krona 1.5%, the Japanese yen 1.3%, the Australian dollar 1.0%, the British pound 1.0%, the South Korean won 0.8%, the Swiss franc 0.8%, the Singapore dollar 0.5%, the euro 0.5%, the Canadian dollar 0.4%, the Brazilian real 0.3%, and the South African rand 0.2%. The Chinese (onshore) renminbi slipped 0.08% versus the dollar (down 1.35% y-t-d).

Commodities Watch:

March 14 – Bloomberg (Grant Smith): “Global oil markets face a supply deficit throughout 2024, instead of the surplus previously expected, assuming that OPEC+ continues output cuts in the second half of the year, according to the International Energy Agency. Saudi Arabia and its partners agreed earlier this month to prolong roughly 2 million barrels day of production curbs to the middle of the year. The IEA assumes the measures will in fact continue until the end of 2024, reflecting the ‘bloc’s efforts to balance oil markets,’ it said…”

The Bloomberg Commodities Index gained 1.2% (up 0.6% y-t-d). Spot Gold dipped 1.1% to $2,156 (up 4.5%). Silver surged 3.6% to $25.19 (up 5.8%). WTI crude jumped $3.03, or 3.9%, to $81.04 (up 13%). Gasoline surged 7.7% (up 29%), while Natural Gas dropped 8.3% to $1.66 (down 34%). Copper surged 6.0% (up 6.0%). Wheat increased 0.3% (down 16%), and Corn recovered 2.5% (down 7%). Bitcoin gained $1,040, or 1.5%, to $69,600 (up 63.7%).

Middle East War Watch:

March 12 – Wall Street Journal (Sune Engel Rasmussen and Adam Chamseddine): “Hostilities flared between Israel and the Lebanese Hezbollah militia, threatening to broaden Israel’s war to its northern border amid an impasse in negotiations to reach a cease-fire in Gaza. Hezbollah launched about 100 Katyusha rockets at northern Israel on Tuesday, the heaviest barrage since Israel’s war in Gaza against Hamas… began five months ago. Hezbollah said its rockets were a response to an Israeli airstrike Monday night in Baalbek in northeastern Lebanon. Israel retaliated later Tuesday with more strikes against two Hezbollah military command centers and weapons depots, also in Baalbek… Israel said the Monday strike in Baalbek was retaliation for drones dispatched to the Golan Heights.”

March 11 – Reuters (Mohammed Ghobari): “Airstrikes attributed to a U.S.-British coalition hit port cities and small towns in western Yemen on Monday, killing at least 11 people and injuring 14 while defending commercial shipping, a spokesperson for Yemen's internationally recognized government told Reuters. At least 17 airstrikes were reported in the country, including in the principal port city of Hodeidah and at Ras Issa Port…”

March 10 – Wall Street Journal (Costas Paris): “More than 50 ships queued to cross the Panama Canal on a recent day—from tankers hauling propane to cargo ships packed with food. A prolonged drought has led the canal’s operator to cut the number of crossings, resulting in longer waits. The tolls that ships pay are now around eight times more expensive than normal. Over 7,000 miles away, vessels that move containers through Egypt’s Suez Canal are waiting for naval escorts or avoiding the passage altogether to take a much longer voyage around South Africa… The Suez’s problems are geopolitical and those in Panama are climate-based, but both are roiling global trade. Cargo volumes through the Suez and Panama canals have plunged by more than a third. Hundreds of vessels have diverted to longer routes, resulting in delivery delays, higher transportation costs and economic wreckage for local communities.”

Ukraine War Watch:

March 12 – Reuters (Guy Faulconbridge and Lidia Kelly): “Ukraine pounded targets in Russia on Tuesday with dozens of drones and rockets in an attack that inflicted serious damage on a major oil refinery and sought to pierce the land borders of the world's biggest nuclear power with armed proxies. Russia and Ukraine have both used drones to strike critical infrastructure, military installations and troop concentrations in their more than two-year war, with Kyiv hitting Russian refineries and energy facilities in recent months.”

March 13 – Bloomberg: “Ukrainian drone attacks halted three oil refineries deep within Russian territory in an assault President Vladimir Putin said was aimed at disrupting his presidential election later this week. An aerial strike on Wednesday caused a blaze at one of the country’s biggest crude-processing facilities, Rosneft PJSC’s Ryazan plant near Moscow. The smaller Novoshakhtinsk refinery in the southern Rostov region was also halted by a drone attack…”

Taiwan Watch:

March 10 – Reuters (Yimou Lee and Fabian Hamacher): “Taiwan's top security official told parliament… that China runs ‘joint combat readiness patrols’ near the democratic island every 7-10 days on average, saying Chinese forces were trying to ‘normalise’ drills near Taiwan. China has in recent years stepped up military activities near Taiwan, with almost daily incursions into the island's air defence identification zones and regular ‘combat readiness patrols’ that included drills by its air and naval forces.”

Market Instability Watch:

March 11 – New York Times (Angel Ubide): “Issues such as climate change, energy independence and national security plans are piling up for investors — and no one is certain where the pieces will fall. Before the global financial crisis of 2008, the economic policy framework was largely more transparent and predictable: manage demand by stabilising inflation while controlling public debt. It required fewer policy instruments and benefited from expanding globalisation and growing capital flows… But faced with a plethora of monetary, fiscal, regulatory, trade and industrial policies, that framework is now under pressure and it is on a collision course with the forces of rising nationalism and regionalised interests. As Mario Draghi warned during a speech in February, the disjointed policies emerging as a result could have unexpected and dire consequences.”

