Weekly Commentary: Really BIG

Notable developments for two key facets of the global government finance Bubble this week.

November 21 – Financial Times (George Steer): “Hedge funds betting on a decline in US and European stock markets have suffered an estimated $43bn of losses in a sharp rally over recent days. Short sellers, many of whom had built up bets against companies exposed to higher borrowing costs over the past year or so, have been caught out by a ‘painful’ rebound in ‘low quality’ stocks this month, said Barclays’ head of European equity strategy Emmanuel Cau. That has come as the market has grown more confident that the US Federal Reserve’s cycle of rate rises is finally over.”

It's definitely been The Year of the Squeeze. The Goldman Sachs most short index began the year with a 34% rally into early February. And after a spring retreat, the index surged 32% in the June/July period. While painful, the recent equities squeeze has been relatively modest. Yet stocks are only part of the story. Powerful squeezes have engulfed bonds, currencies, and the Credit default swap (CDS) marketplace.

Under the headline, “Crushed Bond Shorts See Quants Rush to Exit Wrong-Way Fed Bets,” a Tuesday Bloomberg article by Edward Bolingbroke: “The front-end of the Treasuries curve is expected to be propped up in the near-term by further waves of covering from commodity trading advisers, or CTAs, fresh from a washout of short positions triggered by last week’s US inflation data.”

The above FT article ran under the headline, “Hedge Fund Short Sellers Suffer $43bn of Losses in Market Rally.” To be sure, traditional short sellers account for only a small fraction of outstanding short positions. In last week’s WSJ article reporting on renowned short seller Jim Chanos’ decision to shutter his funds after almost four decades, it was noted that the short-only hedge fund sector has shriveled down to a mere (market inconsequential) $5 billion.

November 21 – Financial Times (George Steer): “The US stock market’s “Magnificent Seven” have been a headache for mutual fund managers, who have mostly eschewed them and are paying the performance price. Hedge funds have taken a different tack — in short, they yelled ‘YOLO’ and jumped in with both feet. From Goldman Sachs…: ‘The combination of elevated hedge fund concentration and the strong performance of popular stocks has supported returns this year but lifted our crowding index to a record high. Our Hedge Fund VIP list of the most popular long positions has returned +31% YTD, and most of the ‘Magnificent 7’ mega-cap tech stocks remain at the top of the list. Mirroring the increasing concentration in the equity market, concentration in hedge fund portfolios has risen; the typical hedge fund holds 70% of its long portfolio in its top 10 positions. These dynamics have also lifted hedge fund exposure to the Momentum factor to a near record.'Hedge fund crowding is now the most extreme it has been in the 22 years that Goldman has tracked hedge fund positioning…”

The FT article references “Goldman’s quarterly Hedge Fund Trend Monitor, which analyses over 700 hedge funds with $2.4tn of gross stock positions.” “Hedge fund exposure to momentum has rarely been as extreme as this, and the swing since 2022 has been astonishing.” A Bloomberg article stated the Goldman hedge fund universe holds $1.6 TN of longs versus $797 billion of shorts. Today, most shorting is associated with long/short and derivatives strategies.

The Goldman hedge fund universe captures only a slice of the vast “global leveraged speculating community.” Within my analytical framework, the global levered speculators operate as the marginal source of marketplace liquidity. “Risk on” leveraging creates liquidity, while de-risking/deleveraging destroys it. Stock shorts are only a small part of overall short exposure. I assume there’s a huge short position in Treasuries that finances holdings of higher yielding corporate debt. Shorting of Japanese government debt and other yen instruments could be one of the largest short positions ever.

While there have been close calls, it’s been a rewarding year for levered speculation. Yet fragility lies just below the surface. Performance dispersion has been exceptional. Some funds have performed quite well, while many have struggled. This has promoted extreme crowding in the high-flying big momentum technology stocks (i.e., “magnificent seven” and AI). The highly levered Treasury “basis trade” is surely crowded, along with myriad “carry trades” (corporate bonds, MBS, EM, European periphery).

Most importantly, I view leveraged speculation as one Really BIG Crowded Trade. Way too much “money” playing popular trading strategies ensures volatility and unstable markets. In particular, the proliferation of hedging and options strategies promotes instability. The potential is there for hedging and derivatives strategies to precipitate a market crash. But so far, this market structure has fueled repeated upside dislocations. The urgent unwind of hedges, short positions, and bearish CDS trades combine with FOMO for melt-up dynamics. The bottom line is that this aberrant structure impedes normal market function.

Under the Friday Bloomberg headline, “Wall Street Goes All-In on Cross-Market Meltup as Bears Retreat” (Isabelle Lee and Denitsa Tsekova): “It’s the major casualty of November’s sizzling stock rally: Investor caution. Thanks to what’s shaping up to be one of the biggest market meltups over the last 100 years, demand for protective strategies has all but evaporated. Professional and retail traders are battling to keep pace with an S&P 500 that has advanced almost 9% this month alone. Erstwhile defensive refuges — everything from inflation-protected bonds to cash ETFs and bearish options — are being jettisoned. In their place: Surging appetite for junk bonds and small-cap equities.”

On the other side of the world, Chinese Bubble deflation has gained important momentum, provoking only more extreme measures from an increasingly desperate Beijing. As reality begins to penetrate analysis, numbers quickly turn Really BIG.

November 22 – Bloomberg: “Chinese leaders are making their most forceful push yet to end the nation’s property crisis, ramping up pressure on banks to plug an estimated $446 billion shortfall in funding needed to stabilize the industry and deliver millions of unfinished apartments. Policymakers are finalizing a draft list of 50 developers eligible for financial support that includes Country Garden Holdings Co. and Sino-Ocean Group, indicating a pivot by Beijing to help some of the most distressed builders. Meanwhile, the country’s top lawmaking body said banks should increase funding for developers to reduce the risk of additional defaults and make certain that housing projects get completed.”

November 19 – Wall Street Journal (Rebecca Feng and Cao Li): “China’s housing market has a big problem: millions of unfinished homes that were sold but not delivered. Solving that is crucial for a recovery, but the problem keeps getting bigger. More property developers are defaulting on their debt and adding to the logjam of construction delays and stalled residential developments across the country. Potential home buyers have lost confidence in the housing market because they fear developers won’t be able to complete their projects. That sentiment has created a vicious circle as falling new home sales imperil even more companies. Households that have been waiting for years for the apartments they paid for have also become increasingly desperate for a resolution… Nomura’s chief China economist, Ting Lu, reckons that there are around 20 million units of uncompleted and delayed presold homes across China. He estimated that more than $440 billion would be needed to finish those homes and predicts that Beijing will eventually have to fill that funding gap.”

What are the options when purchasers have provided down-payments and already taken out mortgages on 20 million apartment units - and developers don’t have the money to complete construction? With years’ worth of inventory in many markets, China could live without millions of additional units. Beijing could simply write reimbursement checks to the 20 million buyers. But that would leave millions of construction jobs in jeopardy, along with a legacy of scores of eyesore uncompleted projects.

November 23 – Bloomberg: “China may allow banks to offer unsecured short-term loans to qualified developers for the first time, people familiar with the matter said, a major push to ease the property crisis that’s dragging down growth in the world’s second-largest economy… If the support measures are approved, they would represent China’s most forceful attempt yet to plug an estimated $446 billion shortfall in funding needed to stabilize the industry and deliver millions of uncompleted homes.”

Cajoling an already stretched and vulnerable banking system into unsecured developer lending reeks of desperation.

November 24 – Wall Street Journal (John Cheng): “Any step by China to allow banks to provide unsecured loans to qualified developers ‘would be a risky move’ for the lenders, according to JPMorgan... Such a measure ‘would be negative for banks as it would raise concerns about national service risk and credit risk in the medium term,’ analysts including Katherine Lei and Karl Chan wrote... What’s more, implementation ‘would be challenging, as banks could circumvent such guidance due to credit risk concerns.’”

Bloomberg Economics offered their take, with a report titled, “Unsecured Property Loans? Good Idea, Won’t Work.” “China’s policymakers appear to be racing to fill a liquidity gap facing developers, which we estimate at 15% of GDP.” “The commercial incentive for banks to lend to developers in current market conditions is questionable — even loans to the top firms in the sector are risky. Consider the loan officer who’s on the hook if a loan goes sour — their career could be on the line. With that thought, we conclude that the policy effort to right the teetering property sector is far from over.”

Let’s squeeze in a few Bloomberg Intelligence (Kristy Hung) highlights: “Tier-3 cities’ new-home inventory – at 33 months of average sales in September, the highest since the series started in 2010…” “The backlog in tier-2 cities at 24 months of sales was the second highest in 11 years.” “A surge in secondhand home listings is set to add further supply-side pressure on residential prices, as more homeowners seek to offload their second, third, or fourth properties…”

A couple of the week’s FT headlines: “China Property: Running Out of Options as Fallout Spreads to Shadow Banking.” “China Struggles to Spend its Way Out of Economic Crisis.” Bloomberg estimates that total developer debt exceeds $12 TN. Beijing faces a multi-trillion dollar black hole – one that expands greatly when China’s banking system eventually succumbs. And there’s more than $12 TN of local government debt, along with a $3 TN trust industry. Lots of Really BIG numbers.

November 23 – Financial Times (Hudson Lockett and Sun Yu): “Zhongzhi, one of the biggest groups in China’s vast shadow financing market, faces a shortfall of as much as $36.4bn and has warned that it is ‘severely insolvent’ in a letter to investors. The worsening situation at Zhongzhi has put the spotlight on liquidity issues in China’s nearly $3tn shadow financing market and its exposure to the country’s property sector crisis. Zhongzhi, a sprawling financial conglomerate, wrote… that its total assets amounted to just Rmb200bn ($28bn) against obligations of up to Rmb460bn. The company blamed the shortfall on the departure of ‘multiple senior executives and key personnel’ and the 2021 death of founder Xie Zhikun… The company said ‘internal management ran wild’ as a result of these departures. ‘The group’s investment products have defaulted one after the other, and we deeply apologise to investors,’ it said.”

These BIG numbers can be challenging to comprehend. My brain gets stuck on the combined half Trillion dollars of Evergrande and Country Garden liabilities. And now a single investment company, Zhongzhi, fesses up to a $36 billion hole in its balance sheet. In a company comment I fear is applicable to too many Chinese institutions and companies, “internal management ran wild.”

It’s worth noting that Chinese stocks have basically ignored global “risk on,” the Xi Jinping charm offensive, and a loudening drumbeat of stimulus measures. Developer stocks popped on the latest news, but financial stocks have been notably subdued. The Hang Seng China Financials Index declined 1.3% in Friday trading, reducing the week’s gain to only 1.2%. China’s CSI300 Index declined 0.8% this week, closing barely above four-year lows. A good segue to China’s October Credit data.

Aggregate Financing increased a weaker-than-expected $260 billion, with October (first month of the quarter) typically a slower lending month. This was down from September’s strong $577 billion, but up from October 2022’s $128 billion. Three-month growth of $1.273 TN was 30% above comparable year ago growth. At $4.360 TN, y-t-d growth in Aggregate Financing is running 8.6% ahead of last year. It’s worth noting that 2023 Credit growth is tracking just ahead of 2020’s all-time record.

Total Loan growth slowed to a stronger-than-expected $103 billion, down from September’s $323 billion, but up from the year ago $86 billion. Y-t-d growth of $3.350 TN is running 14% ahead of 2022, with one-year growth at 11.3%. Corporate Loans dropped to $72 billion from September’s $234 billion, but were up from last year’s $65 billion. Y-t-d growth of $2.264 TN is running 9% ahead of 2022, with one-year growth at 13.5%.

Consumer Loans (chiefly mortgages) contracted $5 billion, down from September’s $121 billion increase. Y-t-d growth of $650 billion is 37% ahead of comparable 2022, but 32% below 2021. One year growth of 6.8% remains near multi-decade lows.

Government Bond growth of $220 billion was second only to June 2022’s $227 billion. Three-month growth of $522 billion was up 150% from comparable 2022 ($208bn). At $1.052 TN, y-t-d growth was 21% ahead of 2022. Government bonds expanded 14.3% over one year, 32.6% over two and 51% over three years.

When I ponder China’s current predicament, I often return to Ben Bernanke’s thesis on the Great Depression: if only the Fed had printed money and recapitalized the U.S. banking system, collapse would have been avoided. This is flawed analysis. China could (will) today spend Trillions plugging holes in developer, local government, and corporate balance sheets, while recapitalizing their bloated banking system. Yet it would still require upwards of $5 TN of new Credit each year to hold collapse at bay. Beijing will spend Really BIG amounts, but it’s fighting a losing battle against Bubble Dynamics.


For the Week:

The S&P500 added 1.0% (up 18.7% y-t-d), and the Dow gained 1.3% (up 6.8%). The Utilities increased 0.6% (down 13.7%). The Banks dipped 0.8% (down 18.0%), while the Broker/Dealers rose 1.0% (up 10.3%). The Transports advanced 1.1% (up 12.7%). The S&P 400 Midcaps gained 0.9% (up 5.3%), and the small cap Russell 2000 increased 0.5% (up 2.6%). The Nasdaq100 added 0.9% (up 46.1%). The Semiconductors were unchanged (up 48.0%). The Biotechs gained 1.1% (down 8.4%). With bullion rising $20, the HUI gold equities index jumped 3.7% (down 1.3%).

Three-month Treasury bill rates ended the week at 5.2525%. Two-year government yields gained six bps this week to 4.95% (up 52bps y-t-d). Five-year T-note yields rose four bps to 4.49% (up 48bps). Ten-year Treasury yields increased three bps to 4.47% (up 59bps). Long bond yields added a basis point to 4.60% (up 63bps). Benchmark Fannie Mae MBS yields gained five bps to 6.08% (up 69bps).

Italian yields rose four bps to 4.40% (down 30bps). Greek 10-year yields dipped two bps to 3.82% (down 75bps y-t-d). Spain's 10-year yields gained four bps to 3.63% (up 12bps). German bund yields rose five bps to 2.64% (up 20bps). French yields gained five bps to 3.20% (up 22bps). The French to German 10-year bond spread was unchanged at 56 bps. U.K. 10-year gilt yields surged 18 bps to 4.28% (up 61bps). U.K.'s FTSE equities index slipped 0.2% (up 0.5% y-t-d).

Japan's Nikkei Equities Index was little changed (up 28.9% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.78% (up 36bps y-t-d). France's CAC40 increased 0.8% (up 12.7%). The German DAX equities index added 0.7% (up 15.1%). Spain's IBEX 35 equities index rose 1.8% (up 20.8%). Italy's FTSE MIB index slipped 0.2% (up 24.2%). EM equities were mostly higher. Brazil's Bovespa index increased 0.6% (up 14.3%), and Mexico's Bolsa index gained 0.6% (up 9.3%). South Korea's Kospi index added 1.1% (up 11.6%). India's Sensex equities index increased 0.3% (up 8.4%). China's Shanghai Exchange Index declined 0.4% (down 1.6%). Turkey's Borsa Istanbul National 100 index rose 1.4% (up 44.5%). Russia's MICEX equities index increased 0.4% (up 49.4%).

Federal Reserve Credit declined $43.8bn last week to $7.776 TN. Fed Credit was down $1.125 TN from the June 22nd, 2022, peak. Over the past 219 weeks, Fed Credit expanded $4.049 TN, or 109%. Fed Credit inflated $4.965 TN, or 177%, over the past 576 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $22.9bn last week to an almost five-month low of $3.408 TN. "Custody holdings" were up $97.3bn, or 2.9%, y-o-y.

