[Reuters] U.S., China agree to have semi-annual talks aimed a reforms, resolving disputes: WSJ
[Reuters] Iran says its military shot down Ukrainian plane in 'disastrous mistake'
[Reuters] Taiwan President Tsai set to win re-election
[Reuters] Taiwan president tells China they will not give in to threats
[Bloomberg] Earnings Are Set to Drop Again. Investors Seem Fine With That
[Bloomberg] Bay Area Home Prices Stagnant After Seven-Year Tech Bonanza
[Bloomberg] Tsai’s Record Victory Moves Taiwan Further From Xi’s Grasp
[Bloomberg] Iran-U.S. Conflict to Shift Back to Proxies After Threat of War
[Bloomberg] U.S. and China Are on Taiwan Collision Course
[WSJ] Washington, Beijing Agree to New Dialogue to Pursue Reforms, Address Disputes
[WSJ] Minimum-Income Ideas Get Widest Airing in 50 Years
Saturday, January 11, 2020
Friday, January 10, 2020
Weekly Commentary: Issues 2020
When I began posting the CBB in 1999, I expected “Bubble” to be in the title for no longer than a year or two. It was to be the “Credit Bulletin,” inspired by Benjamin Anderson’s “Economic Bulletin” from the 1920’s. Yet here we are in 2020 with Bubbles everywhere, including in my blog title. In 1999, I would have said that was an impossibility.
There are many things that proved not as impossible as I had believed. What was deemed acceptable monetary policy badly mutated. Mutant monetary management fundamentally altered the tolerance for debt and deficits. Finance and financial markets were similarly transformed, with yet to be appreciated consequences for (grossly simplifying here) Capitalism, societies and geopolitics.
So many changes, but I’m not changing. In my initial CBB I committed to “calling them as I see them and letting the chips fall where they may.” Let them fall.
“The Bubble will either further inflate or burst.” Regular readers will surely recognize this as what has become an annual ritual of my “Issues” pieces. Some might view it as a cop out; others reminded of Einstein’s definition of insanity. Yet Bubbles do have defined characteristics. They are at their core creatures of increasingly powerful momentum. Stimulus will intensity and broaden inflationary effects while enlarging the overall Bubble scope. Especially in the age of unshackled central banks, the timing of their demise is uncertain. Importantly, however, that they become progressively perilous over time remains a certainty.
This year’s “Bubble Will Inflate or Die” prognosis carries a significantly direr tone than in the past. From a Bubble Analysis perspective, 2019 was an absolute fiasco. Alarmed by faltering Bubbles, central bankers were panicked into prolonging the “Terminal Phase of Bubble Excess” through the reckless administration of additional stimulus. The ECB restarted QE before many even realized the previous program had been concluded. The Fed began the year abruptly abandoning “normalization” and then ended with $400 billion of Q4 QE. Rather than helicopter money, envision fleets of helicopters dropping buckets of propellant on columns of bonfires.
Central banks cut funding costs and afforded speculative financial markets hundreds of billions of additional liquidity. More importantly, global central bankers granted the type of guarantee markets had only dreamed of. Monetary policy will be used early and aggressively to backstop the markets, while no amount of excess would elicit any degree of monetary restraint. The Endless Punchbowl (with free salty snacks) – the “insurance rate cut”.
Bubble markets reacted with a vengeance. Global bond markets experienced a historic “melt-up” with yields collapsing over the summer. Global equities ended the year with a fit of panic buying. Bond and equities bears were squeezed to death. By their nature, speculative blow-offs create acute vulnerability. The final euphoric outburst ensures excessive underlying speculative leverage. Price momentum becomes unsustainable, with the inevitable reversal inciting de-risking/deleveraging dynamics. Some degree of illiquidity is unavoidable. Progressively powerful policy responses become necessary to suppress panic and crisis. Trapped.