March 11 – Bloomberg (Lu Wang and Justina Lee): “Forget the artificial-intelligence frenzy — the most-exciting trade on Wall Street right now might just be betting on boring. As winners of the AI boom like Nvidia Corp. power benchmark stock gauges to record after record, a less remarked-upon phenomenon has been unfolding at the heart of the US market: Investors are sinking vast sums into strategies whose performance hinges on enduring equity calm. Known as short-volatility bets, they were a key factor in the stock plunge of early 2018 when they wiped out in epic fashion. Now they’re back in a different guise — and at a much, much bigger scale. Their new form largely takes the shape of ETFs that sell options on stocks or indexes in order to juice returns. Assets in such products have almost quadrupled in two years to a record $64 billion, data compiled by Global X ETFs show. Their 2018 short-vol counterparts — a small group of funds making direct bets on expected volatility — had only about $2.1 billion before they imploded.”

Bank Watch:

March 10 – New York Times (Rob Copeland): “A year ago, the government and America’s largest banks joined forces in a rare moment of comity. They were forced into action after Silicon Valley Bank collapsed on March 10, 2023, quickly followed by two other lenders, Signature Bank and First Republic. Faced with the threat of a billowing crisis that could threaten the banking industry — the worst one since 2008 — rivals and regulators put together a huge bailout fund… The biggest banks emerged from the period even larger, after picking up accounts from their smaller rivals. But they have also grown more confident in challenging regulators on what went wrong and what to do to prevent future crises. Indeed, many bankers and their lobbyists now rush to describe the period as a regional banking crisis, a term that tends to understate how worried the industry was at the time.”

Global Credit Bubble Watch:

March 13 – Bloomberg (Tasos Vossos): “Less than a year ago, investors were gaming out what would happen when billions of dollars of bonds reached maturity dates, leaving borrowers potentially crushed by costly refinancings. Now, those fears are fizzling away, with companies rushing to sell debt to a buoyant market. The implied cost of refinancing junk-rated bonds is now at its lowest since May 2022… For investment-grade firms, it’s the cheapest since the summer of 2022… Those falling costs have spurred a wave of corporate bond sales and, in turn, pushed back the so-called maturity wall of debt coming due. The turnaround has come as rate cuts are built into forecasts for the summer, lowering underlying borrowing costs and creating a risk-on mood among investors… And companies are seizing on the ebullience while it lasts, with the new supply of corporate bonds globally now running almost 30% ahead of last year…”

March 14 – Financial Times (George Steer and Harriet Clarfelt): “More companies have defaulted on their debt in 2024 than in any start to the year since the global financial crisis as inflationary pressures and high interest rates continue to weigh on the world’s riskiest borrowers, according to S&P Global Ratings. This year’s global tally of corporate defaults stands at 29, the highest year-to-date count since the 36 recorded during the same period in 2009... Subdued consumer demand, rising wages and high interest rates… had all contributed to the increase in the number of companies struggling to repay their debt, S&P said.”

March 14 – Wall Street Journal (Matt Wirz): “Private fund managers such as Apollo, Ares, Blackstone and KKR have grown to dominate corporate finance over the past decade. Now they are targeting the biggest prize in the global economy: the U.S. consumer. The firms are pushing aggressively into ‘asset-based finance,’ a kitchen sink of debt including auto loans, credit cards, real-estate mortgages and loans backed by equipment... If asset-based finance by private funds grows as quickly as corporate lending did, consumer, equipment and specialty lending by private funds could rise to $900 billion in the next few years from $350 billion currently, according to research by Atalaya Capital Management. The estimate doesn’t include residential and commercial mortgages, which many of the funds also buy.”

March 14 – Financial Times (Harriet Clarfelt): “Borrowing costs for European companies have fallen to a two-year low against benchmark bonds… The average European investment-grade spread — the premium paid by companies to borrow over equivalent German government bond yields — has dropped from 1.36 percentage points to 1.15 percentage points this year, according to Ice BofA data.”

March 12 – Reuters (Saeed Azhar): “Goldman Sachs Asset Management… aims to expand its private credit portfolio to $300 billion in five years from the current $130 billion, a senior executive said, laying out an aggressive expansion plan. ‘It's a huge opportunity,’ Marc Nachmann, Goldman’s global head of asset and wealth management, told Reuters… Goldman's private credit aspirations are larger than those of its peers, including Morgan Stanley, which aims to double its private credit portfolio to $50 billion in the medium term as it gathers funds from large investors.”

AI Bubble Watch:

March 13 – Associated Press (Kelvin Chan): “European Union lawmakers gave final approval to the 27-nation bloc’s artificial intelligence law Wednesday, putting the world-leading rules on track to take effect later this year. Lawmakers in the European Parliament voted overwhelmingly in favor of the Artificial Intelligence Act, five years after regulations were first proposed. The AI Act is expected to act as a global signpost for other governments grappling with how to regulate the fast-developing technology. ‘The AI Act has nudged the future of AI in a human-centric direction, in a direction where humans are in control of the technology and where it — the technology — helps us leverage new discoveries, economic growth, societal progress and unlock human potential,’ Dragos Tudorache, a Romanian lawmaker who was a co-leader of the Parliament negotiations on the draft law, said…”

March 11 – Bloomberg (Emily Graffeo): “Artificial-intelligence bulls are increasingly gravitating toward an ETF that amps up bets on Nvidia Corp. as trading volumes and inflows hit all-time highs. After notching a record $252 million in fresh capital last week, the GraniteShares 2x Long NVDA Daily exchange-traded fund (ticker NVDL) saw its second-biggest trading volume on Monday as Wall Street’s AI darling extended its Friday retreat. The fund, which gives investors two times the daily return of the underlying stock, has grown to $1.4 billion since launching at the end of 2022.”