Total Commercial Paper increased $10.0bn to $1.253 TN. CP was down $56bn, or 4.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 12 bps to a 15-week low 7.13% (up 59bps y-o-y). Fifteen-year rates fell 13 bps to 6.58% (up 70bps). Five-year hybrid ARM rates sank 19 bps to 6.82% (up 131bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 7.82% (up 109bps).

Currency Watch:

November 20 – Reuters (Joe Cash): “The People's Bank of China and the Saudi Central Bank recently signed a local currency swap agreement worth 50 billion yuan ($6.93bn) or 26 billion Saudi riyals, both banks said… as bilateral relations continued to gather momentum. Saudi Arabia, the world's top oil exporter, and China, the world's biggest energy consumer, have worked to take relations beyond hydrocarbon ties in recent years… The swap agreement, which will be valid for three years and can be extended by mutual agreement, ‘will help strengthen financial cooperation... expand the use of local currencies... and promote trade and investment,’ between Riyadh and Beijing, the statement from China’s central bank said.”

For the week, the U.S. Dollar Index declined 0.5% to 103.39 (down 0.1% y-t-d). For the week on the upside, the New Zealand dollar increased 1.4%, the British pound 1.1%, the Australian dollar 1.1%, the Norwegian krone 0.7%, the Mexican peso 0.7%, the Canadian dollar 0.6%, the Swedish krona 0.6%, the Swiss franc 0.3%, the Singapore dollar 0.3%, the euro 0.2%, the Brazilian real 0.2%, and the Japanese yen 0.1%. On the downside, the South African rand dropped 2.2% and the South Korean won declined 0.7%. The Chinese (onshore) renminbi increased 0.91% versus the dollar (down 3.5%).

Commodities Watch:

The Bloomberg Commodities Index declined 0.5% (down 10.1% y-t-d). Spot Gold rose 1.0% to $2,001 (up 9.7%). Silver jumped 2.6% to $24.33 (up 1.6%). WTI crude slipped 35 cents, or 0.5%, to $75.54 (down 6%). Gasoline declined 0.9% (down 12%), and Natural Gas dropped 3.5% to $2.86 (down 36%). Copper gained 1.7% (up 1%). Wheat dipped 0.4% (down 31%), and Corn declined 0.8% (down 32%). Bitcoin rose $1,429, or 3.9%, to $37,920 (up 129%).

Middle East War Watch:

November 22 – Reuters: “Israel and Hamas agreed on Wednesday to a ceasefire in Gaza for at least four days, to let in aid and free at least 50 hostages held by militants in the Palestinian enclave in exchange for at least 150 Palestinians jailed in Israel. The first truce in a brutal, near seven-week-old war, reached after mediation by Qatar, was hailed around the world as a sign of progress that could ease the suffering of civilians in Israeli-besieged Gaza and bring more Israeli captives home.”

November 23 – Associated Press (Bassem Mroue): “The militant Hezbollah group fired more than 50 rockets at military posts in northern Israel on Thursday, a day after an Israeli airstrike on a home in southern Lebanon killed five of the group’s senior fighters. The waves of rockets sent over the border represented one of the most intense bombardments since Hezbollah started attacking Israeli posts in the country’s north at the beginning of the Israel-Hamas war.”

November 22 – Associated Press (Tara Copp and Kareem Chehayeb): “A major Iranian-backed militant group in Iraq warned it may strike additional U.S. targets after U.S. warplanes killed multiple militants in response to the first use of short-range ballistic missiles against U.S. forces at Al-Asad Air Base Monday. U.S. fighter jets struck a Kataib Hezbollah operations center and a Kataib Hezbollah command and control node near Al Anbar and Jurf al Saqr, south of Baghdad, on Tuesday… Kataib Hezbolla… meanwhile said it was considering ‘expanding the scope of targets’ if the U.S. military continues with its strikes, adding that the attack ‘will not go unpunished’.”

November 22 – Wall Street Journal (Michael R. Gordon): “The U.S. fears Iran is preparing to provide Russia with advanced short-range ballistic missiles for its military campaign in Ukraine, U.S. officials said… Iran has already provided Russia with armed drones, guided aerial bombs and artillery shells, U.S. officials said. But U.S. concern that the military cooperation between the nations may further expand grew when Iran showed its Ababil and Fateh-110 missiles to Russian Defense Minister Sergei Shoigu when he visited Tehran in September.”

November 21 – Wall Street Journal (Chun Han Wong): “Chinese leader Xi Jinping is seizing on the conflict in Gaza to portray his country as a force for stability in the Muslim world, in contrast with what Beijing casts as American meddling in the Middle East. In recent weeks, China has ramped up its appeals to halt the Israel-Gaza war, a show of diplomatic bustle laden with humanitarian platitudes but light on substantive proposals... China’s foreign minister on Monday hosted top diplomats from Arab and Muslim-majority countries in Beijing to discuss ways to mediate peace, building on efforts by Beijing’s Middle East envoy, who shuttled across the region this month to pledge Chinese support for talks to end the fighting in Gaza. Xi has weighed in as well.”

Market Instability Watch:

November 19 – Wall Street Journal (Eric Wallerstein): “The recent hack of a Chinese banking giant reignited Wall Street’s long-running fears of disruptions to the short-term cash markets underpinning the global financial system. Traders swiftly contained the cyberattack on the Industrial and Commercial Bank of China. But some said the incident exposed cracks in the multitrillion-dollar market for repurchase agreements, known as repo, where banks and hedge funds borrow cash mainly using Treasurys as collateral. Investors fear snarls in the repo market because it facilitates trading across Wall Street. Repo played a role in the pandemic market crash and the collapse of Lehman Brothers. Many worry problems originating there could spread rapidly throughout markets.”

November 21 – Reuters (Richard Cowan and Moira Warburton): “The U.S. Congress is facing growing calls to find a way to stem rising budget deficits and debt following this month's warning by Moody's that political dysfunction could lead it to lower the federal government's credit rating. There is no rocket science to the three basic choices for grappling with a national debt that has doubled in just the last decade and stands at $33.7 trillion, around 124% of GDP: raise taxes, cut spending or do a combination of the two. That has led some lawmakers to call for a commission to do the heavy lifting of coming up with realistic approaches to addressing the ballooning debt, a growing concern now that interest rates have risen, producing a jaw-dropping $659 billion in payments just on the national debt in fiscal year 2023…”

November 19 – Bloomberg (Billy House and Erik Wasson): “Republican ultra-conservatives are running out of patience less than four weeks after installing one their own, Mike Johnson, as House speaker, signaling turmoil ahead and heightened risk of a government shutdown in the new year. Many of them are fuming over the new speaker’s support of an interim funding measure that postponed a Nov. 18 government shutdown until mid-January without winning concessions conservatives wanted. That seemed too reminiscent of Johnson’s predecessor, whose ouster unleashed a fierce succession struggle.”

November 24 – Bloomberg (Sagarika Jaisinghani): “Investors flocked into equities at the fastest pace in almost two years, according to Bank of America Corp.’s Michael Hartnett, as wagers of peak interest rates grow. Global stock funds have seen inflows of about $40 billion in the two weeks through Nov. 21 — the most since February 2022, Hartnett wrote…”

Bubble and Mania Watch:

November 20 – Politico (Eleanor Mueller and Victoria Guida): “The national debt has reemerged as a paramount economic issue for the first time in nearly a decade, raising alarms from Congress to Wall Street. But even with all the outward drama, there’s little evidence that Washington is ready to stem the tide of red ink… Even GOP lawmakers acknowledged an inability to reach consensus within their own ranks on the path forward. Democrats want to focus on raising taxes, not spending reductions — and some don’t agree that deficits are an urgent issue at all. Both President Joe Biden and Donald Trump have refused to entertain cuts to Social Security and Medicare — taking two of the biggest drivers of the debt off the table. ‘Do Republicans have the political will? We sure do talk big,’ House Budget Chair Jodey Arrington (R-Texas) said.”

November 20 – Wall Street Journal (Konrad Putzier): “The office sector’s credit crunch is intensifying. By one measure, it’s now worse than during the 2008-09 global financial crisis. Only one out of every three securitized office mortgages that expired during the first nine months of 2023 was paid off by the end of September, according to Moody’s Analytics. That is the smallest share for the first nine months of any year since at least 2008 and well below the nadir reached in 2009, when 47% of these loans got paid off.”

November 22 – Reuters (Tom Wilson): “The most powerful man in crypto has lost his crown - and could see his freedom curtailed as well. Binance chief Changpeng Zhao on Tuesday stepped down and pleaded guilty to breaking U.S. anti-money laundering laws as part of a $4.3 billion settlement resolving a years-long probe into the world's largest crypto exchange, prosecutors said. The deal with the Justice Department, part of a large settlement between Binance and other U.S. agencies, resolves criminal charges for conducting an unlicensed money transmitter business, conspiracy and breaching sanctions regulations.”

November 22 – Reuters (Lisa Pauline Mattackal, Chris Prentice and Jonathan Stempel): “Investors pulled about $956 million from crypto exchange Binance over the past 24 hours after its chief, Changpeng Zhao, stepped down and faced prison time after pleading guilty to settle a years-long U.S. illicit finance probe. The deal, in which Binance will pay $4.3 billion to U.S. authorities, raises questions over the future of the world's largest crypto exchange and marks another blow for an industry beset by scandals.”

Banking Crisis Watch:

November 22 – Bloomberg (Alexandra Harris): “US regional banks are seeing ‘permanently’ elevated funding costs relative to their major competitors in the wake of the March turmoil that upended the sector and financial markets, according to Torsten Slok at Apollo Management. Eight months after the collapse of Silicon Valley Bank, ‘large banks continue to enjoy significantly lower funding costs and, hence, higher profit margins than regional banks,’ Slok, the firm’s chief economist, said…”

November 22 – Financial Times (Martin Arnold): “The balance sheets of eurozone banks are showing ‘early signs of stress’ after a rise in loan defaults and late repayments from historic lows, the European Central Bank has warned. Officials urged lenders to increase provisions to cover rising loan losses and predicted their profits would be hit by a drop in lending volumes and increased funding costs… ‘A longer period of high interest rates is likely to lead to higher provisions, which in turn will be a drag on profitability further down the line,’ the central bank said at its twice-yearly financial stability review.”

November 21 – Financial Times (Martin Arnold): “Eurozone property companies are being hit by surging losses and some will struggle to support their debts, which have risen to a higher level than before the 2008 financial crisis, the European Central Bank has warned. The losses, which the ECB said would have ‘consequences for the resilience of banks’ loan books’, stem from sharply higher financing costs, falling commercial property values, weaker rental income and rising concerns about the energy efficiency of buildings. The central bank said signs of stress in the commercial property sector, which accounts for 10% of all eurozone bank loans, ‘have the potential to significantly amplify an adverse scenario’ and would ‘drive large losses’ in the wider financial system.”

November 23 – Reuters (Balazs Koranyi): “Germany's financial firms may be well capitalised now but face challenges ranging from rising interest expenditure and weak loan demand to unrealised losses, Bundesbank Vice President Claudia Buch said… Interest rates have risen at the fastest pace on record in the past year and banks have done well to cope with the change but the new operating environment also holds risks… ‘Almost two-thirds of savings banks and credit cooperatives now have unrealised losses throughout their banking book, which comprises loans as well as securities… Life insurers are in a similar situation.’”

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

November 20 – Wall Street Journal (Alastair Gale): “For decades, the U.S. hasn’t had to worry much about China’s submarines. They were noisy and easy to track. The Chinese military, meanwhile, struggled to detect America’s ultraquiet submarines. Now, China is narrowing one of the biggest gaps separating the U.S. and Chinese militaries as it makes advances in its submarine technology and undersea detection capabilities, with major implications for American military planning for a potential conflict over Taiwan.”

November 20 – Bloomberg (Li Liu): “Chinese President Xi Jinping says China is willing to work with Russia in ‘resolutely’ developing bilateral relations featuring permanent friendship, comprehensive strategic coordination and mutually beneficial cooperation, China Central Television reports… China, Russia ties will inject more stability into the world, Xi is cited as saying. Putin also sent a congratulatory letter to the 10th meeting of the dialogue mechanism between the ruling parties of China and Russia.”

Inflation Watch:

November 22 – Reuters (Dan Burns): “U.S. consumers' inflation expectations rose for a second straight month in November despite growing signs that price increases are in fact slowing, according to a survey… that may create some worry for Federal Reserve policymakers. American households see inflation accelerating to 4.5% over the next year, up from 4.2% in October and from 3.2% in September, the University of Michigan's twice-monthly survey of consumer sentiment showed. That is the highest rate since April. Over a five-year horizon, consumers now see inflation running at 3.2% on average, up from 3.0% in October and 2.8% in September. That is the highest since a matching reading of 3.2% in 2011. Households' long-term inflation outlook has not been higher than that since 2008 when it reached 3.4% as the financial crisis was beginning to unfold. ‘These expectations have risen in spite of the fact that consumers have taken note of the continued slowdown in inflation,’ survey Director Joanne Hsu said… ‘Consumers appear worried that the softening of inflation could reverse in the months and years ahead.’”

November 20 – Wall Street Journal (Will Parker): “Big public companies that rent out single-family homes are beating the rest of the rental market this year, thanks to tenants who are paying large rent increases on the sorts of homes they increasingly can’t afford to buy. Landlords Tricon Residential, Invitation Homes and AMH, which together own about 180,000 rental homes, each posted rent increases greater than 6% for the third quarter over the same period a year prior. That was about twice as much as the average increase for rental homes in September, compared with the same month last year…”

Biden Administration Watch:

November 20 – CNBC (Rebecca Picciotto): “Treasury Secretary Janet Yellen said… U.S. President Joe Biden and Chinese President Xi Jinping remained far apart on the status of Taiwan after their high-profile meeting last week during the Asia-Pacific Economic Cooperation summit in San Francisco. ‘President Xi did express the view that it’s important for Taiwan and mainland China to unify. He certainly expressed the desire to have that occur by peaceful means,’ Yellen said… ‘But President Biden said our policy remains unchanged from what it’s always been with respect to Taiwan.’ The U.S. recognizes the People’s Republic of China as the sole government of China but also maintains that Taiwan is a self-governing island, despite China’s claims to the contrary.”

November 21 – Bloomberg (Jane Lanhee Lee, Ian King, Mackenzie Hawkins and Jillian Deutsch): “President Joe Biden has adopted a two-pronged approach to constrain China’s high-tech progress, curbing Beijing’s access to leading-edge chips while bolstering semiconductor production in the US. He’s about to ratchet up the pressure further, shifting focus to an emerging arena of the contest for technological supremacy: the process of packaging semiconductors that’s increasingly seen as a path to achieving higher performance. Only the US isn’t alone is recognizing the potential of so-called advanced packaging: China, too, is capitalizing on an area that isn’t subject to sanctions, capturing global market share and achieving progress denied it in manufacturing high-end chips.”
Federal Reserve Watch:

November 21 – Financial Times (Colby Smith): “Federal Reserve officials expressed little urgency to raise interest rates again at their most recent meeting, even as they reiterated their willingness to tighten monetary policy further if warranted by new data. Minutes from the Federal Open Market Committee’s November meeting… confirmed that all officials are still committed to proceeding ‘carefully’ on future rate decisions, as they debate whether they have squeezed the economy sufficiently to get inflation back down to the central bank’s 2% target. Data ‘in coming months’ would clarify the progress against inflation, the minutes emphasised, with the Fed looking for signs that demand from consumers and businesses was moderating and the labour market cooling.”