The probability of a global crisis during 2020 is the highest since 2008. The nucleus of “The Bubble” in 2008 was in U.S. mortgage finance. “The Bubble” today is global, across virtually all financial assets (sovereign debt, stocks, corporate Credit, and derivatives), real estate (residential and commercial) and private businesses. From a Credit perspective, “The Bubble” has spread to – and corrupted - the foundation of global finance (central bank Credit and sovereign debt).
How can it end other than with a systemic crisis of confidence? Mispricing of U.S. government and corporate securities is unprecedented. The excesses in Chinese finance have moved far beyond any historical Bubble episode (Japan during the eighties and the U.S. mortgage finance Bubble mere kids’ stuff). All the punditry fuss over predicting a year-end S&P500 level seems especially pointless.
What really makes this so dangerous? Markets know that policymakers know the system is acutely fragile. Central bankers are not only trapped, the situation is so dire that they have no choice but to move early and aggressively to ensure Bubbles can’t begin deflating (no corrections or adjustments allowed).
January 5 – Reuters (Ismail Shakil): “New York Fed President John Williams said… it was important for the U.S. Federal Reserve to stick to its 2% inflation target and achieve it even as low global interest rates will likely continue… ‘There’s been a process of going through the stages of grief about a low neutral rate,’ Williams was quoted as saying… ‘These factors are basically the hand we’ve been dealt for the next five to 10 years.’ ‘If inflation continues to underrun our target levels like it has, this downward trend in inflation expectations will likely continue with inflation expectations falling well below target levels,’ he said.”
I’m reminded of a salient point from Adam Fergusson’s masterpiece, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany:” Throughout the unfolding monetary, economic and social catastrophe, Reichsbank officials insisted they were responding to outside forces. They somehow remained oblivious to their central role.
My response to Fed President Williams’ “the hand we’ve been dealt” comment: You’ve not only been the dealer, but also the manufacturer and the stacker of the cards. Slot machine odds have been fixed by your coterie. You may now have issues with casino operations, its patrons and the consequences for the community - but you central bankers own it. And, of course, you will be keen to finger local government officials for the proliferation of crazed gamblers, pawn shops, bail bond outfits, unseemly motels, alcoholism and those run-down schools. Why the unwavering support for ever more commanding casinos?
January 9 – Wall Street Journal (James Mackintosh): “Tesla Inc. shares have doubled in three months, while General Electric Co. shares are up 44%. The pair are the two most valuable loss-making companies, part of a shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market. While Tesla and GE couldn’t be more different, they are exemplars of two trends driving the rising number of loss makers. Tesla shows a desire by investors to back disruptive companies as they build their sales. GE represents a growing number of companies struggling to make money from traditional businesses… The combination of forces has pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%, its highest level since the late 1990s outside of postrecession periods.”
“Mal-investment” is one of these invaluable “Austrian” concepts that is both wonderfully intuitive and exceptionally difficult to quantify (vitally important yet unfitting for econometric models). “Pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%” is sufficient. Imagine the percentage come the next recession.
Stimulus, loose finance and Bubbles ensure market malfunction, price distortions, resource misallocation and malinvestment - all Issues 2020. This fateful experiment in late-cycle stimulus/Bubble extension is prolonging the boom in uneconomic enterprises and scores of businesses that will face dire circumstances when the Bubble inevitably bursts. On the one hand, any tightening of finance will expose cash flow and balance sheet vulnerabilities. On the other, today’s booming wealth-induced demand is unsustainable, exposing a mounting number of businesses to post-Bubble waning demand and altered spending patterns.
Last year provided a hint of underlying fragilities. Junk bonds, leveraged loans and IPOs all suffered convulsions as “risk off” and illiquidity made fleeting appearances. Tesla – the most valuable automobile manufacturer ever or bankruptcy candidate? A matter of market “risk on” or “risk off.” To what extent is Tesla a microcosm of Tech Bubble 2.0, the overall U.S. economy, China’s boom and the global Bubble?