Bubble and Mania Watch:

March 10 – Financial Times (Will Louch): “Private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn, as a sharp slowdown in dealmaking creates a crunch for investors looking to sell assets. The numbers, revealed in consultancy firm Bain & Co’s annual private equity report, show how rapidly the industry has grown over the past decade, as well as the challenges it faces from higher interest rates… ‘It may be another two to three years before the money starts to come back [to investors],’ Hugh MacArthur, chair of Bain’s private equity practice, told the Financial Times. ‘It’s probably the number one concern in the marketplace right now.’”

March 11 – Bloomberg (Elijah Nicholson-Messmer): “A wave of investor interest is driving billions of dollars into cryptocurrency assets this year, pushing inflows to record-breaking levels, according to CoinShares International Ltd. A record $2.7 billion flowed into crypto assets last week… The bulk of the flows went toward Bitcoin... Earlier on Monday, Bitcoin topped $72,000 for the first time ever, and has now notched six straight days of gains.”
March 14 – Bloomberg (Jeffry Bartash): “Bitcoin played the ‘anti-hero’ this week, stealing the spotlight from pop icons Taylor Swift and BeyoncĂ© in Google search popularity. Bitcoin’s record-breaking rally has sent searches for the largest cryptocurrency to their highest point in over a year, attracting more US searches than the two music artists combined over the last week, according to Google Trends data. Bitcoin has repeatedly set new all-time highs in recent days as investors pour into the digital asset.”

March 12 – Reuters (Nick Carey): “Global sales of fully electric and plug-in hybrid vehicles (PHEVs) rose at a tepid rate of 3% in February versus the same period last year mainly due to the impact of the Chinese Lunar New Year celebrations, market research firm Rho Motion said… The company said global sales hit 800,000 units. Sales in Europe grew 12% versus February of last year and rose 31% in the U.S. and Canada, but they fell 12% in China.”

March 13 – Reuters (Iain Withers): “The troubled U.S. office market is the world's most oversupplied and property investors have taken on too much debt, a Brookfield Asset Management executive said… ‘Per capita, it's the most oversupplied office market in the world,’ Bradley Weismiller, Brookfield's managing partner for real estate capital markets, told the MIPIM property conference. ‘That’s really the story. Unfortunately we (the U.S.) build too much of it in certain places ... and it doesn’t need to be used as office anymore,’ Weismiller said… ‘The sector as a whole borrowed too much money,’ he added.”

March 11 – Wall Street Journal (Anne Tergesen): “The 401(k) is doing double duty as both a retirement account and a source of emergency funds for more Americans. A record share of 401(k) account holders took early withdrawals from their accounts last year for financial emergencies, according to… Vanguard Group. Overall, 3.6% of its plan participants did so last year, up from 2.8% in 2022 and a prepandemic average of about 2%... Values in these accounts have risen substantially, in part because of a strong stock market and programs that automatically funnel money from people’s paychecks into their 401(k) accounts. These surging balances, however, have helped make more people comfortable dipping into their accounts when needed.”

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

March 11 – Reuters (Patricia Zengerle and Jonathan Landay): “U.S. intelligence agencies said… the country faces an ‘increasingly fragile world order,’ strained by great power competition, transnational challenges and regional conflicts, in a report released as agency leaders testified in Congress. ‘An ambitious but anxious China, a confrontational Russia, some regional powers, such as Iran, and more capable non-state actors are challenging longstanding rules of the international system as well as U.S. primacy within it,’ the agencies said in their 2024 Annual Threat Assessment.”

March 12 – Financial Times (Max Seddon): “Vladimir Putin has said Russia is prepared for a nuclear war, delivering a crude warning to the west as his army advances on the Ukrainian battlefield more than two years into its full-scale invasion. The Russian president boasted that his nuclear forces were on ‘constant alert’, claimed that Russia had surpassed the US in developing a new generation of nuclear-capable weapons and said testing could resume in a state television interview broadcast… ‘From the military-technical point of view we are, of course, prepared,’ Putin said. ‘[The US is] developing their components. So are we. That doesn’t mean, in my view, that they are prepared to start this nuclear war tomorrow. If they are — what can we do? We’re prepared.’”

March 11 – Reuters: “Russia said a group of its warships had arrived in Iran to take part in drills with Iran and China in the Gulf of Oman and the Arabian Sea. The joint exercises, called ‘Maritime Security Belt – 2024’, will involve warships and aviation, the Russian defence ministry said… ‘The practical part of the exercise will take place in the waters of the Gulf of Oman of the Arabian Sea,’ the ministry said. ‘The main purpose of the maneuvers is to work out the safety of maritime economic activity.’”