November 20 – Reuters (Michael S. Derby): “Demand for new credit in the U.S. over the last year has declined and will likely stay soft in the future, according to a survey released on Monday by the New York Federal Reserve. There was a ‘notable’ decline in credit over the last year, with application rates at 41.2%, compared to 44.8% in 2022 and the pre-pandemic 2019 level of 45.8%, the regional Fed bank's quarterly Survey of Consumer Expectations Credit Access survey showed.”

U.S. Bubble Watch:

November 22 – Associated Press (Paul Wiseman): “The number of Americans applying for unemployment benefits fell sharply last week, a sign that U.S. job market remains resilient despite higher interest rates. The Labor Department reported Wednesday that jobless claims dropped by 24,000 to 209,000. The previous week’s total — 233,000 — had been the highest since August. The four-week moving average of claims, which smooths out week-to-week volatility, fell by 750 to 220,000. Overall, 1.84 million Americans were receiving unemployment benefits the week that ended Nov. 11, down by 22,000 from the week before.”

November 22 – Reuters (Alicia Clanton): “Mortgage rates in the US continued their slide, reaching the lowest level since mid-September. The average for a 30-year, fixed loan was 7.29%, down from 7.44% last week, Freddie Mac said… The four-week streak of declines offers a bit of hope to would-be homebuyers who’ve been waiting for the market to shift in their favor. But borrowing costs are still elevated — and just part of the equation.”

November 22 – CNBC (Diana Olick): “Mortgage demand is finally crawling out of the basement as interest rates continue to move lower. Total application volume increased 3% last week from the previous week, according to the Mortgage Bankers Association’s… index… Applications for a mortgage to purchase a home increased 4% week to week but were still 20% lower than one year ago. ‘The average loan size on a purchase application was $403,600, the lowest since January 2023. This is consistent with other sources of home sales data showing a gradually increasing first-time homebuyer share,’ Kan added.”

November 21 – CNBC (Diana Olick): “Sales of previously owned homes were 4.1% lower in October compared with September, running at a seasonally adjusted annualized rate of 3.79 million units, according to the National Association of Realtors. It was the slowest sales pace since August 2010. Analysts were expecting a smaller drop, to 3.9 million units. Sales were down 14.6% year over year… At the end of October there were 1.15 million homes for sale, down 5.7% from a year earlier. This is about half as many homes as were available for sale pre-Covid. At the current sales pace, that represents a 3.6-month supply. a six-month supply is considered a balanced market... Tight supply kept pressure under prices. The median price of an existing home sold in October was $391,800, an increase of 3.4% from a year ago ($378,800). Prices rose in all regions of the country.”

November 22 – Reuters (Ananta Agarwal): “New vehicle sales in the United States are expected to rise in November, a report from industry consultants showed…, as demand for the latest models remains strong and inventories improve. U.S. new vehicle sales, including retail and non-retail transactions, are estimated to reach 1,236,000 units in November, a 10.2% jump from a year earlier, according to the joint forecast report by J.D. Power and GlobalData. ‘Sales growth is being enabled by improving vehicle availability,’ said Thomas King, president of the data and analytics division at J.D. Power…”

November 21 – Bloomberg (Leslie Patton and Laura Bejder Jensen): “Richer Americans are curtailing their spending ahead of Black Friday, a worrisome sign for an economy that has so far depended on the US consumer to stave off a recession. In the three months ahead of the all-important holiday shopping season, a group of retailers that cater to the upper middle class — including Apple, Coach and Nordstrom — saw its biggest sales drop in two years, according to an exclusive analysis of Bloomberg Second Measure data. The malaise also hit top-performing malls in wealthier areas, even as overall retail-sales figures march higher.”

November 20 – Axios (April Rubin): “The U.S. housing market has shattered the stereotypical American dream, as the dominant group of homebuyers ages and moves without young children. Why it matters: The median homebuyer age has jumped 10 years — to 49 — in two decades…, as the housing affordability crisis deepens. Repeat buyers were a median age of 58 in 2023, while first-time buyers were 35, per National Association of Realtors annual data... The data analyzed transactions between July 2022 to June 2023. ‘We're talking about a different profile of homebuyer today,’ Jessica Lautz, NAR deputy chief economist, told Axios, referring to older and more affluent purchasers.”

Fixed Income Watch:

November 22 – Financial Times (Harriet Clarfelt): “Investors are pouring cash into US corporate bond funds at the fastest pace in more than three years, signalling a growing appetite for risky assets as markets call the peak in interest rates. More than $16bn has flooded into corporate bond funds in the month to November 20…, already a larger net inflow than any full month since July 2020. The trend has been concentrated mainly in ‘junk’ debt, with $11.4bn flowing into funds investing in these low-grade, high-yield bonds this month. Another $5bn has poured into investment grade funds, which hold better quality corporate debt.”

November 21 – Bloomberg (Martin Z. Braun): “Bond investors have piled into New York City’s tax-exempt bonds, lured by their relatively high yields. He points to the city’s looming $7 billion budget deficit, exacerbated in part by spiraling costs of sheltering asylum seekers and other migrants that have sought refuge in New York. Declining Wall Street profits and job cuts at major investment banks will put pressure on city tax revenue, dimming New York’s fiscal outlook. That suggests the city’s general obligation bonds aren’t particularly attractive at current valuations.”

November 20 – Reuters (Matt Tracy): “Issuance of securities backed by U.S. commercial real estate (CRE) loans posted a rare rebound last quarter, but sector struggles will likely persist through 2023, according to ratings agency DBRS Morningstar. The third quarter saw roughly $3 billion in new collateralized loan obligations (CLOs) backed by CRE loans… This marks a significant turn from the second quarter, which saw less than $1 billion in CRE CLO issuance.”

China Watch:

November 21 – CNBC (Evelyn Cheng): “China’s property market… needs more government support to prevent it from deteriorating further, analysts said. Existing home prices fell in October by the most since 2014, while outstanding property loans fell for the first time in history, Larry Hu, chief economist at Macquarie, said… That indicates increased drags on both the demand and the supply side. Policy so far has focused on boosting demand. But the government hasn’t ‘addressed the most important issue: credit risk related to developers,’ according to a Macquarie report. ‘Without a lender of last resort, a self-fulfilled confidence crisis could easily happen as falling sales and rising default risks reinforce each other,’ the report said. ‘Indeed, some large developers have recently seen their credit risks rising rapidly.’”

November 21 – Bloomberg: “Country Garden Holdings Co. and Sino-Ocean Group have been included on China’s draft list of 50 developers eligible for a range of financing support, according to people familiar…, signaling a pivot by Beijing to help some of the nation’s most distressed builders… Bloomberg reported… that China is drafting a list to guide financial institutions as they weigh support for the property industry via loans, debt and equity financing. The scope of the funding — and the long-term implications for creditors and shareholders — remain unclear.”

November 22 – Bloomberg: “One of China’s largest shadow banks warned it’s ‘severely insolvent,’ with a debt pile more than two times higher than assets, according to a letter seen by Bloomberg... In a further sign of trouble for the nation’s $3 trillion trust sector, Zhongzhi Enterprise Group Co. told investors… it has debts of about 420 billion yuan to 460 billion yuan ($58.7bn to $64.3bn), compared with assets of 200 billion yuan. Liquidity has dried up and the recoverable amount from asset disposals is expected to be low, the company said.”

November 21 – Financial Times (Joe Leahy): “This month, China’s new finance minister Lan Fo’an told markets what they had been waiting to hear — Beijing would boost budget spending to support a struggling post-pandemic recovery in the world’s second-largest economy. China is to deploy an arsenal of local and central government bonds, including a new Rmb1tn ($140bn) treasury facility — which will push Beijing’s budget deficit up to a two-decade high of 3.8% this year, Lan said, to ‘maintain fiscal spending intensity at an appropriate level’. But while the message was welcomed by investors, many analysts question just how much budgetary firepower Beijing really has to boost flagging confidence and drive stronger economic momentum.”

November 20 – Bloomberg: “China’s central bank has encouraged lenders to cap the amount of new loans they issue in early 2024 and shift some forward to this year as authorities try to smooth the credit cycle, people familiar with the matter said. The People’s Bank of China last week guided lenders to make sure the value of new loans they extend in January-to-March does not exceed the quarterly average issued over the past five years… The guidance from the PBOC implies a limit in the first quarter of 7.9 trillion yuan ($1.1 trillion) in loans… — a quarter less than the amount in the first three months of 2023.”

November 23 – Bloomberg (Tom Hancock): “China’s labor market is weak and dragging on confidence in the world’s second-largest economy, alternative data show, contrasting with official gauges of employment suggesting a steady jobs picture. Independent analysis of online job listings and official economic and household surveys indicate the nation’s job market worsened in the third quarter of the year, with some showing softness stretching into October and November. Consumer confidence remains muted and Chinese companies are offering new hires lower salaries.”

November 21 – Wall Street Journal (Peter Grant): “Shares of battered down office landlords had their biggest one-day rally in three years last week, after inflation data came in lower than anticipated and expectations rose that the Federal Reserve was done raising interest rates. Shares of office real-estate investment trusts soared an average of 11.5% on Nov. 14… That is the largest daily increase since November 2020, when an even larger rally was sparked by the announcement of a Covid-19 vaccine.”

November 20 – Financial Times (Hudson Lockett): “More than three-quarters of the foreign money that flowed into China’s stock market in the first seven months of the year has left, with global investors dumping more than $25bn worth of shares despite Beijing’s efforts to restore confidence in the world’s second-largest economy. The sharp selling in recent months puts net purchases by offshore investors on course for the smallest annual total since 2015, the first full year of the Stock Connect programme that links up markets in Hong Kong and mainland China.”

Central Banker Watch:

November 20 – Financial Times (Sam Fleming): “The Bank of England governor warned… it was too early to declare victory over inflation even after the weaker price growth reported this month, as he predicted UK monetary policy will have to stay restrictive for ‘quite some time yet’. Andrew Bailey argued in a speech that the squeeze on household incomes from higher food and energy prices might still be influencing wage demands, which risks perpetuating inflationary pressures.”

November 21 – Financial Times (Martin Arnold): “Christine Lagarde has said it is too early to ‘start declaring victory’ in the European Central Bank’s push to tame inflation, calling for rate-setters — and markets — to ‘allow some time’ to see how fast disinflationary forces take effect. After raising interest rates by an unprecedented 4.5 percentage points in the past year, eurozone policymakers left borrowing costs on hold at their October policy meeting and are expected to do so again in December. Those pauses and weak eurozone growth have raised expectations that borrowing costs could edge lower, with investors betting the ECB could cut interest rates as early as April.”

November 23 – Bloomberg (Alexander Weber): “‘If wage growth remains at a level that is not compatible with the 2.0%, there is unfortunately nothing we can do even if there is a recession,’ Belgian central bank Governor Pierre Wunsch told Boersen-Zeitung… ‘With wage growth of around 5%, we will not lower interest rates — even if the economy shrinks slightly.’ ‘I think there is now a kind of consensus that we should err on the side of caution before cutting interest rates’.”

Europe Watch:

November 23 – Reuters (Johnny Cotton, Toby Sterling and Bart H. Meijer): “Far-right populist Geert Wilders wants to be the Netherlands' next prime minister and would focus his efforts on curbing immigration, he said… Wilders' win sent a warning shot to mainstream parties across Europe ahead of European Parliament elections next June, which will likely be fought on the same issues as the Dutch election: immigration, cost of living and climate change. ‘We've had it with the old politicians,’ voter Herman Borcher said…, summing up the mood. A fan of former U.S. President Donald Trump and Hungary's eurosceptic Prime Minister Viktor Orban, Wilders is openly anti-Islam, and anti-EU and said ‘the Netherlands will be returned to the Dutch.’”

November 21 – Bloomberg (Kamil Kowalcze and Michael Nienaber): “Germany imposed an emergency spending freeze in response to last week’s ruling by the country’s top court, deepening an unprecedented budget crisis that has rocked Europe’s biggest economy. Chancellor Olaf Scholz’s government has been racing to work out the implications of the Constitutional Court judgment, which called into question hundreds of billions of euros of financing in special funds that are not part of the regular federal budget. The Finance Ministry in Berlin on Monday froze virtually all new spending authorizations for this year as it tries to identify the broader and longer-term impact…”

November 22 – Bloomberg (Michael Nienaber and Kamil Kowalcze): “Germany’s ruling coalition is locked in near non-stop talks to try to resolve an unprecedented budget crisis triggered by last week’s shock ruling on off-budget funds by the country’s top court. As Chancellor Olaf Scholz hosted a regular weekly meeting of his cabinet Wednesday morning, government lawyers and officials continued frantic efforts to address the Constitutional Court judgment, which blew a €60 billion ($65.4bn) hole in a pot for funding initiatives to protect the climate and spur Germany’s industrial transformation.”

November 23 – Bloomberg (Alexander Weber and Zoe Schneeweiss): “A recession in the euro area is looking increasingly likely as the economic downturn persists in the final quarter of the year, private-sector activity surveys showed. S&P Global’s purchasing managers’ index was in contraction again in November, hitting 47.1. While that’s a bigger uptick than anticipated by economists, it marks the sixth consecutive month below the 50 level that marks expansion.”

Japan Watch:

November 23 – Reuters (Tetsushi Kajimoto): “Japan's core consumer price growth picked up slightly in October, after easing the previous month, reinforcing investors' views that stubborn inflation may push the Bank of Japan (BOJ) to roll back monetary stimulus before long. The nationwide core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.9% year-on-year in October…”

November 19 – Reuters (Tetsushi Kajimoto and Kentaro Sugiyama): “Japan's big employers are set to follow this year's bumper pay hikes with another round in 2024, which are expected to help lift household spending and give the central bank the conditions it needs to finally roll back massive monetary stimulus. Early indications from businesses, unions and economists suggest the labour and cost pressures that set the stage for this year's pay hikes - the largest in more than three decades - will persist heading into next year's key spring wage talks. The head of major beverage maker Suntory Holdings Ltd, for example, plans to offer employees average monthly pay hikes of 7% in 2024 for the second straight year, to retain talent in a tight labour market and offset rising inflation.”

November 20 – Bloomberg (Emi Urabe and Toru Fujioka): “Japan’s advisory board for the finance ministry flagged the need to pay more attention to the possible adverse impact of inflation and higher interest rates on the nation’s finances as a shift in Bank of Japan policy looms large. ‘It will become even more important to manage Japan’s finances responsibly, bearing in mind the risks of a sharp rise in interest rate payments,’ the board said… ‘There is a possibility of entering a different phase in which high inflation and rising interest rates are normal.’”

November 21 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan is on track for zero purchases of real estate investment trusts this year and its smallest annual haul of exchange-traded funds since 2010 as it continues to stealthily tiptoe in the direction of more conventional policy… The lack of buying in the two markets reflects their robust growth, a factor that largely sidelines the need for additional help from the central bank.”