There are New Paradigm sentiments reminiscent of the Q1 2000 “tech” Bubble Crescendo. After ending 1999 at 3,708 (following a one-year gain of 102%), the Nasdaq100 (NDX) surged another 30% to an all-time high 4,818 on March 24th. The NDX then traded as low as 3,107 in April, 2,897 in May and then down to 2,175 in December. Myths exposed and fallacies revealed. Much of the boom-time demand for technology components, products and services was a direct consequence of the industry’s investment Bubble. Speculative finance reversed, financial conditions tightened, uneconomic companies lost access to finance, and the Bubble burst (not before, of course, one final brutal short squeeze and derivatives-related melt-up).
Current bullishness may even exceed early-2000. Trust in central bankers is far greater. Market pundits highlight fundamentals supportive of an ongoing bull market. The longest economic expansion on record is poised to endure. After an unimpressive 2019, corporate profit growth is to accelerate. The global economy will perk up as the year progresses. Goldilocks with central bank guardianship.
But let’s not pretend that economic activity drives the securities markets. Investment-grade Credit default swaps (5yr Markit CDS) traded Friday at 43.7 bps, right at the low since before the crisis. High-yield CDS is near all-time lows. Goldman Sachs CDS closed the week at 52 bps, down from the 135 bps January 4, 2019 high. Trillion dollar plus (5% of GDP) annual fiscal deficits. Short-term rates at about 1.5%. Ten-year Treasury yields at 1.82%. Thirty-year mortgage rates at 3.64%. A Fed balance sheet exceeding $4.0 TN and inflating. Record stock prices. Why then wouldn’t the economy be expanding and corporate profits growing?
January 9 – Bloomberg (Molly Smith, Michael Gambale, and Hannah Benjamin): “Companies around the globe, concerned that heightened tensions between the U.S. and Iran could roil bond markets, are rushing to borrow cheaply while they still can. Investment-grade firms have sold more than $61 billion of notes in the U.S. through Thursday, double the same period in 2019… Borrowers from around the Asia Pacific region sold more than $28 billion in dollar notes this week, in a record start.”
January 10 – Bloomberg (Hannah Benjamin and Priscila Azevedo Rocha): “Europe’s bond market is wrapping up its biggest week ever, with over $100 billion of new debt sales underscoring its status as a major global funding vehicle. Issuers from China, Indonesia, Japan and the U.S. joined local borrowers in tapping Europe’s super-low funding costs and increasingly mature bond market, helping push sales for the week to 92.5 billion euros ($103bn).”
January 10 – Wall Street Journal (Frances Yoon): “Chinese property companies have kicked off 2020 by selling billions of dollars of longer-dated bonds, capitalizing on a hot market to reduce their heavy reliance on short-term funding. The country’s real-estate groups sold about $8 billion of dollar bonds in the first two weeks of January, according to credit strategists at ANZ.”
So long as financial conditions remain extraordinarily loose, I don’t know why the U.S. economy can’t surprise on the upside. With momentum building throughout 2019, expect some housing market “crazy” this year. “Tech Bubble 2.0” – growing only crazier. Los Angeles Times headline: “Taco Bell Offers $100,000 Salaries and Paid Sick Time.” Good to have that sick leave. Lavish cheap “money” on an overheated economy and one thing is a given: it will be borrowed and spent.
But when things go wrong they will really go wrong. Every passing month ensures maladjusted financial and economic systems only further hooked on unrelenting loose finance. I see a high probability of a 2020 financial accident. And I know most would say this is crazy talk. But we were close in the U.S. last September and January. China began to unravel in the early summer.
ETF Trends (Tom Lyndon): “Last year, fixed income ETFs took in $330 billion in new assets, the second-best year on record. Of that massive tally, bond ETFs accounted for a record $155 billion, prompting some market observers to say 2020 will be even better for bond ETFs. When 2019 came to a close, five of the top 10 ETFs in terms of new assets were bond funds and plenty of others in the fixed income space packed on assets as well.”