De-globalization and Iron Curtain Watch:

March 12 – New York Times (Keith Bradsher): “China’s factory exports are powering ahead faster than almost anyone expected, putting jobs around the world in jeopardy and setting off a backlash that is gaining momentum. From steel and cars to consumer electronics and solar panels, Chinese factories are finding more overseas buyers for goods. The world’s appetite for its goods is welcomed by China, which is enduring a severe downturn… But other countries are increasingly concerned that China’s rise is coming partly at their expense… The European Union announced last week that it was preparing to charge tariffs, which are import taxes, on all electric cars arriving from China. The European Union said that it had found ‘substantial evidence’ that Chinese government agencies have been illegally subsidizing these exports…”

March 9 – Financial Times (Ryan McMorrow, Nian Liu, Gloria Li, and Michael Acton): “Apple and Tesla cracked China, but now the two largest US consumer companies in the country are experiencing cracks in their own strategies as domestic rivals gain ground and patriotic buying often trumps their allure. Falling market share and sales figures reported this month indicate the two groups face rising competition and the whiplash of US-China geopolitical tensions. Both have turned to discounting to try to maintain their appeal. A shift away from Apple, in particular, has been sharp, spurred on by a top-down campaign to reduce iPhone usage among state employees and the triumphant return of Chinese national champion Huawei…”

Inflation Watch:

March 11 – CNBC (Jeff Cox): “Consumers increasingly doubt the Federal Reserve can achieve its inflation goals anytime soon, according to a survey… from the New York Federal Reserve. While the outlook over the next year was unchanged at 3%, that wasn’t the case for the longer term. At the three-year range, expectations rose 0.3 percentage point to 2.7%, while the five-year outlook jumped even more, up 0.4 percentage point to 2.9%. All three are well ahead of the Fed’s 2% goal for 12-month inflation…”

March 12 – Reuters (Ann Saphir): “A second straight month of stronger-than-expected inflation has effectively shut the door on the possibility of a Federal Reserve interest-rate cut before June… Gasoline and shelter prices drove the February consumer price index up 3.2% versus a year earlier, an acceleration from January's 3.1% increase. Underlying core inflation, excluding gas and food prices, slowed less than economists had forecast, and on a three-month and six-month basis actually gained traction… Tuesday's inflation report ‘is an ugly read that will do nothing to sooth nerves’ at the Fed, wrote BMO economist Scott Anderson. ‘Clearly, restrictive monetary policy has not yet fully done its work and a patient and slightly hawkish Fed must remain in place for the monetary medicine to fully take effect.’ Core services inflation excluding rents, a measure to which Fed Chair Jerome Powell has said he pays close attention, rose 0.5% in February from a month earlier, and over the past three months is up on an annualized basis by 6.8%, compared with the 6.7% pace in January.”

March 14 – Associated Press (Christopher Rugaber): “Wholesale prices in the United States accelerated again in February, the latest sign that inflation pressures in the economy remain elevated and might not cool in the coming months as fast as the Federal Reserve or the Biden administration would like. The… producer price index… rose 0.6% from January to February, up from a 0.3% rise the previous month. Measured year over year, producer prices rose by 1.6% in February, the most since last September… Higher wholesale gas prices, which jumped 6.8% just from January to February, drove much of last month’s increase. Wholesale grocery costs also posted a large gain, rising 1%.”

March 12 – New York Times (Jeanna Smialek): “It is costing Americans more to protect against disaster, a development that is pushing up official inflation figures. Various kinds of insurance — including car, medical and property protection — are costing more… Although it is tough for economic policymakers to do much to snuff out the various drivers behind the trend, the pressure is helping to increase overall prices. ‘Insurance of various different kinds — housing insurance, but also automobile insurance, and things like that — that’s been a significant source of inflation over the last few years,’ Jerome H. Powell, the Federal Reserve chair, said during congressional testimony... ‘And it’s to do with a million different factors.’”

March 10 – Wall Street Journal (Heather Haddon): “If you are hungry for barbecue on a Saturday night this month, a delivery of a pulled-pork sandwich from Cali BBQ could cost you around $18. Or you could hold off a few days and order the same sandwich delivered on a weekday afternoon for around $12. Restaurants like… Cali BBQ are experimenting with a form of the dynamic pricing long used by airlines, hotels and ride-hailing services. Technology providers are pitching services that enable restaurants to change prices weekly or monthly, increasing or slashing the cost… depending on demand and sales patterns.”

March 14 – Reuters (Maytaal Angel and Maxwell Akalaare Adombila): “Major African cocoa plants in Ivory Coast and Ghana have stopped or cut processing because they cannot afford to buy beans…, meaning chocolate prices around the world are likely to soar. Chocolate-makers have already increased prices to consumers, after three years of poor cocoa harvests, with a fourth expected, in the two countries that produce nearly 60% of the world's cocoa.”

Federal Reserve Watch:

March 11 – Reuters (Michael S. Derby): “A Federal Reserve facility launched in haste a year ago amid the heavy stress triggered by Silicon Valley Bank's collapse closes for new business on Monday, amid evidence it helped turn the tide of trouble that risked derailing the economy and upending the central bank’s efforts to lower inflation. A year after the Bank Term Funding Program was unveiled on a Sunday afternoon -- when regulators feared a systemwide bank run might unfold the next day -- deposits have stabilized, bank loan books overall are growing, no bank of meaningful size has failed in 10 months, and the Fed was not forced to change its monetary policy footing.”

Biden Administration Watch:

March 13 – Bloomberg (Viktoria Dendrinou and Christopher Condon): “US Treasury Secretary Janet Yellen said it’s ‘unlikely’ that market interest rates will return to levels that prevailed before the Covid-19 pandemic triggered a wave of inflation and higher yields. Asked why White House projections… showed markedly higher expectations for interest rates in coming years compared with projections a year ago, Yellen said the new numbers were in line with private sector forecasts.”