EM Watch:

November 19 – Reuters (Nicolás Misculin, Lucinda Elliott and Walter Bianchi): “Argentina elected right-wing libertarian Javier Milei as its new president on Sunday, rolling the dice on an outsider with radical views to fix an economy battered by triple-digit inflation, a looming recession and rising poverty. Milei, who rode a wave of voter anger with the political mainstream, won by a wider-than-expected margin. He landed some 56% of the vote versus just over 44% for his rival, Peronist Economy Minister Sergio Massa…”

November 20 – Wall Street Journal (Ryan Dubé and Santiago Pérez): “The self-styled anarcho-capitalist who won Argentina’s presidency… plans to ditch his nation’s peso and adopt the U.S. dollar as the national currency. President-elect Javier Milei’s top campaign proposal was aimed at eradicating rampant inflation that has for decades ravaged Latin America’s third-biggest economy by removing the battered national currency from circulation and stripping the central bank of its power to print money. Uncontrolled money-printing to cover public expenditures, economists say, has fueled 143% inflation, one of the world’s highest. ‘Closing the central bank is a moral obligation,’ Milei said…”

November 22 – Reuters (Horaci Soria): “Argentina's libertarian President-elect Javier Milei is sticking by his plans for economic ‘shock’ therapy to fix the country's myriad crises from triple-digit inflation to rising poverty and a dearth of foreign currency reserves. In an interview late on Tuesday, Milei said that his government, which will take office on Dec. 10, would have to make deep spending cuts, something he pledged in the campaign as part of a ‘chainsaw’ plan to trim state spending. ‘There’s no money. There's no money," Milei told… Neura Media. ‘If we don't make a fiscal adjustment, we’re headed for hyperinflation. We'll have hyperinflation and we are going to have 95% poverty and 70% or 80% homeless.’”

November 21 – Bloomberg (Anup Roy): “India’s central bank Governor Shaktikanta Das warned banks to undertake stress tests and said all forms of ‘exuberance’ should be avoided, days after imposing curbs on some lending. ‘At the current juncture, there may not be any cause for worry,’ Das said… But banks and non-bank financial companies ‘would be well advised to take certain precautionary measures,’ he said. The Reserve Bank of India last week clamped down on unsecured lending by lenders and shadow banks to curb financial stability risks… With lending accelerating, banks and non-banks should take care that credit growth at all levels ‘remain sustainable and all forms of exuberance must be avoided,’ Das said.”

November 23 – Reuters (Karin Strohecker and Ezgi Erkoyun): “Turkey's central bank delivered a larger-than-expected 500 bps interest rate hike on Thursday, lifting its benchmark to 40% but also flagging that the pace of monetary tightening was set to slow down and the end of the cycle was in sight.”

Levered Speculation Watch:

November 21 – Bloomberg (Michael Msika): “Hedge funds are holding their most concentrated wagers on US equities than anytime in the past 22 years, according to data from Goldman Sachs... An index created by the investment bank to track crowding across hedge funds has reached a record high…, which said the average fund holds 70% of its long portfolio in its top 10 positions. The most popular bets remain in megacap tech, with Microsoft Corp. Amazon.com Inc. and Meta Platforms Inc. in Goldman’s list of ‘Hedge Fund VIPs’ this quarter. A group of seven tech companies account for about 13% of the average hedge fund long portfolio, twice the weighting from the start of 2023, Goldman’s analysis show.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 24 – Wall Street Journal (Aaron Zitner): “The American dream—the proposition that anyone who works hard can get ahead, regardless of their background—has slipped out of reach in the minds of many Americans. Only 36% of voters in a new Wall Street Journal/NORC survey said the American dream still holds true, substantially fewer than the 53% who said so in 2012 and 48% in 2016 in similar surveys of adults by another pollster.”

November 19 – Financial Times (Kenza Bryan and Steven Bernard): “The cyclical El Niño effect which helped put the world on track for a heat record this year and is continuing to exacerbate and interfere with weather patterns will persist into 2024, scientists say. The naturally occurring warming effect in the Pacific Ocean can cause global temperatures to rise in the short term and wreak havoc on crop yields in some parts of the world. Companies in various sectors, including food and transportation, have warned about the disruption to commodities and supply chains, as well as higher insurance risks. In Brazil, where it is still spring, the National Institute of Meteorology issued a red alert for heat in the past week across several regions.”

November 20 – Financial Times (Kenza Bryan and Steven Bernard): “The world is on track for a temperature rise of up to 2.9C above pre-industrial levels, a report by the UN environment programme has found, even assuming countries stick to their Paris agreement climate pledges. UN chief António Guterres said that keeping the Paris goal of limiting the rise to ideally 1.5C and well below 2C would require ‘tearing out the poisoned root of the climate crisis: fossil fuels.’ ‘Otherwise, we’re simply inflating the lifeboats while breaking the oars,’ he added. The world has already warmed by at least 1.1C.”

Geopolitical Watch:

November 21 – Reuters (Ben Blanchard): “Taiwan cannot afford chaos or ‘experiments’ when it comes to being president, the front-runner to be the island's next leader said… as the opposition remained mired in a bitter dispute on mounting a joint presidential challenge. The Jan. 13 election will shape Chinese-claimed Taiwan's relations with Beijing at a time China has stepped up military pressure to assert its sovereignty claims. Vice President Lai Ching-te of the ruling Democratic Progressive Party (DPP), who China views as a separatist, leads opinion polls to be Taiwan's next president. Talks between the two main opposition parties to team up and take him on have floundered and are in deadlock.”

November 20 – Reuters (Ben Blanchard and Fabian Hamacher): “Lai Ching-te, the frontrunner for Taiwan's presidency, named on Monday Taipei's former envoy to the United States as his running mate in January's election, a high-profile diplomat well known in Washington but who Beijing denounces as a separatist. Lai, vice president and the ruling Democratic Progressive Party's (DPP) presidential candidate, has led in most opinion polls ahead of the election, which is taking place as Taiwan comes under increased pressure from China to accept its sovereignty claim.”

November 22 – Reuters (Ju-min Park): “North Korea vowed… to deploy stronger armed forces and new weapons on its border with the South, pulling back from a 2018 military accord designed to curb the risk of inadvertent clashes between two countries that remain technically at war. Pyongyang's statement came a day after South Korea suspended part of the same inter-Korean agreement and resumed frontline aerial surveillance of North Korea in a protest over Pyongyang's launch of a spy satellite.”

November 22 – Reuters (Hyonhee Shin): “North Korea got help from Russia for its successful launch of a reconnaissance satellite this week, South Korean lawmakers said…, citing the country's intelligence agency. Tuesday's launch was North Korea's third attempt after two failed tries, and the first since its leader Kim Jong Un's rare trip to Russia in September, during which President Vladimir Putin promised to help Pyongyang build satellites.”

November 21 – Financial Times (Kathrin Hille): “The US and the Philippines have started joint air and sea patrols in the South China Sea, the latest step in the two allies’ efforts to strengthen military co-operation amid growing tension with Beijing in the disputed waters. ‘This significant initiative is a testament to our commitment to bolster the interoperability of our military forces,’ Philippine President Ferdinand Marcos Jr wrote in… The move comes as Manila and Beijing are embroiled in an increasingly heated stand-off over the Philippine military’s regular resupply missions to its outpost on Second Thomas Shoal…”

November 18 – BBC: “Australia has accused China's navy of using sonar pulses in an incident in international waters that resulted in Australian divers suffering injuries. The Australian defence minister said a Chinese warship had resorted to ‘unsafe and unprofessional’ actions during the encounter off Japan earlier this week. The warship approached an Australian frigate as divers were clearing fishing nets from its propellers, he said. The Chinese ship then emitted dangerous sonar pulses, the minister added. This had posed ‘a risk to the safety of the Australian divers, who were forced to exit the water’, Defence Minister Richard Marles said…”

Friday's News Links

[Yahoo/Bloomberg] Bond Rally Shows Signs of Stalling as Stocks Waver: Markets Wrap

[Yahoo/Bloomberg] Oil Holds Decline as OPEC+ Dispute Clouds Outlook for Production

[Dow Jones] U.S. Business Activity Remains in Expansion Territory in November, PMI Data Suggest

[Reuters] Retailers offer deep Black Friday discounts to lure shoppers

[Yahoo/Bloomberg] Market Melt-Up Lures Biggest Inflows to Stocks Since Early 2022

[Reuters] Ceasefire takes hold in Gaza ahead of hostage release, aid enters enclave

[Reuters] Japanese inflation picks up as BOJ pivot bets grow

[Yahoo/Bloomberg] Xi Tolerance for Property Pain Nears Limit as Rescue Emerges

[Reuters] China ties on the line as Taiwan opposition splits in dramatic feud

[Reuters] Dutch parties position for tough coalition talks after Wilders' shock poll win

[Bloomberg] US Money-Market Fund Assets Climb to Record $5.76 Trillion

[WSJ] Voters See American Dream Slipping Out of Reach, WSJ/NORC Poll Shows

[WSJ] Canada’s Real-Estate Market Stumbles as Rate Hikes Bite

[FT] China property: running out of options as fallout spreads to shadow banking

Thursday's News Links

[Yahoo/Bloomberg] European Stocks Struggle as PMIs Show Contraction: Markets Wrap

[Yahoo/Bloomberg] Oil Dragged Lower as OPEC+ Discord Forces Delay to Key Meeting

[Reuters] Americans celebrate Thanksgiving on edge over world events

[Reuters] War rages on in Gaza as truce delayed until at least Friday

[AP] Hezbollah fires rockets at north Israel after an airstrike kills 5 of the group’s senior fighters

[Reuters] China wealth manager Zhongzhi flags insolvency, liabilities of $64 bln

[Yahoo/Bloomberg] Euro-Area Business Weakness Increases the Odds of Recession

[Reuters] Germany financial sector facing dark clouds, Bundesbank warns

[Reuters] Dutch election: Far-right's Wilders aims to be PM after shock win

[Reuters] Dutch election: what's at stake for markets after far-right Wilders' victory

[Reuters] Turkey central bank ramps up interest rates to 40%

[Reuters] WHO asks China for details on respiratory illness outbreaks

[Reuters] North Korea received Russian aid for satellite launch -South Korea lawmakers

[Reuters] Military agreement fractures as tensions rise with North Korea

[Bloomberg] China Races to End Property Panic, Fill $446 Billion Gap

[WSJ] China Tried Using Economic Ties to Bring Taiwan Closer. It Isn’t Working.

[FT] Inflation puts US Black Friday crowds in a bargain-hunting mood

[FT] Treasury clearing 101

[FT] Chinese shadow bank Zhongzhi faces $36bn shortfall after ‘management ran wild’

[FT] How Germany’s ‘debt brake’ broke the budget

Wednesday Evening Links

[Yahoo/Bloomberg] Asian Shares Set for Muted Open as Treasuries Fall: Markets Wrap

[Yahoo/Bloomberg] US Yields Climb Amid Unwinding of Dovish Fed Bets: Markets Wrap

[Yahoo/Bloomberg] Oil Falls as OPEC+ Meeting Delay Dims Hopes for More Output Cuts

[Yahoo/Bloomberg] Dutch Far-Right Leader Wilders Scores Shock Election Victory

[Reuters] Praise, fear after Dutch populist Wilders' election win

Wednesday Afternoon Links

[Yahoo/Bloomberg] US Two-Year Yield Tops 4.9% After Economic Data: Markets Wrap

[Reuters] Oil tumbles 4% as OPEC+ meeting delayed

[Reuters] US consumers worry inflation will pick up again, UMich survey finds

[Yahoo/Bloomberg] US Consumer Year-Ahead Inflation Expectations Rise Further

[Yahoo/Bloomberg] US Mortgage Rates Fall to 7.29%, Lowest Since September

[Reuters] Binance sees $956 mln in outflows after Zhao steps down to settle U.S. probe

[Reuters] US new vehicle sales to rise in November on strong demand - report

[Yahoo/Bloomberg] Regional Banks See Permanently High Funding Costs, Slok Says

[Yahoo/Bloomberg] China’s Troubled Shadow Bank Zhongzhi Warns of Insolvency

[Reuters] 'There's no money': Argentina's Milei doubles down on economic shock therapy

Wednesday's News Links

[Yahoo/Bloomberg] Stocks, Bonds, Dollar Waver After ‘Mixed’ Data: Markets Wrap

[Yahoo/Bloomberg] Brent Oil Dips Below $80 as OPEC+ Talks Get Rocky Before Meeting

[AP] U.S. unemployment claims drop by 24,000 to 209,000, another sign of labor market resiliency

[Reuters] Big investors say US markets rally could prove short-lived

[CNBC] Mortgage demand jumps to six-week high as interest rates continue to drop

[Reuters] Israel, Hamas agree four-day truce, 50 hostages to go free

[AP] U.S. fighter aircraft strike Hezbollah targets in Iraq after attacks on bases

[Yahoo/Bloomberg] BOJ Pulls Back From Risk Asset Buying in Sign of Normalization

[Yahoo/Bloomberg] Milei Says Argentina Heading for ‘Shock’ Fiscal Therapy in 2024

[Yahoo/Bloomberg] China Puts Country Garden on Draft List of Builders to Support

[Yahoo/Bloomberg] Germany Races to Fix Its Budget and Avert a Government Crisis

[Reuters] Economic models buckle under strain of climate reality

[Yahoo/Bloomberg] India’s Central Bank Governor Warns of Credit ‘Exuberance’

[Reuters] Taiwan ruling party powers ahead with opposition mired in bitter dispute

[Reuters] Taiwan reports Chinese fighters, bombers nearby as election campaign heats up

[FT] Falling inflation might not dent gold’s rally

[FT] Hedge fund short sellers suffer $43bn of losses in market rally

[FT] Investors pour cash into US corporate debt in bet Fed rates have peaked

[FT] ECB warns of ‘early signs of stress’ at eurozone banks as default rates rise

Tuesday Evening Links

[Yahoo/Bloomberg] Asia Stocks to Fall as Nvidia Caps Sluggish US Day: Markets Wrap

[CNN Live Updates] Israel agrees to hostage deal with Hamas

[Reuters] Israeli government debates deal for release of Gaza hostages, truce

[Reuters] Fed shifts into cautious policy mode as risks become more two-sided

[Reuters] US retailers brace for a tough holiday season despite discounts

[Reuters] Changpeng Zhao, the crypto king and Binance chief, ousted for US crimes

[Yahoo/Bloomberg] Bond Investors Largely Ignore NYC’s $7 Billion Deficit

[Bloomberg] Ren: China Housing’s 'Rotten Tails' Need a Lehman Solution

[WSJ] The Fed Wants More Evidence Before Changing Rate Stance

[WSJ] U.S. Warns Iran Is Weighing Sending Short-Range Missiles to Russia

[FT] Federal Reserve officials showed little urgency to raise interest rates further

[FT] Christine Lagarde warns ECB ‘not done’ in inflation fight

[FT] Commercial property’s debt burden exceeds pre-2008 level in eurozone, warns ECB

Tuesday's News Links

[Yahoo/Bloomberg] Stock Rally Seen Stretched: Markets Wrap

[Reuters] Gold hits over 2-week peak on softer dollar, Fed minutes in spotlight

[Yahoo/Bloomberg] As US Dollar Weakens, Emerging-Market Currencies Are Back Up After Wild Year

[Yahoo/Bloomberg] Treasuries Climb to Erase 2023 Losses as Fed Cut Bets Blossom

[CNN] Israel-Hamas War Live Updates

[CNBC] Home sales fell to a 13-year low in October as prices rose

[Yahoo Finance] Home prices kept climbing even as existing home sales tanked last month

[Dow Jones] U.S. Economy Fell Back in October — Chicago Fed

[Reuters] Rising US debt stokes calls in Congress for special fiscal commission

[Reuters] Exclusive: China's state banks are buying yuan, quickening its rally

[CNBC] China’s property sector needs more government support as crisis deepens

[Yahoo/Bloomberg] China Guides Banks to Cap Early 2024 Loans, Shift Some Forward

[Reuters] ECB says property slump could last years in threat to lenders

[Yahoo/Bloomberg] German Budget Crisis Deepens With Freeze on New Spending

[WSJ] October Home Sales Likely Fell to New 13-Year Low

[WSJ] Houses Too Expensive to Buy Underpin Lofty Rents

[WSJ] Office Stocks Post Biggest Rally in Three Years. Their Real-Estate Problems Remain.