The Fed’s Q4 liquidity injections only exacerbated system fragility. Before celebrating apparent stability, our central bank should ponder the ramifications of colossal speculative flows. The liquidity flooding into bond ETFs increases the probability of a destabilizing reversal of flows and resulting illiquidity. The Fed’s $400 billion liquidity add only boosted systemic dependency. The Fed’s has its planned $60 billion monthly QE for the first half. Throw in another crisis scare and the Fed’s balance sheet rather quickly lunges toward $5.0 TN.
January 8 – Financial Times (Hung Tran): “Much attention has been focused on potential stresses in the US repo market. More attention should be paid to the FX swap market, which non-US banks and other entities have relied on for short-term US dollar funding. Recent changes in supply/demand conditions for US dollar funds in that market could make it more susceptible to stresses. In particular, emerging market banks have become more exposed to risk… Meanwhile, non-US banks have relied ever more on the $3.2tn-a-day FX swap market. According to the Bank for International Settlements (BIS), non-US banks have about $14tn of US dollar assets, not all of which are funded with liabilities such as deposits, loans and bond issuance. The FX funding gap — estimated by the IMF to be about $1.5tn — needs to be covered by borrowing in domestic currencies, swapped into US dollars.”
“Repo” markets, “FX swaps,” and money markets – at home and abroad – have all become one monumental trade. Last year’s instability was a harbinger of bigger issues to come. There has never been as much global leveraged speculation. How tens of Trillions of securities are financed and hundreds of Trillions of derivatives structured is in the realm of the murkiest of murky. How many Trillions of “carry trades” (borrow in low/negative rates to lever in higher-yielding securities) have accumulated – in yen, euro, Swiss, etc. How big is the “carry” in Chinese bonds? EM debt – local currency and Dollar-denominated? European peripheral bonds? How levered are trades in low-yielding Treasuries, bunds and JGBs? What is the scope of fixed-income derivatives leverage, with dynamic trading programs feeding buying on the upside – and liquidity crisis lying in wait for the downside?
Loose global finance papers over scores of festering issues. Key Issue 2020: China is a bigger accident in the making than it was this time last year. With accelerated growth of increasingly unsound Credit, systemic risk continues to rise exponentially. Upwards of $4 TN of additional Credit, another year of housing Bubble excess, uneconomic enterprises piling on more debt, resource misallocation and only deeper structural economic maladjustment.
China was forced to again hit the accelerator, and Beijing will be compelled again to move to rein in system Credit excess. Last year’s crack in the small banking sector was a harbinger of liquidity and confidence issues I expect to afflict China’s broader banking system. The repeatedly extended mortgage and apartment Bubbles ensure a dreadful Day of Reckoning. China’s consumer borrowing boom – 2019’s savior - is on borrowed time. And how long can the renminbi withstand such egregious financial and economic excess?
Global currency market instability is an Issue 2020: For the most part, currencies have been seductively sedate. Perilous fault lines lacking pressure relief beckon for caution. My own theory is that a systemic global Bubble with systematic liquidity excess fosters a dysfunctional steadiness. In a world of liquidity and speculative excess backstopped by “whatever it takes” central banking, market reversals have been quickly resolved by eager speculative flows. The traditional dynamic of “hot money” reversals, de-risking/deleveraging, crises of confidence and market dislocation is contained before barely getting started.
Yet it all creates a dynamic where an abrupt bout of risk aversion risks unleashing powerful pent-up global forces. For a while now, I’ve contemplated that this could end with a “seizing up” of global markets – a systemic de-risking/deleveraging dynamic and resulting globalized market illiquidity and dislocation. After witnessing 2019 markets dynamics – the extraordinary correlations between international bond, equities, and derivatives markets, along with interconnected money markets, (synchronized Bubbles) – I have ratcheted up the probability of the “seizing up” outcome. I know, central bankers are there to ensure it can’t materialize. They were there in force in 2019, and their actions only exacerbated excesses and worsened fragilities.