U.S. Bubble Watch:

March 12 – Reuters (Dan Burns): “The U.S. federal budget deficit grew in February… The deficit last month was $296 billion, 13% larger than the $262 billion shortfall in February 2023. Outlays for the month grew 8% to $567 billion - a record for the month - while receipts rose 3% to $271 billion. For the first five months of the fiscal year, the deficit rose by $106 billion, or 15%, to $828 billion… The Treasury said both receipts and outlays were records on a year-to-date basis, with receipts up 7% to $1.856 trillion, and outlays up 9% to $2.684 trillion… Interest expenses on the $26 trillion national debt continue to grow rapidly, with debt-servicing costs up 67% from February 2023 to $76 billion… On a year-to-date basis, interest on the public debt rose 41% to $433 billion and for the first five months of the fiscal year was exceeded only by Social Security in individual line item expenses. The weighted-average interest rate on Treasury securities rose to 3.2% in February from 2.52% a year ago and 3.15% in January.”

March 13 – Bloomberg (Christopher Anstey): “Harvard University economics professor Kenneth Rogoff said both President Joe Biden and his predecessor and challenger Donald Trump risk sending US debt levels into dangerous territory as Washington fails to grasp that the era of ultra-low interest rates won’t come back. Washington in general has a very relaxed attitude towards debt that I think they’re going to be sorry about,” Rogoff said… ‘It’s just not the free lunch that Congress and perhaps the two presidential candidates have gotten used to.’”

March 14 – Dow Jones (Jeffry Bartash): “Strong labor market keeps U.S. out of recession… The number of Americans who applied for unemployment benefits last week slipped to 209,000 and continued to signal a strong labor market and low level of layoffs. Economists… had forecast new claims to total 218,000… New jobless claims have ranged from 194,000 to 225,000 a week in the first three months of 2024, an extremely low level from a historical perspective… The number of people collecting unemployment benefits in the U.S., meanwhile, rose by 17,000 to 1.81 million…”

March 14 – Associated Press (Anne D’Innocenzio): “Americans picked up their spending a bit in February after pulling back the previous month. But last month’s gain was weaker than expected, and January’s decline was revised even lower, suggesting that many are growing more cautious with their money. Retail sales rose 0.6% last month after falling a revised 1.1% in January, dragged down in part by inclement weather…”

March 12 – CNBC (Steve Liesman): “Consumer spending bounced back in February from a January dip, with a little help from leap day. But sales still registered good gains even after correcting for that extra spending day. The CNBC/NRF Retail Monitor, derived from actual credit card spending data from Affinity Solutions, rose 1.06% in February, when excluding autos and gas.”

March 10 – NBC (J.J. McCorvey): “Buying now and paying later is still a popular way to splurge on airfare to Cabo. It’s an increasingly common way to buy groceries and lawn furniture, too. Consumers ages 35 and under comprise 53% of ‘buy now, pay later’ users but just 35% of traditional credit card holders, according to LexisNexis Risk Solutions. Many of those core ‘BNPL’ borrowers have grown so comfortable using the installment loans for just-out-of-reach luxuries that they’re putting more everyday purchases on them as well. Apparel and accessories were the most popular product category among millennial (ages 30-44) and Gen Z (18-29) users of the BNPL provider Afterpay in 2021 and 2022. But last year it fell to fourth place behind ‘arts, travel and entertainment,’ ‘home and garden’ and hardware’… The shift adds to signs that fast-growing BNPL services… are becoming a routine tool in young adults’ wallets as they adapt to higher prices.”

March 13 – CNBC (Diana Olick): “Mortgage rates swung slightly lower last week, fueling a significant jump in mortgage demand for the second straight week… Applications for a mortgage to purchase a home rose 5% for the week but were still 11% lower than a year ago. Homebuyers are up against more than just high interest rates. They are looking at sky-high home prices and a still lean supply of houses for sale. While more inventory is coming onto the market with the spring season, it is not enough to meet the demand, especially for smaller, starter homes.”

March 12 – Reuters (Amina Niasse): “U.S. small business sentiment fell in February to the lowest level since May due to continued concerns around inflation… The monthly National Federation of Independent Business sentiment index fell to 89.4 in February from 89.9 in January. The reading marks the 26th-straight-month where the index remained below its 50-year average of 98. The share of owners citing inflation as their most pressing problem rose 3 points to 23%, the top concern for businesses according to the report… ‘While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates,’ said Bill Dunkelberg, NFIB's chief economist.”

March 13 – CNBC (Eric Rosenbaum): “Chief financial officers at large companies see a U.S. economy and equities market that can continue to grow, even as fears about sticky inflation and a potentially overextended, and concentrated, bull run in stocks weigh on investors. That’s according to the CNBC CFO Council Survey for the first quarter of 2024… The percentage of CFOs who think the Fed will be able to achieve a soft landing has reached a five-quarter high, at 48%... CFOs don’t see rate anxiety as being a major short-term hurdle for stocks. Over 80% of CFOs believe the Dow Jones Industrial Average is more likely to continue its run up to the 40,000-point mark, with technology continuing to lead the way among sectors, than slip into a bear market.”

Fixed Income Watch:

March 14 – Bloomberg (James Crombie): “Tighter policy in Japan means higher domestic yields, reducing the need for that investor base to stretch for returns elsewhere. That’s bad news for high-grade US corporate bonds, which have long had a significant buyer base in Japan. US credit markets have been worrying about an end to Japanese yield curve control since its demise was first rumored, well over a year ago. That and elevated yen-dollar hedging costs are seen as potential threats to demand for investment-grade bonds, which are being issued at a record pace this year.”

China Watch:

March 11 – Associated Press (Elaine Kurtenbach and Ken Moritsugu): “China’s national legislature wrapped up its annual session Monday with the usual show of near-unanimous support for plans designed to carry out ruling Communist Party leader Xi Jinping’s vision for the nation. The weeklong event, replete with meetings carefully scripted to allow no surprises, has highlighted how China’s politics have become ever more calibrated to elevate Xi. Monday’s agenda lacked the usual closing news conference by the premier, the party’s No. 2 leader. The news conference has been held most years since 1988 and was the one time when journalists could directly question a top Chinese leader.”