[WSJ] China Steps Up Support for Palestinian Cause in Challenge to U.S. Mideast Policy

[FT] Hedge fund herding is worse than ever

[FT] Over 75% of foreign money invested into Chinese stocks in 2023 has left

[FT] US and Philippines launch joint air and sea patrols to counter China

Monday Evening Links

[Yahoo/Bloomberg] Asia Stocks to Gain After Tech Giants Boost Nasdaq: Markets Wrap

[Reuters] Dollar falls to 2-1/2 month low on Fed expectations, yen strengthens

[Yahoo/Bloomberg] Oil Extends Advance as Traders Increase Bets on More OPEC+ Cuts

[Yahoo/Bloomberg] US commercial property loan activity to drop off in Q4 after Q3 pickup -DBRS

[Reuters] Japan's inflation comeback prompts investors to tear up old playbooks

[FT] The Fed’s balance sheet isn’t so boring after all

[FT] Can China spend its way out of economic crisis?

[FT] BoE signals rates must stay high in spite of fall in inflation

Monday Afternoon Links

[Reuters] Nasdaq leads Wall St higher as Microsoft hits record high

[Yahoo/Bloomberg] Oil Extends Advance as Traders Eye OPEC+ Meeting This Weekend

[Yahoo/Bloomberg] Hostage Talks Progress as Israel-Hamas Fighting Grips Gaza

[Reuters] US demand for new credit down in 2023, New York Fed survey shows

[CNBC] Yellen says Biden, Xi remain far apart on Taiwan’s independence post-APEC

[FT] Milei promises shock therapy for Argentina

[FT] Global warming on track for 2.9C as greenhouse gases keep rising, UN says

Monday's News Links

[Yahoo/Bloomberg] Dollar Extends Drop; Microsoft Gains on AI Hires: Markets Wrap

[Reuters] Dollar drops to two-month low, yen hits 6-1/2 week high

[Reuters] Oil rises on expectations of further OPEC+ supply cuts

[Yahoo/Bloomberg] Argentina’s Dollar Bonds, Stocks Rally After Milei’s Victory

[Politico] Washington blinks as debt costs begin to bite

[Yahoo/Bloomberg] Fed Officials Rely on Real-Time Anecdotes Over Data to Bolster Case for Patience

[AP] Microsoft hires Sam Altman and OpenAI's new CEO vows to investigate his firing

[Yahoo/Bloomberg] The Doomed Mission Behind Sam Altman's Shock Ouster From OpenAI

[Axios] America's homebuyers are getting older

[Yahoo/Blooberg] China Pauses Rate Cuts as Focus Shifts to Credit Stability

[Yahoo/Bloomberg] Chinese Banks Keep Lending Rates After PBOC Policy Rate Hold

[Reuters] China, Saudi Arabia sign currency swap agreement

[Reuters] Argentina's next president Milei must tame inflation, turn around economy

[Yahoo/Bloomberg] Japan’s Fiscal Advisory Board Warns of Impact of Higher Rates

[Reuters] Taiwan's former US envoy, well-known in U.S., vilified by China, named VP candidate

[WSJ] Office Landlords Can’t Get a Loan Anymore

[WSJ] Apple Had Better Watch Its Back in China

[WSJ] Argentina’s New President Wants to Adopt the U.S. Dollar as the National Currency

[WSJ] Era of Total U.S. Submarine Dominance Over China Is Ending

[FT] Private equity’s new financial engineering brings risks

Sunday Evening Links

[Yahoo/Bloomberg] Asian Stocks Set for Mixed Open as US Rally Stalls: Markets Wrap

[Yahoo/Bloomberg] Bonds’ Best Month Since March Faces ‘Sanity Check’ in Auction

[Yahoo/Bloomberg] Five Key Charts to Watch in Global Commodity Markets This Week

[Reuters] Argentina elects 'shock therapy' libertarian Javier Milei as president

[Reuters] Japan's back-to-back wage bonanza would open door for BOJ exit 

Sunday's News Links

[Reuters] Hamas battles Israeli forces in north Gaza amid hopes of hostage deal

[Yahoo/Bloomberg] Israel Latest: Iranian-Backed Houthi Rebels Said to Hijack Ship

[Yahoo/Bloomberg] Speaker Mike Johnson Faces Hard-Right Discontent, Risking Disarray Ahead

[Yahoo Finance] China's neighbors are wooing American CEOs. The CEOs are listening.

[WSJ] How a Hack Shook Wall Street’s Multitrillion-Dollar Foundations

[WSJ] China’s Problem With Unfinished Homes Keeps Getting Bigger

[FT] China’s rise is reversing

[FT] El Niño expected to cause floods and heatwaves into early 2024, warn scientists

Saturday's News Links

[Reuters] Wall St Week Ahead: After breathtaking surge, US stocks' path may rest on economic soft landing

[Politico] How a flood of congressional retirements is rocking the 2024 elections

[AP] Israeli drone fires missiles at aluminum plant in south Lebanon

[Reuters] China vows to support property sector, tackle local debt

[Reuters] Russian drone attack hits Ukraine infrastructure, causes power outage

[BBC] China navy used sonar pulses against divers, Australia says

Weekly Commentary: A Wolf in Panda's Clothing

Good to see U.S./China tensions ease. It’s clearly in both countries' interest. Especially with war raging in Gaza, President Biden could sure use a boost. And China’s faltering Bubble is in more desperate need of a boost than even the President’s poll numbers. The Xi Jinping charm offensive was a thing of beauty. “Planet Earth is big enough for the two countries to succeed.” “China is pursuing high-quality development, and the United States is revitalizing its economy. There is plenty of room for our cooperation.”

November 16 – Reuters (Trevor Hunnicutt, Jeff Mason and Steve Holland): “U.S. President Joe Biden and Chinese leader Xi Jinping agreed on Wednesday to open a presidential hotline, resume military-to-military communications and work to curb fentanyl production, showing tangible progress in their first face-to-face talks in a year. Biden and Xi met for about four hours on the outskirts of San Francisco to discuss issues that have strained U.S.-Chinese relations. Simmering differences remain, particularly over Taiwan.”

Sticking with Biden/Xi deliverables, how about the Panda news - “envoys of friendship between the Chinese and American peoples.” WSJ: “The business leaders applauded Xi’s speech several times, including when he indicated the possibility of China sending new Pandas to the U.S... ‘We are ready to continue our cooperation with the United States on panda conservation,’ Xi said.”

For a country these days held in such low regard by the American public, recalling all the beloved Pandas was a dim-witted move. China should fire its PR firm.

NYT on Xi’s dinner with American business leaders: “Mr. Xi spoke of pandas. He spoke of Ping-Pong. He spoke of Americans and Chinese working together during World War II to battle the Japanese.” It all sounds so warm and nice - and almost embarrassingly superficial. Bloomberg headline: “Xi Pledges ‘Heart-Warming’ Steps to Attract Foreign Capital.”

November 16 – Reuters (Trevor Hunnicutt, Jeff Mason and Steve Holland): “Chinese President Xi Jinping told U.S. President Joe Biden during their four-hour meeting on Wednesday that Taiwan was the biggest, most dangerous issue in U.S.-China ties, a senior U.S. official told reporters. The official quoted Xi as saying China’s preference was for peaceful ‘reunification’ with the Chinese-claimed island of Taiwan… ‘President Xi ... underscored that this was the biggest, most potentially dangerous issue in U.S.-China relations, laid out clearly that, you know, their preference was for peaceful reunification but then moved immediately to conditions that the potential use of force could be utilized,’ the senior U.S. official told reporters… ‘President Biden responded very clearly that the long-standing position of the United States was ... determination to maintain peace and stability,’ the official said. ‘President Xi responded: look, peace is… all well and good but at some point we need to move towards resolution more generally,’ the official said.”

While following Wednesday evening developments, my thoughts kept returning to a Monday NYT article (Chris Buckley): “Speeches by the Chinese leader show how he was bracing for an intensifying rivalry with the United States from early in his rule. When President Xi Jinping of China made his first state visit to the United States in 2015, he wrapped his demands for respect in reassurances. He courted tech executives, while defending China’s internet controls. He denied that China was militarizing the disputed South China Sea, while asserting its maritime claims there. He spoke hopefully of a ‘new model’ for great power relations, in which Beijing and Washington would coexist peacefully as equals. But back in China, in meetings with the military, Mr. Xi was warning in strikingly stark terms that intensifying competition between a rising China and a long-dominant United States was all but unavoidable, and that the People’s Liberation Army should be prepared for a potential conflict.”

“Despite his assurances to President Obama not to militarize the South China Sea, Mr. Xi told his senior commanders in February 2016 that China must bolster its presence there.” “In Mr. Xi’s worldview, the West has sought to subvert the Chinese Communist Party’s power at home and contain the country’s influence abroad. The Communist Party had to respond to these threats with iron-fisted rule and an ever-stronger People’s Liberation Army.”

Panda talk was a nice touch. But it seems obvious that Beijing has decided to play nice only because the nice guy act is today a necessary expedient for the tough guy to be in the most advantageous position to later impose his will. Wolf Warrior in Panda’s Clothing.

At least for a day, we could forget about Xi’s “no limits partnership” pact with Putin, a dictator brotherhood appearing only to have strengthened since Russia’s Ukraine invasion (and associated atrocities). And we can overlook Team Xi/Putin, these days burning the midnight oil assembling their anti-U.S. alliance with a motley crew of countries deserving of the “axis of evil” moniker. No reason to dwell on Hong Kong repression, the crazy Chinese surveillance state and eradication of basic freedoms, or the Uyghur tragedy. Sure will be fun to welcome the Pandas back.

I hope I’m wrong on Xi’s China; hope my views on lots of things are wrong. At lot has gone right for the markets of late. While the war in Gaza is horrendous, escalation has been limited so far. There is little to indicate that Hezbollah and Iran were initially prepared for a concerted war effort with Hamas. Crude prices declined $1.28, or 1.7%, this week, capping an almost 19% drop from October 20th highs ($90).

The release of better-than-expected October CPI data provoked a significant market response. Headline CPI was flat for the month, versus expectations of 0.1% (“core” 0.2% vs. 0.3%). Ten-year Treasury yields sank 19 bps on CPI Tuesday, with yields at that point down 45 bps in 11 sessions (55bps from the 10/19 high). MBS yields dropped 27 bps, with a 64 bps 11-session collapse (77bps from 10/19). The market immediately priced zero chance of an additional Fed rate hike (from Monday’s 28%).

Equities went a little nuts, with short squeeze dynamics playing an integral role. The Goldman Sachs most short index surged 7.2% in Tuesday trading, the largest one-day gain in a year (11/10/22). Indicative of squeeze dynamics, the year’s underperformers sprang to life. The KBW Bank Index jumped 7.5%, the biggest gain in almost six months (5/17). The Bloomberg REIT Index rose 5.4%, also the strongest in a year. The small cap Russell 2000 rallied 5.4%, the largest one-day gain in over a year (11/10/22). The “average stock” Value Line Arithmetic Index rose 4.1% Tuesday (also strongest in a year).

Market reaction recalled the June CPI report, with consumer inflation reported a tenth below expectations at 0.2% for the month. After trading at 4.07% on July 7th, yields were down 32 bps in eight sessions to 3.75%. June non-farm payrolls (209k) were reported weaker-than-expected, while yields dropped aggressively on the release of the tenth less-than-forecast increase in June CPI (reported on July 12th). That inflation “all’s clear” proved premature, with yields reversing sharply higher – to trade to 5.00% in mid-October.

History informs us that inflation is not easily contained once the Genie has escaped from the bottle. Inflation will ebb and flow, while retaining a powerful bias for upside surprises.

CPI (y-o-y) began 1968 at 3.6% and traded as high as 6.2% during December 1969. CPI had dropped back down to 2.7% by June 1972, only to shoot to 12.3% to end 1974. Inflation then reversed sharply lower, with a reading of 4.9% during November 1976. Despite market and policymaker optimism, the inflation fight was anything but mission accomplished. CPI reached 9.0% in 1978, 12.2% in 1979, and then peaked at 14.7% in April 1980.

The Fed funds rate began 1968 at 4.6%, only to reach 9.2% by August 1969. It was back down to 3.50% by February 1971, before reversing higher, with the policy rate surpassing 10% in July 1973. Fed funds began 1976 below 5%, jumped back to 10% in late-1978, and reached 15.5% in October 1979 – only to peak at 20% in Q1 1980. Fed officials are well aware of inflation’s resilient and cyclical nature – along with the dangers of “stop-start” policy tightening.

November 15 – Financial Times (Colby Smith): “The US Federal Reserve would put its credibility at risk if it prematurely declared victory in its fight against inflation and then had to raise interest rates again, one of the central bank’s top officials warned... Mary Daly, president of the Federal Reserve Bank of San Francisco, told the Financial Times that recent economic data showing a further deceleration in inflation was ‘very, very encouraging’ and indicated that the Fed’s policies are proving effective. But Daly refused to rule out another interest rate increase… ‘What I worry about is that without a sufficient amount of information about whether we’re really on that disinflationary process that brings us back to 2, we have to ‘stop-start’,’ she said… ‘People need to plan and if you’re in a ‘stop-start’ mentality, then that’s really disruptive. It also ultimately tears at credibility.’”

Deficit spending and bank lending were the key drivers of monetary inflation in the seventies and early eighties. I would argue that market structure these days adds a critical element to inflation risk. Market-based finance is the marginal source of monetary fuel that can either stoke inflation or spur disinflation. Since the March bank bailout, I have chronicled how “risk on” and resulting loosened financial conditions usurped the Fed’s tightening cycle.

Financial conditions have loosened meaningfully over recent weeks. High yield CDS prices collapsed 112 bps over three weeks, the largest three-week drop since coming out of the Covid pandemic crisis in July 2020. The 18 bps three-week fall in investment-grade CDS was the largest since October 2022. MBS yields collapsed 82 bps in a month (10/19 high). Treasury yields have sunk 55 bps over the past month, while corporate spreads (to Treasuries) have narrowed to September levels.

Unless it proves ephemeral, I would expect this latest loosening to underpin economic activity, while providing inflation only a greater opportunity to establish deeper roots. Tentative signs of somewhat looser labor market conditions bear watching. But at 9.55 million job openings, JOLTS data still point to extraordinary demands for labor.

A few snippets from the week: “Hyundai has joined Honda and Toyota in raising factory worker wages… said Monday it will raise factory worker pay 25% by 2028…” “California Highway Patrol officers are getting a 7.9% wage increase, marking their biggest raise in 20 years. Last year, they received a 6.2%...” “The National Defense Authorization Act (NDAA) for 2024 has been approved by the House of Representatives, allocating an impressive 5.2% pay increase to military members.” “Alaska’s minimum wage will increase on Jan. 1, 2024 from $10.85 to $11.73 an hour…” “Starbucks workers stage ‘Red Cup Day’ strike.”