January 3 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “Investors have barely set foot in the new year before getting their first reminder of the risks -- the existential and the more-manageable -- that could derail their plans for 2020. The U.S. airstrike that killed one of Iran’s most powerful generals raised security alerts around the world, and added to anxieties that could dominate markets this year. Money managers blindsided by the 2016 Brexit vote and U.S. President Donald Trump’s election know the price of ignoring politics. Uncertainties stemming from these events are still unresolved -- trade relationships between the U.K. and European Union, and the U.S. and China still hang in the balance -- and other risks are emerging.”
Geopolitical risks - where to begin. From my analytical perspective, geopolitical risks in 2020 are the greatest since WWII. Not appreciated is the role that geopolitics have played of late in perpetuating Bubbles. In the increasingly heated battle for global supremacy, strongmen leaders Trump and Xi are keenly focused on the critical roles played by finance, the markets and economic growth. And I would add that the rise of the strongman leader globally is no coincidence – and it is undoubtedly linked to the instability and insecurities associated with decades of unsound money and Credit (with its recurring booms and busts, growing inequalities and myriad stresses).
Not only have geopolitical considerations perpetuated Bubble excess. As Bubbles have continued to inflate, geopolitical rivalries have grown only more intense. As was abundantly clear in 2019, the risk of confrontation has risen significantly. Meanwhile, highly inflated Bubbles greatly increase the risk of a geopolitical event sparking market dislocation. Don’t let the markets relatively calm response to the past week’s Iranian developments fool you into complacency. Markets are today extraordinarily vulnerable.
Geopolitical is a key Issue 2020. A U.S./Iranian military confrontation is a real possibility. Recent U.S./China calm could prove short-lived. An accident in the South China See is a possibility, as is a mishap with Russia’s increasingly aggressive military. The entire Middle East remains a precarious tinderbox. China could become more confrontational with Taiwan, drawing U.S. ire. There are as well scores of other potential flashpoints.
If there weren’t enough global uncertainties, there are pivotal U.S. elections in November. 2016 elections were crazy; expect crazier for 2020. The President is vulnerable, a vulnerability that would increase in the event of market, economic or climate shocks. Booming markets currently envisage a second Trump term. Things get interesting if a geopolitical event and market disruption throw the election into disarray. Abruptly, the pro-market Trump candidacy could find itself in trouble, boosting the odds for the democrat – potentially an anti-market candidate. With a deeply divided nation in such a volatile environment, November’s election could go down to the wire between two diametrically-opposed agendas.
It’s destined to be a fascinating year. If we’re lucky, I’ll be prognosticating about the risk of a bursting Bubble in Issues 2021. There will surely be unexpected developments that shape market and economic backdrops. There are some more obvious catalysts for piercing global Bubbles. Chinese Credit remains at the top of the list.
Despite today’s amazing bullishness, there is a lengthy list of EM vulnerabilities. There are cracks in India, Indonesia and Turkey, to name a few. Asian finance, in particular, is hopelessly unsound. The huge banking systems in Hong Kong and Singapore offer potential for negative surprises. Similar to Chinese finance, the “offshore” financial centers are accidents in the making. I wouldn’t bet against global money market problems. The world is one serious bout of “risk off” deleveraging away from exposing massive leverage and chicanery. It’s difficult for me to see the year pass without serious market liquidity issues. That’s the way I see Issues 2020. I restrained myself.
There are many things that proved not as impossible as I had believed. What was deemed acceptable monetary policy badly mutated. Mutant monetary management fundamentally altered the tolerance for debt and deficits. Finance and financial markets were similarly transformed, with yet to be appreciated consequences for (grossly simplifying here) Capitalism, societies and geopolitics.
So many changes, but I’m not changing. In my initial CBB I committed to “calling them as I see them and letting the chips fall where they may.” Let them fall.