March 11 – Wall Street Journal (Brian Spegele): “This was supposed to be a story about a press conference with China’s premier. Each year for more than three decades, China’s No. 2 leader has concluded the country’s annual legislative meetings in Beijing by taking questions from journalists. Broadcast on national television, it has been one of the few chances Chinese people have had to hear a top official questioned directly about pressing issues facing the country. Until Monday. This year, Chinese Premier Li Qiang exited Beijing’s Great Hall of the People at the end of the session without fielding a single query—a potent reflection of the secrecy that shrouds decision-making in China as leader Xi Jinping tightens his grip in the face of growing challenges.”

March 15 – Bloomberg: “China offered a surprise reminder to bankers swimming in a pool of cash for months now that its liquidity boost is aimed at rejuvenating the economy, not helping support financial speculation. Draining cash from the banking system Friday, policymakers said their support has already ‘fully’ satisfied financial institutions’ needs… While there are no signs that banks are desperate for cash, the move also underscored Beijing’s frustration that its monetary stimulus has had more of an impact in fueling a bond market rally than in lifting economic growth. The liquidity withdrawal — the first since 2022 for its most high-profile lending tool — has been also taken by some market watchers as a message that Beijing is conscious of the risks of speculative bubbles forming in even China’s safest assets. ‘The net drainage this time is a clear signal that the People’s Bank of China wants to squeeze out speculative funds from the market,’ said Zhaopeng Xing, senior China strategist at Australia and New Zealand Banking Group.”

March 11 – Reuters: “China has asked banks to enhance financing support for state-backed China Vanke and called on creditors to consider private debt maturity extension, in a rare intervention from central government to help an embattled property firm, two sources said. The State Council - China's cabinet - is coordinating support effort for China Vanke…, adding financial institutions have been requested to make swift progress. Authorities are scrambling to stabilise a real estate sector in the throes of a debt crisis characterised by default among the country's biggest property firms, with support including boosting financing for developers of certain projects.”

March 12 – Bloomberg: “China Vanke Co. is in talks with banks on a debt swap that would help the cash-strapped developer stave off its first-ever bond default, according to people familiar... Vanke’s major creditor banks are considering a plan to swap bond holdings worth tens of billions of yuan in principal into secured debt… The swap would help China’s second-largest real estate company avoid a public default while giving banks collateral to protect against any potential losses. The talks, coordinated by China’s financial regulators and the local government of Shenzhen, are ongoing… Vanke’s cash crunch has become a major focus for investors trying to gauge how much help China’s government and its banks will provide to the few remaining property giants that have so far avoided default.”

March 11 – Bloomberg: “China Vanke Co. is facing resistance from the nation’s two largest banks on a new HK$4.5 billion ($575 million) offshore loan, according to people familiar…, in a major test of state support for the cash-strapped real-estate giant… ICBC and Construction Bank have asked Vanke to provide sufficient collateral to back the new loan but the developer was unwilling to do so, one of the people said. Without collateral or other forms of credit enhancement, the lenders would need clearing from regulators to proceed, the person added.”

March 11 – Financial Times (Thomas Hale in Shanghai and Hudson Lockett): “Chinese developer Vanke’s bonds have been downgraded by Moody’s in the latest outbreak of stress across the country’s troubled property sector. Vanke, the second-largest developer in China by sales, is state-backed and had retained investment-grade ratings despite a wave of defaults in the sector since the 2021 collapse of China Evergrande. The company has in recent weeks become the focal point of a property slowdown that has piled pressure on policymakers in Beijing as they seek to boost confidence in the world’s second-largest economy.”

March 15 – Wall Street Journal (Cao Li): “China’s real-estate market set an unwelcome record last month. The price of secondhand homes in the country’s most developed cities fell 6.3% in February compared to the same month last year. That was the worst year-on-year decline since the government started releasing data in 2011. It was part of a widespread drop in prices across the country, as China’s painful real-estate slump shows no signs of losing steam.”

March 11 – CNBC (Evelyn Cheng): “China’s struggling real estate developers won’t be getting a major bailout, Chinese authorities have indicated, warning that those who ‘harm the interests of the masses’ will be punished. ‘For real estate companies that are seriously insolvent and have lost the ability to operate, those that must go bankrupt should go bankrupt, or be restructured, in accordance with the law and market principles,’ Ni Hong, Minister of Housing and Urban-Rural Development, said… ‘Those who commit acts that harm the interests of the masses will be resolutely investigated and punished in accordance with the law,’ he said. ‘They will be made to pay the due price.’”

March 9 – Financial Times (Cheng Leng): “Officials from some of China’s most indebted provinces and cities have met leading state bankers in Beijing in recent days as they step up efforts to renegotiate debt payments on billions of dollars in liabilities that threaten to constrain growth in the world’s second-biggest economy. China’s local governments accumulated enormous liabilities over a decade-long, debt-fuelled building spree. While the infrastructure drive helped fuel growth, many local governments are now grappling with billions of dollars of off-balance sheet debt…”

March 12 – Financial Times (Joe Leahy, Ryan McMorrow and Cheng Leng): “China is scrapping a string of infrastructure projects in indebted regions as it struggles to reconcile a need to save money with this year’s target for economic growth. Beijing has ordered a dozen highly indebted areas, many of them less-developed and far from the coast, to curb infrastructure spending as it tries to unwind a decade-long investment binge many believe is unsustainable. But analysts say the austerity drive may make it even more difficult to achieve the ambitious 5% target for annual growth set by Premier Li Qiang during China’s ‘Two Sessions’ political gathering this month — with potentially far-reaching implications for the global economy.”