The Nasdaq100 (NDX) ended the week with a y-t-d return of 45.9%, with the S&P500 returning 19.3%. The NDX is now only 4.4% from all-time highs, with the S&P500 less than 6% away. High yield bonds (the HYG ETF) have returned 6.74% y-t-d, with investment-grade bonds returning 2.46% (LQD).

I believe tighter financial conditions will be necessary to reduce inflation risk. And conditions were tightening throughout September and October. But, once again, when tighter conditions begin to translate into softer market and economic backdrops, markets become susceptible to powerful squeeze dynamics – the unwind of short positions and the reversal of hedges. And in this hyper-speculative marketplace, squeezes quickly entice aggressive “FOMO” performance-chasing buying.

This week provided further evidence of extraordinary correlations – across various markets and globally. Whether it’s “risk on” or “risk off” – it is a highly synchronized world. Major equities indices this week were up 4.5% in Germany, 4.2% in Spain, 3.5% in Italy, 3.5% in Brazil, 3.1% in Japan, and 2.8% in Mexico. Ten-year yields dropped 23 bps in the UK and 22 bps in Italy. EM (local currency) yields dropped 36 bps in Chile, 34 bps in South Africa, 30 bps in Colombia, 28 bps in Brazil, and 24 bps in Hungary. EM currencies were squeezed higher, as dollar bulls took one on the chin. In China, Asia, Europe and the U.S., bank CDS prices have moved sharply lower.

Stocks are always good for upside surprises. And with all the derivatives, hedging, speculating, and leveraging, we shouldn’t be surprised by wild CDS and currency market volatility. But it’s the bond market that I find most fascinating. There will be ebbs and flows. Treasuries and MBS were overdue for a “rip your face off” squeeze. But there will be a couple more Trillion of Treasuries to sell over the coming year, in the face of additional QT and waning international demand. And “risk on” only heightens the risk of upside surprises in economic growth and inflation.

The bottom line is that when the bond market approaches the point of imposing some desperately needed discipline (in the markets and Washington), a confluence of squeezes, unwind of hedges, speculative flows and leveraging spurs looser conditions. Enjoying the whole loosening experience, Gold jumped 2.1% this week and Silver surged 6.5%.

But I expect the bond market to push back against “risk on.” With $2 TN annual deficits as far as the eye can see, it's either begin imposing discipline or watch inflation and supply eat away at system stability.

For the Week:

The S&P500 rose 2.2% (up 17.6% y-t-d), and the Dow gained 1.9% (up 5.4%). The Utilities rallied 2.8% (down 14.2%). The Banks surged 6.9% (down 17.3%), and the Broker/Dealers added 2.1% (up 9.2%). The Transports jumped 3.5% (up 11.5%). The S&P 400 Midcaps rose 4.0% (up 4.4%), and the small cap Russell 2000 surged 5.4% (up 2.1%). The Nasdaq100 advanced 2.0% (up 44.8%). The Semiconductors jumped 4.4% (up 48.0%). The Biotechs recovered 3.2% (down 9.4%). With bullion up $41, the HUI gold equities index rallied 4.3% (down 4.8%).

Three-month Treasury bill rates ended the week at 5.23%. Two-year government yields dropped 18 bps this week to 4.89% (up 46bps y-t-d). Five-year T-note yields sank 24 bps to 4.44% (up 44bps). Ten-year Treasury yields dropped 22 bps to 4.44% (up 56bps). Long bond yields fell 17 bps to 4.59% (up 62bps). Benchmark Fannie Mae MBS yields collapsed 38 bps to 6.03% (up 64bps).

Italian yields sank 22 bps to 4.36% (down 34bps). Greek 10-year yields fell 13 bps to 3.84% (down 73bps y-t-d). Spain's 10-year yields dropped 18 bps to 3.60% (up 8bps). German bund yields fell 13 bps to 2.59% (up 14bps). French yields dropped 15 bps to 3.15% (up 17bps). The French to German 10-year bond spread narrowed two to 56 bps. U.K. 10-year gilt yields sank 23 bps to 4.10% (up 43bps). U.K.'s FTSE equities index rallied 2.0% (up 0.7% y-t-d).

Japan's Nikkei Equities Index jumped 3.1% (up 28.7% y-t-d). Japanese 10-year "JGB" yields dropped nine bps to 0.76% (up 33bps y-t-d). France's CAC40 rose 2.7% (up 11.7%). The German DAX equities index surged 4.5% (up 14.3%). Spain's IBEX 35 equities index jumped 4.2% (up 18.6%). Italy's FTSE MIB index rose 3.5% (up 24.4%). EM equities were mostly higher. Brazil's Bovespa index jumped 3.5% (up 13.7%), and Mexico's Bolsa index gained 2.8% (up 8.7%). South Korea's Kospi index rose 2.5% (up 10.4%). India's Sensex equities index gained 1.4% (up 8.1%). China's Shanghai Exchange Index increased 0.5% (down 1.1%). Turkey's Borsa Istanbul National 100 index gained 1.1% (up 42.6%). Russia's MICEX equities index declined 1.1% (up 48.8%).

Federal Reserve Credit declined $2.6bn last week to $7.819 TN. Fed Credit was down $1.081 TN from the June 22nd, 2022, peak. Over the past 218 weeks, Fed Credit expanded $4.093 TN, or 110%. Fed Credit inflated $5.009 TN, or 178%, over the past 575 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.2bn last week to $3.431 TN. "Custody holdings" were up $122bn, or 3.7%, y-o-y.

Total money market fund assets expanded $21.9bn to a record $5.734 TN, with a 36-week gain of $840bn (25% annualized). Total money funds were up $1.109 TN, or 24.0%, y-o-y.

Total Commercial Paper increased $2.1bn to $1.243 TN. CP was down $61bn, or 4.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell 10 bps to 7.25% (up 69bps y-o-y). Fifteen-year rates dropped eight bps to 6.71% (up 73bps). Five-year hybrid ARM rates slipped two bps to 7.01% (up 148bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 7.77% (up 92bps).

Currency Watch:

November 14 – Bloomberg (Yumi Teso and Daisuke Sakai): “The yen’s rebound from the cusp of a 33-year low versus the dollar has only served to highlight the increased pressure it faces with other major currencies. It touched the weakest in 15 years against the euro on Wednesday, depreciated to a record level to the Swiss franc and registered a drop versus ever other Group-of-10 currency. In fact, Bloomberg’s measure of the yen’s relative strength against its G-10 peers fell to the lowest since 2007.”

November 13 – Reuters (Tetsushi Kajimoto and Kaori Kaneko): “Japanese Finance Minister Shunichi Suzuki said… that the government would take all possible steps necessary to respond to currency moves, repeating his usual mantra that excessive swings were undesirable. Suzuki made the remarks when asked about impacts from the weak yen on households which have been pressured by rising living costs due to higher import prices for fuel and food.”

For the week, the U.S. Dollar Index dropped 1.8% to 103.92 (up 0.4% y-t-d). For the week on the upside, the Swedish krona increased 3.6%, the Norwegian krone 2.8%, the Australian dollar 2.4%, the euro 2.1%, the South African rand 2.0%, the British pound 1.9%, the Swiss franc 1.9%, the New Zealand dollar 1.7%, the South Korean won 1.6%, the Singapore dollar 1.3%, the Japanese yen 1.3% and the Canadian dollar 0.6%. The Chinese (onshore) renminbi increased 0.99% versus the dollar (down 4.38%).

Commodities Watch:

November 13 – Bloomberg (Swansy Afonso): “Gold jewelers made brisk sales in India on the Diwali weekend with consumers’ interest riding on a recent drop in prices… The world’s second-largest gold consumer saw an 8% growth in demand on Dhanteras, the first day of the Diwali period… Coins made for about a third of the sales and the rest was jewelry…”

The Bloomberg Commodities Index increased 0.3% (down 9.6% y-t-d). Spot Gold rallied 2.1% to $1,981 (up 8.6%). Silver silver surged 6.5% to $23.72 (down 1.0%). WTI crude fell $1.28, or 1.7%, to $75.89 (down 5.4%). Gasoline slipped 0.2% (down 11%), and Natural Gas dropped 2.4% to $2.96 (down 34%). Copper rallied 5.1% (down 1%). Wheat sank 4.3% (down 31%), while Corn increased 0.6% (down 31%). Bitcoin declined $870, or 2.3%, to $36,500 (up 120%).

Middle East War Watch:

November 14 – Reuters (Parisa Hafezi, Laila Bassam and Arshad Mohammed): “Iran's supreme leader delivered a clear message to the head of Hamas when they met in Tehran in early November, according to three senior officials: You gave us no warning of your Oct. 7 attack on Israel and we will not enter the war on your behalf. Ayatollah Ali Khamenei told Ismail Haniyeh that Iran - a longtime backer of Hamas - would continue to lend the group its political and moral support, but wouldn't intervene directly, said the Iranian and Hamas officials with knowledge of the discussions… The supreme leader pressed Haniyeh to silence those voices in the Palestinian group publicly calling for Iran and its powerful Lebanese ally Hezbollah to join the battle against Israel in full force, a Hamas official told Reuters.”

November 12 – The Hill (Ellen Mitchell): “As attacks on U.S. troops and assets continue to stack up in the Middle East, Washington has turned to targeted retaliatory strikes on assets belonging to Iran and its proxies. The tit for tat comes as regional tensions flare over the Israel-Hamas war… But the exchange of fire has already injured dozens of U.S. troops and adds to the dangerous landscape facing the Biden administration in the Middle East… ‘I’m sure there is a hope that [the U.S. strikes] would have a deterrent effect, but clearly they have not,’ said Jonathan Lord, the director of the Middle East Security Program at the Center for a New American Security. ‘I don’t suspect that they would because these groups that are conducting these strikes are trying to [get] the U.S. into a larger conflict. That is their purpose in targeting the U.S. forces at this point.’”

November 14 – Reuters (Phil Stewart): “The U.S. believes its latest air strikes on Sunday against Iran-linked militia in Syria killed up to seven people, a U.S. official said… The deaths would be the first since the U.S. started carrying out retaliatory strikes in the past month against militia who Washington blames for attacking American troops at bases in Iraq and Syria. The other strikes have hit unoccupied facilities… U.S. and coalition troops have been attacked at least 55 times in Iraq and Syria since Oct. 17, injuring 59 personnel, though all have returned to duty.”

November 11 – Reuters (Laila Bassam, Maya Gebeily and Maayan Lubell): “The head of Lebanon’s powerful Hezbollah party said… its armed wing had used new types of weapons and struck new targets in Israel, and pledged that the front against its sworn enemy would remain active. It was Sayyed Hassan Nasrallah's second speech since the war between Israel and Hamas began in October. In his first, he said there was a possibility of fighting on the Lebanese front turning into a fully-fledged war. On Saturday, in a televised address, he said Hezbollah had shown ‘a quantitative improvement in the number of operations, the size and the number of targets, as well as an increase in the type of weapons’. He said it had used a ‘Burkan’ missile that carries an explosive payload of 300-500 kg, as well as weaponised drones for the first time.”

November 16 – Reuters (Parisa Hafezi): “The top commander of Iran's Quds force said the resistance front supported the Tehran-backed Hamas militant group in its war with Israel in Gaza. ‘Your brothers in the Axis of Resistance stand united with you… the resistance will not allow the enemy to achieve its dirty goals in Gaza and Palestine,’ Esmail Qaani… Iran, which refers to its aligned armed groups around the Middle East as being part of the ‘Resistance Axis’, has warned Israel of escalation if it failed to end aggressions in the Gaza Strip.”

Ukraine War Watch:

November 13 – Reuters (Ron Popeski and Maria Starkova): “President Volodymyr Zelenskiy warned Ukrainians…. to prepare for new waves of Russian attacks on infrastructure as winter approached and said troops were anticipating an onslaught in the eastern theatre of the war… ‘We are almost half way through November and must be prepared for the fact that the enemy may increase the number of drone or missile strikes on our infrastructure… Russia is preparing for Ukraine. And here, in Ukraine, all attention should be focused on defence, on responding to terrorists on everything that Ukraine can do to get through the winter and improve our soldiers' capabilities.’”

Market Instability Watch:

November 17 – Wall Street Journal (Chelsey Dulaney and Megumi Fujikawa): “Foreigners no longer have an insatiable appetite for U.S. government debt. That’s bad news for Washington. The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately. Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. ‘U.S. issuance is way up, and foreign demand hasn’t gone up,’ said Brad Setser, senior fellow at the Council on Foreign Relations. ‘And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.’”

November 13 – Bloomberg (Skylar Woodhouse): “The interest the US pays on its debt soared in October from a year before, showcasing the rising cost to the government of higher yields on Treasuries. Interest on the public debt was $88.9 billion in the first month of the fiscal year, up 87% from the figure in October 2022… Despite the surge, the budget deficit for the month of October was notably smaller than a year ago — down 24% to $66.6 billion from $87.9 billion. Adjusting for calendar differences, the deficit shrank by 4%.”

November 15 – Wall Street Journal (Chelsey Dulaney, Andrew Duehren and Peter Santilli): “The world spent the past decade-plus taking advantage of rock-bottom interest rates to binge on debt. An unprecedented bill is coming due. Governments are expected to spend a net $2 trillion paying interest on their debt this year as higher interest rates make borrowing more expensive, up more than 10% from 2022… By 2027, it could top $3 trillion, according to Teal Insights. The surge in interest costs leaves governments with difficult choices. As debt servicing takes up more revenue, politicians face unpopular decisions to raise taxes, cut spending or keep running deficits that will add to interest costs. That comes as they face higher military spending amid escalating geopolitical uncertainty, as well as the costs of responding to extreme and costly weather events and caring for rapidly aging populations.”

November 16 – Bloomberg (Vince Golle): “China’s holdings of US Treasuries slumped in September by the most in a year, and currently stand at the lowest level since mid-2009. China’s stockpile — the largest foreign holdings behind Japan’s — fell by $27.3 billion to $778.1 billion… The decline was the sixth-straight and extends a more than two-year downtrend. Japan’s holdings decreased, as well, falling $28.5 billion to nearly $1.09 trillion — the lowest since March. Total overseas holdings of US Treasuries decreased by nearly $102 billion, to around $7.61 trillion in September. That was the largest monthly decline this year…”

November 15 – Financial Times Costas Mourselas, Kate Duguid and Cheng Leng): “As they patch up their bond trading operations following the hack of Industrial and Commercial Bank of China, brokers are also piecing together how China’s largest lender became such a significant player in US Treasuries that the attack on its systems could disrupt the $26tn market. The impact of the attack was still being felt days after the ransomware was found… The company confirmed it was helping clients suffering from the impact of the hack. ‘The unexpected thing we uncovered was that [market] exposure to ICBC was significantly higher than what we expected,’ said a senior executive in fixed-income prime brokerage at a large US bank.”

November 12 – Bloomberg (Swati Pandey): “The US fiscal position is on an ‘unsustainable trajectory’ due to a lack of political will to resolve the crisis at a time when debt costs are soaring, former Federal Reserve Bank of New York President Bill Dudley said. ‘The situation is going to get worse because the government’s debt is going to be repriced at much higher interest rates than what we’ve had over the last 15 years’ Dudley… said… He also pointed to ballooning costs of healthcare and social security as the baby-boomer generation retires, further exacerbating the fiscal outlook. ‘A final problem we have is the political problem. We do not have a very functional government in the United States right now in terms of getting things done… We’re absolutely on an unsustainable trajectory.’”