“The Bubble will either further inflate or burst.” Regular readers will surely recognize this as what has become an annual ritual of my “Issues” pieces. Some might view it as a cop out; others reminded of Einstein’s definition of insanity. Yet Bubbles do have defined characteristics. They are at their core creatures of increasingly powerful momentum. Stimulus will intensity and broaden inflationary effects while enlarging the overall Bubble scope. Especially in the age of unshackled central banks, the timing of their demise is uncertain. Importantly, however, that they become progressively perilous over time remains a certainty.
This year’s “Bubble Will Inflate or Die” prognosis carries a significantly direr tone than in the past. From a Bubble Analysis perspective, 2019 was an absolute fiasco. Alarmed by faltering Bubbles, central bankers were panicked into prolonging the “Terminal Phase of Bubble Excess” through the reckless administration of additional stimulus. The ECB restarted QE before many even realized the previous program had been concluded. The Fed began the year abruptly abandoning “normalization” and then ended with $400 billion of Q4 QE. Rather than helicopter money, envision fleets of helicopters dropping buckets of propellant on columns of bonfires.
Central banks cut funding costs and afforded speculative financial markets hundreds of billions of additional liquidity. More importantly, global central bankers granted the type of guarantee markets had only dreamed of. Monetary policy will be used early and aggressively to backstop the markets, while no amount of excess would elicit any degree of monetary restraint. The Endless Punchbowl (with free salty snacks) – the “insurance rate cut”.
Bubble markets reacted with a vengeance. Global bond markets experienced a historic “melt-up” with yields collapsing over the summer. Global equities ended the year with a fit of panic buying. Bond and equities bears were squeezed to death. By their nature, speculative blow-offs create acute vulnerability. The final euphoric outburst ensures excessive underlying speculative leverage. Price momentum becomes unsustainable, with the inevitable reversal inciting de-risking/deleveraging dynamics. Some degree of illiquidity is unavoidable. Progressively powerful policy responses become necessary to suppress panic and crisis. Trapped.
The probability of a global crisis during 2020 is the highest since 2008. The nucleus of “The Bubble” in 2008 was in U.S. mortgage finance. “The Bubble” today is global, across virtually all financial assets (sovereign debt, stocks, corporate Credit, and derivatives), real estate (residential and commercial) and private businesses. From a Credit perspective, “The Bubble” has spread to – and corrupted - the foundation of global finance (central bank Credit and sovereign debt).
How can it end other than with a systemic crisis of confidence? Mispricing of U.S. government and corporate securities is unprecedented. The excesses in Chinese finance have moved far beyond any historical Bubble episode (Japan during the eighties and the U.S. mortgage finance Bubble mere kids’ stuff). All the punditry fuss over predicting a year-end S&P500 level seems especially pointless.
What really makes this so dangerous? Markets know that policymakers know the system is acutely fragile. Central bankers are not only trapped, the situation is so dire that they have no choice but to move early and aggressively to ensure Bubbles can’t begin deflating (no corrections or adjustments allowed).
January 5 – Reuters (Ismail Shakil): “New York Fed President John Williams said… it was important for the U.S. Federal Reserve to stick to its 2% inflation target and achieve it even as low global interest rates will likely continue… ‘There’s been a process of going through the stages of grief about a low neutral rate,’ Williams was quoted as saying… ‘These factors are basically the hand we’ve been dealt for the next five to 10 years.’ ‘If inflation continues to underrun our target levels like it has, this downward trend in inflation expectations will likely continue with inflation expectations falling well below target levels,’ he said.”
I’m reminded of a salient point from Adam Fergusson’s masterpiece, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany:” Throughout the unfolding monetary, economic and social catastrophe, Reichsbank officials insisted they were responding to outside forces. They somehow remained oblivious to their central role.