March 12 – Bloomberg: “Chinese regulators told some of the country’s lenders to limit their use of a repayment-support mechanism that has backed offshore bond issuance by local government financing vehicles, according to people familiar…. At least four commercial banks… were asked last week to limit use of the so-called standby letter of credit, or SBLC, which is a pledge by a lender to repay the debt if the issuer can’t…”

March 14 – Bloomberg (Jackie Cai): “China’s banking regulator has started to scrutinize offshore holdings of local government financing vehicles’ debt at the nation’s financial institutions in Hong Kong, according to people familiar... The regulator contacted the Hong Kong units of several Chinese banks and insurers earlier this week and asked them to detail their holdings of dollar bonds issued by LGFVs… Officials were particularly interested in their exposure to bonds with tenors of less than one year, the people added.”

March 8 – Bloomberg (Katia Dmitrieva): “China’s consumer prices rose for the first time since August, breaking a contraction streak that has put growth potential in the world’s second-largest economy under pressure. The consumer price index increased 0.7% in February from a year earlier…, rebounding from the biggest drop since 2009 in January. The gain was higher than analysts’ estimates of a 0.3% gain…”

March 14 – Bloomberg: “China’s state funds bought around $50 billion of the nation’s equities over the past five months, with purchases slowing during the annual meeting of the nation’s top legislators, according to an analysis by Bloomberg Intelligence. The so-called National Team, including sovereign wealth fund Central Huijin Investment Ltd., made most of the purchases in late January and early February through exchange-traded funds...”

March 13 – Wall Street Journal (Weilun Soon and Rebecca Feng): “China’s biggest quant funds beat the market for years by applying complicated statistical models to stock picking. But they didn’t model a key factor—the government. Quantitative funds, which use algorithms to chew masses of data and make trading decisions, have become a powerful force in the U.S., where funds such as AQR Capital Management, Renaissance Technologies and Millennium Management manage huge portfolios… But the industry has at times been controversial, being accused of herd behavior that exacerbates periods of volatility. China’s $200 billion quant fund industry is facing similar accusations, and the ramifications for the sector could be huge. These funds lost billions of dollars last month when their bets on small companies’ shares went wrong. They have found themselves in the crosshairs of Chinese regulators…”

March 12 – Reuters: “Chinese Premier Li Qiang does not intend to hold a meeting with visiting foreign CEOs at the upcoming China Development Forum (CDF) in late March, three sources… said, raising concerns about Beijing's commitment to attract investment from abroad at a time of souring sentiment. Organised annually by Beijing since 2000 at the Diaoyutai State Guesthouse, the high-level forum traditionally serves as an opportunity for global CEOs and Chinese policymakers to meet and discuss foreign investment.”

Global Bubble Watch:

March 14 – Bloomberg (Manuel Baigorri): “It wasn’t so long ago that Chinese companies — state-owned and private — had a reputation for snapping up all sorts of international assets, from airports to football clubs, as they rapidly expanded overseas. The craving for foreign trophies was so strong that dealmakers in Europe and the US would sometimes use mystery Chinese bidders as wild cards to make the sale process more competitive… That trend has gone into reverse, with cash-strapped companies… ditching expansionism and selling off assets instead. ‘Some Chinese conglomerates are now accelerating their asset disposals because some are faced with liquidity issues,’ said Samson Lo…, head of Asia Pacific mergers and acquisitions at UBS Group AG. ‘Those groups are under increasing pressure to raise cash and repay debt.’”

Central Banker Watch:

March 13 – Bloomberg (William Horobin): “The European Central Bank will lower borrowing costs in the spring, with June more likely than April for a first move, Bank of France Governor Francois Villeroy de Galhau said. ‘We will probably cut rates in spring, and spring in Europe is from April to June 21,’ Villeroy said… ‘It’s perhaps more probable in June — we are very pragmatic and will see depending on the data.’ The ECB has policy decisions scheduled for April 11 and June 6, with the vast majority of Villeroy’s colleagues indicating the latter meeting will likely see the deposit rate start to be lowered…”

March 13 – Financial Times (Martin Arnold): “The European Central Bank has announced one of the biggest overhauls of its connections to the financial system for a decade, outlining plans to lend more to commercial banks while shrinking its vast bond portfolio. The shift, which ECB governing council members agreed… on Wednesday, underlines how major central banks are rethinking the way they provide liquidity to the financial system while reducing the size of their balance sheets. Having pumped vast amounts of liquidity into the financial system for the past decade through massive bond-buying, the ECB has been debating for several months what ‘operational framework’ to switch to now that its assets are shrinking. The reduction of the ECB’s balance sheet means it will steadily drain excess liquidity from the banking system. At some point, this risks leaving lenders without sufficient reserves and could cause unwanted volatility in short-term borrowing costs and even a credit crunch.”

Japan Watch:

March 12 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials are edging closer to raising interest rates and will decide whether to move this month at next week’s policy meeting, with the outcome currently too close to call, according to people familiar with the matter. A final decision will be made after officials see the initial tally from spring wage talks due Friday…”

March 11 – Bloomberg (Toru Fujioka): “The Bank of Japan is widely expected to scrap the world’s last negative interest rate in the coming weeks, marking the closing act of global central banks’ grand experiment with unorthodox policies. Governor Kazuo Ueda is forecast to raise the short-term rate from -0.1% either next week or in April in what would be the first rate hike in Japan since 2007… The move would mark a step toward mainstream policy after decades of experimentation saw the BOJ amass a mountain of bonds and equities, swelling its balance sheet to 127% of annual output.”