November 16 – Reuters (David Morgan): “A group of hardline Republicans has put new U.S. House Speaker Mike Johnson on notice that he can no longer count on their support for legislation, signaling a possible early end to his ‘honeymoon’ period. Three weeks after the Louisiana lawmaker won the gavel of the House of Representatives, 19 House Republicans - including 15 hardliners - voted to block debate on their party's bill to fund federal programs on commerce, justice and science for fiscal 2024... ‘We want the message to be clear,’ said Representative Scott Perry, chairman of the hardline conservative House Freedom Caucus. ‘We’re not going to pass bills that don’t address the problems that America faces.’”

November 14 – Bloomberg (Farah Elbahrawy): “Investors turned the most bullish on bonds since the global financial crisis on ‘big conviction’ that rates will move lower in 2024, according to the latest Bank of America Corp. fund manager survey. The monthly survey showed investors were dumping cash to hold the biggest overweight position in bonds since 2009. BofA’s Michael Hartnett said the ‘big change’ was not the macro outlook, but expectations that inflation and yields will move lower in 2024.”

Bubble and Mania Watch:

November 17 – Bloomberg (Katie Greifeld): “At first blush, a record $100 billion flood into actively managed exchange-traded funds this year raises a tantalizing prospect: A revival of stockpicking… Yet, a look under the hood of popular ETFs shows the boom is almost entirely taking place in passive-looking trades. Active strategies have attracted nearly 25% of the $423 billion that’s flowed to US ETFs so far in 2023 — a record share… But those billions aren’t being sent to the likes of traditional bond- and stockpickers. Rather, firms like Dimensional Fund Advisors and JPMorgan Asset Management have led the charge. Dimensional, the largest active ETF issuer with roughly $100 billion in assets, is known for its systematic funds. Meanwhile, JPMorgan has struck gold with its suite of covered-call ETFs, which employ options overlay strategies to generate additional yield.”

November 13 – Wall Street Journal (Jon Sindreu): “Wall Street’s doom-mongers spent years warning that private lenders would be the next bubble to burst when central banks tightened policy. Instead, the funds are becoming even more ubiquitous as companies scramble to refinance debt in a higher interest-rate environment… In the middle ground between debt and equity sit other private-credit firms. Among them is… Park Square Capital, which said earlier this month it would commit over $100 million in preferred equity to the deal. This is an example of the ‘mezzanine’ strategies keeping the private-credit boom alive… Private debt—where funds extend credit directly to companies—has ballooned from about $280 billion of assets under management in 2007 to $1.5 trillion in 2022… Private-equity firms such as KKR, Apollo and Blackstone are channeling an increasing share of their assets into these markets. This year, asset-management behemoths such as BlackRock, Fidelity and PGIM, owned by Prudential, have also invested heavily in the sector.”

November 15 – Financial Times (Eric Platt): “Blackstone is planning to borrow hundreds of millions of dollars to give its flagship private credit fund added investment firepower, as the asset manager taps a new source of leverage that it and rivals aim to increasingly exploit in the years to come. The private equity behemoth is in the final stages of raising just under $400mn through a so-called collateralised loan obligation secured by the very loans held by its $52bn Blackstone Private Credit Fund, known as BCRED… Blackstone’s ability to clinch the financing package underscores how big credit investors are comfortable with the risks in this opaque but rapidly growing corner of financial markets…”

November 13 – Wall Street Journal (Konrad Putzier): “Foreclosures are surging in an opaque and risky corner of commercial real-estate finance, offering one of the starkest signs yet that turmoil in the property market is worsening. Lenders this year have issued a record number of foreclosure notices for high-risk property loans… Many of these loans are similar to second mortgages and commonly known as mezzanine loans. Mezzanine loans have high interest rates and offer a faster and easier path to foreclose than mortgages. The Journal analysis found notices for 62 mezzanine loans and other high-risk loans this year through October. That is more than double the number for all of last year, and likely the highest total ever for a single year, as higher interest rates and rising vacancies punish the property sector.”

Banking Crisis Watch:

November 11 – Financial Times (Stephen Gandel): “The four biggest US lenders grabbed almost half of all banking profits in the third quarter, highlighting their growing advantage in the new era of higher-for-longer interest rates. Earnings at JPMorgan…, Bank of America, Wells Fargo and Citigroup were up 23% according to BankRegData… Of the nation’s almost 4,400 banks, the big four made 45% of the industry’s overall profits in the third quarter. That was up from 35% a year ago, and well above the 10-year average of 39%.”

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

November 14 – New York Times (Peter S. Goodman): “For more than a quarter century, the fortunes of the United States and China were fused in a uniquely monumental joint venture. Americans treated China like the mother of all outlet stores, purchasing staggering quantities of low-priced factory goods. Major brands exploited China as the ultimate means of cutting costs, manufacturing their products in a land where wages are low... As Chinese industry filled American homes with electronics and furniture, factory jobs lifted hundreds of millions of Chinese from poverty. China’s leaders used the proceeds of the export juggernaut to buy trillions of dollars of U.S. government bonds, keeping America’s borrowing costs low and allowing its spending bonanza to continue. Here were two countries separated by the Pacific Ocean, one shaped by freewheeling capitalism, the other ruled by an authoritarian Communist Party, yet conjoined in an enterprise so consequential that the economic historian Niall Ferguson coined a term: Chimerica, shorthand for their ‘symbiotic economic relationship.’”

November 13 – Financial Times (Kathrin Hille): “The US is rushing to strengthen Taiwan’s defences against a potential Chinese attack, including by training its troops, Taipei’s top national security official has said in remarks that are likely to rankle Beijing… Washington’s security co-operation with Taiwan covered ‘all aspects’, said Wellington Koo, secretary-general of President Tsai Ing-wen’s National Security Council… ‘They are not just discussing it with us but taking action.’ ‘[Our] relationship on these security issues is so close, but we must keep a low profile,’ said Koo. ‘I can only say, they are using all possible ways to help us, no matter if it’s in training or the build-up of asymmetric fighting capabilities.’”

November 15 – Reuters (Ben Blanchard and Yimou Lee): “Lai Ching-te, the frontrunner for Taiwan's presidency, has picked Taipei's envoy to the United States - a fluent English speaker with deep connections in Washington - to be his running mate for January's election, sources… said. Lai, vice president and the ruling Democratic Progressive Party's (DPP) presidential candidate, has almost consistently led opinion polls ahead of an election taking place amid increased Chinese pressure on Taiwan to accept Beijing's sovereignty claims. Hsiao Bi-khim, 52, who has been Taiwan's de facto ambassador to the United States since 2020, has been considered by party officials, diplomats and Taiwanese media for months to the most likely running mate for Lai.”

Inflation Watch:

November 15 – Wall Street Journal (Greg Ip): “Two weeks ago, I asked why Americans were in such a rotten mood when the data said the economy is in such good shape. The disconnect has only grown since. Inflation, we just learned, eased in October, extending a two-week rally in stocks and bonds. And yet the University of Michigan’s index of consumer sentiment keeps falling. It’s clear readers cared less about inflation dropping, which only meant prices were rising more slowly, than about the fact that the level of prices is painfully high compared with three years ago. It is also clear that not all inflation is equal. Three things in particular have our attention: gasoline, food and houses.”

November 14 – CNBC (Jeff Cox): “Inflation was flat in October from the previous month, providing a hopeful sign that stubbornly high prices are easing their grip on the U.S. economy… The consumer price index… increased 3.2% from a year ago despite being unchanged for the month… Economists surveyed… had been looking for respective readings of 0.1% and 3.3%. The headline CPI had increased 0.4% in September. Excluding volatile food and energy prices, the core CPI increased 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual level was the lowest in two years, down from 4.1% in September, though still well above the Federal Reserve’s 2% target.”

November 15 – Associated Press (Paul Wiseman): “U.S. wholesale prices fell sharply last month as inflationary pressure continued to ease after a year and a half of higher interest rates. The… producer price index… dropped 0.5% in October from September, the first decline since May and biggest since April 2020. On a year-over-year basis, producer prices rose 1.3% from October 2022, down from 2.2% in September and the smallest gain since July. Excluding volatile food and energy costs, so-called core consumer prices were unchanged from September to October and rose 2.4% from a year earlier. The year-over-year gain in core producer prices was the smallest since January 2021.”

November 13 – Bloomberg (Michael S. Derby): “The expected path for inflation softened on balance in October amid rising expectations for future gasoline price increases and a largely stable outlook for employment and personal finances, the Federal Reserve Bank of New York reported… Respondents to the bank’s latest Survey of Consumer Expectations project inflation a year from now will stand at 3.6% from September’s 3.7%, with inflation three years from now seen at 3%, the same level as the prior month, while five years from now inflation is forecast to stand at 2.7%, from September’s 2.8%.”

November 13 – Reuters (David Shepardson): “Hyundai Motor said… it will hike wages for nonunion production workers at its Alabama factory by 25% by 2028, weeks after the United Auto Workers won new contracts with the Detroit Three automakers. The Korean automaker joins Toyota Motor and Honda Motor in raising U.S. factory wages after the UAW won a new contract with General Motors, Ford Motor and Chrysler parent Stellantis that will result wage increases of 25% through 2028. The Detroit Three wage hikes amount to 33% when expected cost-of-living adjustments are factored in.”

November 15 – Reuters (Howard Schneider): “As families in the U.S. prepare to gather for their Thanksgiving dinners next week, food prices have largely flatlined for months, gasoline prices are about 10% lower than a year ago, and the average cost of much of what goes into a shopping cart has been roughly unchanged for a year. But the steady ebbing of inflation hasn't translated into good news for either President Joe Biden or the Federal Reserve when it comes to public opinion. Attitudes towards both have kept slipping in light of one unchanging fact: Stuff remains pricier than it was before the coronavirus pandemic, and will likely stay that way… ‘Inflation falls ... but prices don't come down. They're just going up at a slower rate,’ Fed Governor Christopher Waller said… ‘What people have in their mind right now is ... prices to go back to where they were in 2021. That's not going to happen. These prices are probably there forever.’”

Biden Administration Watch:

November 17 – Reuters (Trevor Hunnicutt and Gokul Pisharody): “U.S. President Joe Biden signed… a stopgap spending bill to avert a government shutdown, a day after the Senate passed it… Biden signed the document on the sidelines of a dinner at the Legion of Honor museum in San Francisco, where leaders are attending the Asia Pacific Economic Cooperation (APEC) summit. The Senate's 87-11 vote on Wednesday marked the end of this year's third fiscal standoff in Congress that saw lawmakers bring Washington to the brink of defaulting on its more than $31 trillion in debt this spring and twice within days of a partial shutdown that would have interrupted pay for about 4 million federal workers.”

November 10 – Reuters (David Lawder and Ann Saphir): “U.S. Treasury Secretary Janet Yellen… said the U.S. government had seen evidence that Chinese firms may be aiding in the flow of equipment to Russia's war effort despite Western sanctions, and said she had urged China to crack down. Yellen said she raised the issue during two days of meetings with Chinese Vice Premier He Lifeng, expressing concern that equipment ‘helpful to Russia's military’ was evading sanctions and getting to Moscow to aid its war against Ukraine.”

Federal Reserve Watch:

November 16 – Reuters (Michael S. Derby): “The three newest Federal Reserve governors, including Vice Chair Philip Jefferson, have told a U.S. senator it's unclear how much further the central bank's balance sheet wind-down process will run, but said it is likely the process faces no imminent end. ‘The size of our balance sheet ultimately will depend on the public's demand for our liabilities, particularly currency and reserves and we cannot specify in advance what that demand will be, hence we are not targeting any particular dollar value for our balance sheet,’ Jefferson wrote in a letter to Republican U.S. Senator Rick Scott.”

November 13 – Bloomberg (Alexandra Harris): “The Federal Reserve should stop cutting its bond holdings before a key liquidity facility is completely emptied so it can ensure that banks have sufficient reserves, according to Wrightson ICAP. There’s uncertainty surrounding the level of reserves that the banking system needs before they become scarce and institutions rely more heavily on short-term funding markets. Fed officials see those reserves — currently at $3.36 trillion — as sufficient and have been allowing the central bank’s bond holdings to drop by not buying new securities to replace those that mature. That’s pulling excess cash from the system as others buy the newly issued Treasuries instead. The process, known as quantitative tightening, helped to drain over $1 trillion since June from the Fed’s reverse repurchase facility, where money-market funds go to earn interest on extra cash, leaving about $1 trillion parked there.”

November 14 – Bloomberg (Katherine Burton and Sonali Basak): “Citadel founder Ken Griffin said the Federal Reserve risks a hit to its reputation if it cuts interest rates too quickly. ‘The Fed needs to have the message that they will put the inflation genie back in the bottle,’ Griffin said… ‘If they cut too soon, I think they risk losing credibility around their commitment to a 2% inflation target.’”

U.S. Bubble Watch:

November 16 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits increased to a three-month high last week, suggesting that labor market conditions continued to ease… Initial claims for state unemployment benefits rose 13,000 to a seasonally adjusted 231,000 for the week ended Nov. 11, the highest since August… The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 32,000 to 1.865 million during the week ending Nov. 4, the highest level since November 2021…”

November 16 – Bloomberg (Alicia Clanton): “Mortgage rates in the US fell for a third week, easing to the lowest in more than a month. The average for a 30-year, fixed loan was 7.44%, down from 7.5% last week, Freddie Mac said… The drop brings slight relief to homebuyers that have been facing the highest borrowing costs in decades.”

November 15 – CNBC (Diana Olick): “Current homeowners and potential homebuyers are responding to lower mortgage rates, albeit slowly… Applications for a mortgage to purchase a home increased 3% from the previous week and were 12% lower than the same week a year ago. Lower rates may help a little, but still-rising home prices and the still-low supply of homes are bigger hurdles for today’s potential buyers.”

November 15 – Associated Press (Anne D’Innocenzio and Christopher Rugaber): “Americans cut back on retail spending in October, ending six straight months of gains, though the decline was partly driven by falling prices for both gasoline and cars. Retail sales fell 0.1% last month after jumping a strong 0.9% in September… September’s figure was revised higher from an initial 0.7% gain. Excluding sales of gas and autos, retail sales ticked up 0.1%. The figures reflect a slowdown in consumers’ willingness to spend after a blowout summer.”

November 14 – Wall Street Journal (Ruth Simon): “With borrowing costs double their levels from just two years ago, many small businesses are pulling back… Some entrepreneurs are postponing equipment purchases and expansion plans, while others are delaying hiring, rethinking loan terms or stepping up efforts to collect payments on time. Keeping borrowing costs in check and managing cash flow is an added challenge for business owners already dealing with labor shortages, inflation and economic uncertainty. The average interest rate small businesses paid on short-term loans has stood at 9% or higher over the past three months, according to the National Federation of Independent Business, up from 6.7% a year earlier and 4.6% in August 2021.”

November 16 – Reuters (Lucia Mutikani): “Production at U.S. factories dropped more than expected in October as strikes by the United Auto Workers (UAW) union against Detroit's ‘Big Three’ automakers depressed motor vehicle production, but manufacturing elsewhere continued to hold up. Manufacturing output fell 0.7% last month…”

November 16 – Bloomberg (Laura Nahmias): “New York City will hold off on hiring new police officers, reduce trash pickups and slash spending on services for migrants in an effort to cut 5% from the city’s $107 billion budget. Those are among the cuts Mayor Eric Adams and Budget Director Jacques Jiha will reveal on Thursday… Adams warned in September that he would have to cut 15% from the city’s budget between this month and April 2024.”