My response to Fed President Williams’ “the hand we’ve been dealt” comment: You’ve not only been the dealer, but also the manufacturer and the stacker of the cards. Slot machine odds have been fixed by your coterie. You may now have issues with casino operations, its patrons and the consequences for the community - but you central bankers own it. And, of course, you will be keen to finger local government officials for the proliferation of crazed gamblers, pawn shops, bail bond outfits, unseemly motels, alcoholism and those run-down schools. Why the unwavering support for ever more commanding casinos?
January 9 – Wall Street Journal (James Mackintosh): “Tesla Inc. shares have doubled in three months, while General Electric Co. shares are up 44%. The pair are the two most valuable loss-making companies, part of a shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market. While Tesla and GE couldn’t be more different, they are exemplars of two trends driving the rising number of loss makers. Tesla shows a desire by investors to back disruptive companies as they build their sales. GE represents a growing number of companies struggling to make money from traditional businesses… The combination of forces has pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%, its highest level since the late 1990s outside of postrecession periods.”
“Mal-investment” is one of these invaluable “Austrian” concepts that is both wonderfully intuitive and exceptionally difficult to quantify (vitally important yet unfitting for econometric models). “Pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%” is sufficient. Imagine the percentage come the next recession.
Stimulus, loose finance and Bubbles ensure market malfunction, price distortions, resource misallocation and malinvestment - all Issues 2020. This fateful experiment in late-cycle stimulus/Bubble extension is prolonging the boom in uneconomic enterprises and scores of businesses that will face dire circumstances when the Bubble inevitably bursts. On the one hand, any tightening of finance will expose cash flow and balance sheet vulnerabilities. On the other, today’s booming wealth-induced demand is unsustainable, exposing a mounting number of businesses to post-Bubble waning demand and altered spending patterns.
Last year provided a hint of underlying fragilities. Junk bonds, leveraged loans and IPOs all suffered convulsions as “risk off” and illiquidity made fleeting appearances. Tesla – the most valuable automobile manufacturer ever or bankruptcy candidate? A matter of market “risk on” or “risk off.” To what extent is Tesla a microcosm of Tech Bubble 2.0, the overall U.S. economy, China’s boom and the global Bubble?
There are New Paradigm sentiments reminiscent of the Q1 2000 “tech” Bubble Crescendo. After ending 1999 at 3,708 (following a one-year gain of 102%), the Nasdaq100 (NDX) surged another 30% to an all-time high 4,818 on March 24th. The NDX then traded as low as 3,107 in April, 2,897 in May and then down to 2,175 in December. Myths exposed and fallacies revealed. Much of the boom-time demand for technology components, products and services was a direct consequence of the industry’s investment Bubble. Speculative finance reversed, financial conditions tightened, uneconomic companies lost access to finance, and the Bubble burst (not before, of course, one final brutal short squeeze and derivatives-related melt-up).
Current bullishness may even exceed early-2000. Trust in central bankers is far greater. Market pundits highlight fundamentals supportive of an ongoing bull market. The longest economic expansion on record is poised to endure. After an unimpressive 2019, corporate profit growth is to accelerate. The global economy will perk up as the year progresses. Goldilocks with central bank guardianship.
But let’s not pretend that economic activity drives the securities markets. Investment-grade Credit default swaps (5yr Markit CDS) traded Friday at 43.7 bps, right at the low since before the crisis. High-yield CDS is near all-time lows. Goldman Sachs CDS closed the week at 52 bps, down from the 135 bps January 4, 2019 high. Trillion dollar plus (5% of GDP) annual fiscal deficits. Short-term rates at about 1.5%. Ten-year Treasury yields at 1.82%. Thirty-year mortgage rates at 3.64%. A Fed balance sheet exceeding $4.0 TN and inflating. Record stock prices. Why then wouldn’t the economy be expanding and corporate profits growing?