March 10 – Financial Times (Kana Inagaki and Robin Harding): “Policymakers at the Bank of Japan are tackling a series of thorny policy debates as they confront the practicalities of raising interest rates for the first time since the summer of 2006. While Japan’s central bank has signalled that it is almost ready to end an unprecedented era of cheap money, with the first rate increase expected as early as March or April, it still faces a number of challenging decisions about how to leave negative rates behind without causing turmoil for global markets and Japanese lenders. Among those questions is whether to raise rates first to zero or directly into positive territory; what to do about the central bank’s vast bond portfolio; and most important of all, what to signal about the path of interest rates beyond the first increase.”

March 13 – Reuters (Tetsushi Kajimoto and Anton Bridge): “Toyota Motor agreed to give factory workers their biggest pay increase in 25 years on Wednesday, heightening expectations that bumper pay raises will give the central bank leeway to make a key policy shift next week. Toyota, Panasonic, Nippon Steel, and Nissan were among some of Japan Inc's biggest names that agreed to fully meet union demands for pay hikes at annual wage negotiations that wrap on Wednesday.”

Emerging Market Watch:

March 11 – Bloomberg (Zijia Song, Giovanna Bellotti Azevedo and Srinivasan Sivabalan): “The risk of government defaults in emerging markets this year is subsiding, stoking a rally in bonds that were just recently teetering on collapse and propelling junk-rated sovereign debt to its best start to a year since 2019… Only 10 countries are now flashing signs of distress in the bond market, half as many as in 2022.”

March 11 – Financial Times (Emma Boyde): “Flows into emerging market equity exchange traded funds marked a new record in February, as activity by China’s ‘national team’ appeared to continue at pace. EM equity ETFs sucked in $28.2bn, an increase of more than 20% on the previous record set in January of $23.3bn and a third of the $85.5bn in total captured by equity ETFs globally during the month, according to BlackRock. The vast majority of this money was ploughed into domestic Chinese equity ETFs…”

March 11 – Wall Street Journal (Megha Mandavia): “U.S. markets have been no stranger to meme-driven, casino-like trading in recent years. But on the other side of the world, a stock speculation boom is unfolding that makes GameStop and bitcoin look tame… India accounted for a staggering 78% of equity options contracts traded worldwide in 2023, according to data from the Futures Industry Association… The number of stock index options traded there reached 84.3 billion contracts last year, up 153% from 2022. Total futures and options turnover touched a notional value of $4.5 trillion on the National Stock Exchange on Thursday.”

Leveraged Speculation Watch:

March 12 – Reuters (Carolina Mandl): “Hedge funds' use of leverage in equities trading is near record levels after debt-fueled strategies ballooned in recent years and an upturn in financial markets prompted riskier bets, according to two banking sources… Fresh data compiled by Goldman Sachs, JPMorgan and Morgan Stanley, the three largest global prime brokerages,… show that leverage used to juice up returns is at or close to historical highs... ‘Leverage is definitely at a high in the macro (hedge fund) world,’ said John Delano, a managing director at Commonfund… Goldman Sachs' note showed that hedge funds' leverage in equity positions was at almost three times their books compared with 2.35 times a year ago, and a record level over the past five years…”

March 12 – Bloomberg (David Pan): “Demand for the investment vehicles that offer leveraged exposure to Bitcoin is soaring as the digital asset hits record highs. Leveraged futures-based exchange-traded funds such as VolatilityShares’ 2x Bitcoin Strategy ETF (BITX) are seeing flows rivaling spot Bitcoin ETFs. The fund raked in $630 million in net monthly inflows, beaten only by BlackRock and Fidelity…”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 9 – Bloomberg (David Pan): “After recovering from a near-death experience during the most recent crypto winter, Bitcoin miners are back in survival mode — spending billions of dollars on equipment and drawing energy at a record pace ahead of an update in the digital currency’s code that threatens revenue streams. The surge in activity is sparked by a runup in the world’s largest cryptocurrency, fueled by newly launched spot Bitcoin exchange-traded funds, and a quadrennial event called the halving that is slated to take place in April… Since February 2023, 13 of the top mining companies have placed orders for over $1 billion worth of specialized computers, according to data compiled by TheMinerMag based on public filings.”

Geopolitical Watch:

March 11 – Bloomberg (Andreo Calonzo and Manolo Serapio Jr.): “The Philippines is counting on the US and its allies to play a crucial role in its plans to explore energy resources in the disputed South China Sea, according to Manila’s envoy to Washington. The country is seeking to parlay its deepening security ties with Washington into broader economic benefits, said Philippine Ambassador to the US Jose Manuel Romualdez. ‘When the time comes that we are going to start exploring it, we’ll have the options to be able to see how we can secure the expedition,’ Romualdez said... ‘We’re working closely with our allies, not only the US but also Japan and Australia,’ he said.”

March 12 – Reuters (Mircely Guanipa, Deisy Buitrago and Marianna Parraga): “Iran and Venezuela are trying to patch together an oil alliance that began to fray last year, according to six people…, after the South American country fell behind on oil swaps that had boosted crude exports and helped stem domestic fuel shortages. The expected April return of U.S. sanctions on Venezuela's oil industry will make the Iran alliance critical to keeping its lagging energy sector afloat. Washington last year temporarily relaxed sanctions on Venezuela's promise to allow a competitive presidential election, something that has not happened.”