November 13 – Bloomberg (Kathrin Hille): “The District of Columbia had its outlook revised to negative from stable by Moody’s…, just days after the credit-rating company did the same to the US. ‘The revision of DC’s outlook to negative reflects the District’s unique exposure as the nation’s capital to the federal government through economic, financial, capital market and governance linkages,’ Moody’s said…”

Fixed Income Watch:

November 16 – Bloomberg (Ethan M Steinberg): “Companies are rushing to borrow in US junk bond markets while investor demand is still strong, taking advantage of what could be the last window of opportunity this year. High-yielding issuers have sold more than $13 billion of fresh debt so far this month, tapping markets as Treasury yields retreat from October’s peaks and optimism mounts that the Federal Reserve’s interest-rate hiking cycle is over. Already, November sales are outstripping all of last month’s issuance by over 40%...”

November 14 – Bloomberg (Nina Trentmann): “Some of the largest US companies face billions of dollars in additional interest costs and hits to their profit if they refinance their 2024 maturities at current rates, with a third of them lacking the cash to repay upcoming debt. Non-financial companies in the S&P 500 have a combined $107.7 billion in debt coming due next year, with an average interest rate of 2.8%, according to a Calcbench analysis... Refinancing at 5.44% – the rate of the one-year Treasury bill in early November – would add another $3.09 billion in collective interest expense…”

China Watch:

November 14 – Bloomberg (Tania Chen): “China stepped up its support for the economy by pumping the most cash since late 2016 into the financial system with one-year policy loans. The People’s Bank of China offered 1.45 trillion yuan ($200bn) of cash through its medium-term lending facility — 600 billion yuan more than the amount coming due in November. The net injection was the most in nearly seven years… Beijing faces a dilemma as it seeks to bolster an economy reeling from a weak property while also shielding the yuan from further depreciation due to an already wide monetary policy gap with the US.”

November 13 – Bloomberg: “China’s credit growth remained steady in October, with a big jump in government bond sales to finance stimulus compensating for weak business and household borrowing as well as a large contraction in shadow financing. The flow of aggregate financing, a broad measure of credit, was 1.85 trillion yuan ($254bn)… That missed economists’ expectations of a 1.95 trillion yuan increase. October’s credit expansion relied mainly on issuance of government debt, which took up the biggest share since 2018, showcasing weakness in the private sector. The stock of aggregate financing last month rose 9.3% from a year before, capping the longest string of sub-10% growth rates on record.”

November 17 – Bloomberg (Evelyn Yu): “China’s regulators told the country’s biggest banks and asset managers to meet all ‘reasonable’ funding needs from property firms, in the government’s latest bid to arrest the protracted slump in the real estate market. In a meeting on Friday, the People’s Bank of China, the National Administration of Financial Regulation and the China Securities Regulatory Commission told financial institutions to support property developers in receiving loans, issuing bonds and ensuring reasonable equity financing from capital markets.”

November 17 – Bloomberg: “China told a handful of nationwide lenders to cap interest rates on interbank funding, people familiar… said, a move that dovetailed with a sizable cash injection intended to calm the market after last month’s unexpected liquidity crunch. At least two national banks were told last week by regulators to offer

November 17 – Bloomberg: “There’s a 1.5 trillion yuan ($207bn) question weighing on Chinese bond traders’ minds right now: How will Beijing sell that much debt with just six weeks left in the year? The answer is the People’s Bank of China, the world’s only major central bank on a policy easing path, and a slowing economy that sustains voracious appetite for risk-free assets. China has issued 9.6 trillion yuan of government bonds so far in 2023, against an estimated annual target of 11.1 trillion yuan…. This year’s issuance plan, which would be a record…”

November 15 – Reuters (Tetsushi Kajimoto): “China's new home prices fell for the fourth straight month with dozens of cities hit by declines, the most since the peak of the COVID-19 pandemic last year, suggesting a broader weakening in the sector… New home prices in October dropped 0.3% month-on-month after a 0.2% dip in September… ‘The most important reason for the bearish home prices is that demand is weak, buyers don't know if pre-sold homes they buy will be delivered on the dates promised by the developers,’ said Ma Hong, senior analyst at Zhixin Investment Research Institute. Nomura estimated there are around 20 million pre-sold units that are either not yet constructed or delayed.”

November 14 – Bloomberg: “China plans to provide at least 1 trillion yuan ($137bn) of low-cost financing to the nation’s urban village renovation and affordable housing programs in its latest effort to shore up the struggling property market… The People’s Bank of China would inject funds in phases through policy banks with the money ultimately trickling down to households for home purchases… Officials are considering options including the so-called Pledged Supplemental Lending and special loans… The plan, part of a new initiative by Vice Premier He Lifeng, would mark a major step-up in authorities’ efforts to put a floor under the biggest property downturn in decades…”

November 14 – Reuters (Ellen Zhang and Kevin Yao): “China's industrial output and retail sales growth beat expectations in October, but the underlying economic picture highlighted significant pockets of weakness with the crisis-hit property sector continuing to forestall a full-blown revival… China's industrial output grew 4.6% in October year-on-year, accelerating from the 4.5% pace seen in September… It also marked the strongest growth since April. Retail sales rose 7.6% in October with improvement in both auto and restaurant sales growth, quickening from a 5.5% gain in September and hitting the fastest pace since May. Analysts had expected retail sales to grow 7.0% due to the low base effect in 2022 when COVID curbs disrupted consumers and businesses.”

November 12 – Bloomberg (Tom Hancock): “China’s consumption rebound slowed and private business confidence lost momentum in October, according to independent surveys and alternative data that suggested the economic recovery remains bumpy. An indicator of Chinese consumer demand for recreation and transport published by Paris-based QuantCube Technology, along with an independent survey of consumer sentiment by US company Morning Consult, both fell in October... A poll of private business sentiment from the Cheung Kong Graduate School of Business also declined in the month.”

November 12 – Reuters (Konrad Putzier): “China's leaders, determined to upgrade manufacturing, are steering money toward makers of high-tech products, from semiconductors to EVs, raising fears that overcapacity will fuel a new wave of cheap exports. Lending data from China's central bank offers a glimpse of government priorities: as of the end of September, outstanding loans to the troubled property sector fell 0.2% year-on-year but lending to the manufacturing sector jumped 38.2%. Economists caution that this wave of investment differs in key respects from an earlier capital investment surge… But the trend has alarmed some key trading partners... ‘There is lower consumption in China right now but you have massive overcapacity that is being pushed out to the world, including in batteries, solar and chemicals,’ said Jens Eskelund, president of the European Chamber of Commerce in Beijing.”

November 14 – Bloomberg: “Chinese regulators have told securities firms to stop expanding their over-the-counter derivatives operations involving individual stocks, limiting a profitable business for the brokerage industry and dealing another setback to hedge funds that deploy long-short strategies. Regulators last week told multiple major brokerages to cap OTC businesses including total return swaps and options at the current levels... Similar restrictions were imposed on lending of shares for short selling, as well as some proprietary trading activities, the people said…”

November 14 – Reuters (Kevin Yao and Ziyi Tang): “China has ordered its local governments to halt public-private partnership projects identified as ‘problematic’ and replaced a 10% budget spending allowance for these ventures with a vetting mechanism by Beijing as it tries to curb municipal debt risks… The State Council has issued detailed guidelines to reform the public-private partnership (PPP) model for the first time since its launch in 2014, and comes as worries grow about the impact of ballooning local government debt on the economy. Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China's economic output in 2022, up from 62.2% in 2019…”

November 13 – Reuters (Ellen Zhang and Marius Zaharia): “Having failed to find his dream job at a Chinese internet company upon graduation, Peter Liu settled for a role in a state library where there is so little need for his participation that he spends his time studying for a change in his career path. ‘It's really hard to get work at big companies,’ said the 24-year-old who majored in TV production at a Beijing university before moving back home in the central Henan province. Liu got the librarian job after a government-led campaign to secure temporary work for graduates, which analysts describe as a short-term solution to preserve social stability in a slowing economy with little on offer for young Chinese. Such ‘welfare jobs,’ as they are known in China, include roles as receptionists, office administrators, security guards and community workers.”

Central Banker Watch:

November 17 – Bloomberg (Sonja Wind): “A cut in European Central Bank interest rates won’t be happening in the near future, according to Bundesbank President Joachim Nagel. Borrowing costs ‘have to remain at a high level for a sufficient period,’ Nagel said... ‘While it is impossible to predict exactly how long this period will be, it is highly improbable that it will end anytime soon.’ While Governing Council members have emphasized that the deposit rate will remain at 4% well into 2024, money markets are betting on a reduction as soon as April and now price in a full percentage point of rate cuts next year.”

Europe Watch:

November 14 – Reuters (Jan Strupczewski): “The euro zone economy contracted marginally quarter-on-quarter in the third quarter…, but employment still rose. The European Union's statistics office Eurostat confirmed its estimate from Oct 31 that gross domestic product in the 20 countries sharing the euro fell 0.1% quarter-on-quarter in the July-September period for a 0.1% year-on-year rise… But contrary to the usual trend when the economy weakens, employment in the euro zone rose 0.3% quarter-on-quarter in the same period, for a 1.4% year-on-year increase.”

Japan Watch:

November 15 – Reuters (Leika Kihara): “The Bank of Japan has stepped up its drum beat of hawkish comments over the past week, in a series of communications that insiders say is priming markets for an end to negative interest rates, which could happen in the first few months of next year. The distinct change in BOJ commentary is a part of Governor Kazuo Ueda's plan to dismantle the controversial monetary stimulus of his dovish predecessor Haruhiko Kuroda... The hawkish tilt follows the BOJ's decision last month to relax its cap on long-term rates by tweaking its yield curve control (YCC) policy and contrasts with the rhetoric of Ueda shortly after he took the helm this year, which seemed to call for a continuation of Kuroda-era stimulus.”

November 14 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan's economy contracted in July-September, snapping two straight quarters of expansion on soft consumption and exports, complicating the central bank's efforts to gradually phase out its massive monetary stimulus amid rising inflation. The data suggests stubbornly high inflation is taking a toll on household spending… ‘Given the absence of a growth engine, it wouldn't surprise me if the Japanese economy contracted again in the current quarter. The risk of Japan falling into recession cannot be ruled out,’ said Takeshi Minami, chief economist at Norinchukin Research Institute.”

November 15 – Reuters (Liangping Gao and Ryan Woo): “Japanese exports grew for a second straight month in October but at a sharply slower pace due to slumping China-bound shipments of chips and steel… Exports rose 1.6% in October from a year earlier…, faster than a 1.2% increase expected… but slower than the 4.3% rise in September… ‘With China's economy crawling at the bottom and demand from the United States and Europe slowing, we need to wait until the middle of next year for exports to bottom out,’ said Atsushi Takeda, chief economist at Itochu Economic Research Institute.”

EM Watch:

November 13 – Bloomberg (Patrick Gillespie): “Consumer prices in Argentina rose last month at their fastest pace since the country was exiting hyperinflation more than three decades ago, highlighting the dire state of the economy ahead of Sunday’s presidential election. Prices rose 8.3% in October on a monthly basis, a notch below September’s figure… Annual inflation accelerated to 142.7%...”

Levered Speculation Watch:

November 17 – Wall Street Journal (Gregory Zuckerman and Peter Rudegeair): “Wall Street’s best-known bear is going into hibernation. After nearly four decades, Jim Chanos is shutting down hedge funds he manages that wager against companies he believes are overpriced or fraudulent. His career as a short seller spanned a contrarian bet against Enron that paid off when the energy trader collapsed as well as yearslong, money-losing campaigns against Tesla and AOL. More recently, Chanos has struggled to turn his pessimistic positions into profits while markets generally moved higher. His firm, Chanos & Co., manages less than $200 million today, down from $6 billion in 2008… ‘The marketplace for what I do has changed,’ Chanos, 65, told The Wall Street Journal.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 14 – Wall Street Journal (Amrith Ramkumar): “The U.S. now experiences an extreme weather event in which damages and costs top $1 billion every three weeks. That compares with every four months in the 1980s, when adjusted for inflation, according to… the U.S. National Climate Assessment... For the first time, the assessment includes a separate chapter on the economic impacts associated with climate action. Such events cost the U.S. nearly $150 billion each year and disproportionately hurt poor and disadvantaged communities.”

November 14 – Bloomberg (Kendra Pierre-Louis, Eric Roston and Zahra Hirji): “The floods, heat waves, storms and fires fed by global warming are getting worse across the US and will pose increasing danger to Americans unless greenhouse gas emissions are cut sharply and swiftly… Called the Fifth National Climate Assessment, the report ‘is the authoritative, definitive assessment of how our country is doing on climate change,’ Arati Prabhakar, the director of the White House Office of Science and Technology Policy, said... Not only does it make clear that ‘climate change is here,’ she said, it also highlights how ‘America’s stepping up to meet this moment.’”

Geopolitical Watch:

November 15 – Reuters (Soo-hyang Choi): “Russian and North Korean officials held talks in Pyongyang to discuss expanding cooperation in economy, science and technology to follow up on the agreements reached by their leaders in September, the North's state media reported… The meeting took place on Wednesday…, led by North Korea's minister of external economic relations Yun Jong Ho and Russia's natural resources minister Alexander Kozlov… ‘The meeting discussed and confirmed in detail the measures for revitalizing and expanding the multi-faceted bilateral exchange and cooperation in different fields, including trade, economy, science and technology,’ the news agency said.”

November 15 – Reuters (Hyunsu Yim and Josh Smith): “A Russian delegation led by natural resources minister Alexander Kozlov is visiting Pyongyang…, as the politically isolated state announced new progress in its banned ballistic missile programme. Kozlov arrived on Tuesday, as U.S. Defense Secretary Lloyd Austin met with U.N. member states enforcing the Korean War armistice in Seoul and said they were concerned that China and Russia are helping North Korea expand its military capabilities by enabling Pyongyang to evade U.N. sanctions.”

November 15 – Reuters (Soo-Hyang Choi): “North Korea… criticised a recent visit to South Korea by top U.S. defence officials and vowed more ‘offensive’ responses to what it called military threats from the United States and its allies… A spokesperson for the North's defence ministry blamed the United States for raising tensions in the region, referring to U.S. Secretary of Defense Lloyd Austin's Seoul visit this week. ‘The armed forces of the DPRK will strongly control and manage all threats to its national security and interests with more offensive and overwhelming counteraction capabilities and through visible strategic deterrent military actions’…”

November 16 – Reuters (Guy Faulconbridge and Olzhas Auyezov): “Russia's rocket forces loaded an intercontinental ballistic missile equipped with the nuclear-capable ‘Avangard’ hypersonic glide vehicle into a launch silo in southern Russia… President Vladimir Putin announced the Avangard hypersonic glide vehicle in 2018, saying it was a response to U.S. development of a new generation of weapons and a U.S. missile defence system that it could penetrate.”

November 12 – Reuters (Ryan Woo and Lidia Kelly): “The Chinese and Pakistani navies are holding weeklong drills in the Arabian Sea days after the Russian Pacific Fleet and Myanmar practised repelling attacks in their first maritime exercise, while India and the United States pledged security cooperation. At a naval base in Karachi…, the Chinese and Pakistani navies kicked off the exercise in the waters and airspace of the northern Arabian Sea… During the exercise, China and Pakistan will conduct joint maritime patrols for the first time… The exercise follows what Moscow describes as ‘the first Russian-Myanmar naval exercise in modern history’… in the Andaman Sea on the northeastern fringe of the Indian Ocean, a milestone for Russia's naval presence in a sea that the United States counts as one of its global security interests.”