January 9 – Bloomberg (Molly Smith, Michael Gambale, and Hannah Benjamin): “Companies around the globe, concerned that heightened tensions between the U.S. and Iran could roil bond markets, are rushing to borrow cheaply while they still can. Investment-grade firms have sold more than $61 billion of notes in the U.S. through Thursday, double the same period in 2019… Borrowers from around the Asia Pacific region sold more than $28 billion in dollar notes this week, in a record start.”
January 10 – Bloomberg (Hannah Benjamin and Priscila Azevedo Rocha): “Europe’s bond market is wrapping up its biggest week ever, with over $100 billion of new debt sales underscoring its status as a major global funding vehicle. Issuers from China, Indonesia, Japan and the U.S. joined local borrowers in tapping Europe’s super-low funding costs and increasingly mature bond market, helping push sales for the week to 92.5 billion euros ($103bn).”
January 10 – Wall Street Journal (Frances Yoon): “Chinese property companies have kicked off 2020 by selling billions of dollars of longer-dated bonds, capitalizing on a hot market to reduce their heavy reliance on short-term funding. The country’s real-estate groups sold about $8 billion of dollar bonds in the first two weeks of January, according to credit strategists at ANZ.”
So long as financial conditions remain extraordinarily loose, I don’t know why the U.S. economy can’t surprise on the upside. With momentum building throughout 2019, expect some housing market “crazy” this year. “Tech Bubble 2.0” – growing only crazier. Los Angeles Times headline: “Taco Bell Offers $100,000 Salaries and Paid Sick Time.” Good to have that sick leave. Lavish cheap “money” on an overheated economy and one thing is a given: it will be borrowed and spent.
But when things go wrong they will really go wrong. Every passing month ensures maladjusted financial and economic systems only further hooked on unrelenting loose finance. I see a high probability of a 2020 financial accident. And I know most would say this is crazy talk. But we were close in the U.S. last September and January. China began to unravel in the early summer.
ETF Trends (Tom Lyndon): “Last year, fixed income ETFs took in $330 billion in new assets, the second-best year on record. Of that massive tally, bond ETFs accounted for a record $155 billion, prompting some market observers to say 2020 will be even better for bond ETFs. When 2019 came to a close, five of the top 10 ETFs in terms of new assets were bond funds and plenty of others in the fixed income space packed on assets as well.”
The Fed’s Q4 liquidity injections only exacerbated system fragility. Before celebrating apparent stability, our central bank should ponder the ramifications of colossal speculative flows. The liquidity flooding into bond ETFs increases the probability of a destabilizing reversal of flows and resulting illiquidity. The Fed’s $400 billion liquidity add only boosted systemic dependency. The Fed’s has its planned $60 billion monthly QE for the first half. Throw in another crisis scare and the Fed’s balance sheet rather quickly lunges toward $5.0 TN.
January 8 – Financial Times (Hung Tran): “Much attention has been focused on potential stresses in the US repo market. More attention should be paid to the FX swap market, which non-US banks and other entities have relied on for short-term US dollar funding. Recent changes in supply/demand conditions for US dollar funds in that market could make it more susceptible to stresses. In particular, emerging market banks have become more exposed to risk… Meanwhile, non-US banks have relied ever more on the $3.2tn-a-day FX swap market. According to the Bank for International Settlements (BIS), non-US banks have about $14tn of US dollar assets, not all of which are funded with liabilities such as deposits, loans and bond issuance. The FX funding gap — estimated by the IMF to be about $1.5tn — needs to be covered by borrowing in domestic currencies, swapped into US dollars.”
“Repo” markets, “FX swaps,” and money markets – at home and abroad – have all become one monumental trade. Last year’s instability was a harbinger of bigger issues to come. There has never been as much global leveraged speculation. How tens of Trillions of securities are financed and hundreds of Trillions of derivatives structured is in the realm of the murkiest of murky. How many Trillions of “carry trades” (borrow in low/negative rates to lever in higher-yielding securities) have accumulated – in yen, euro, Swiss, etc. How big is the “carry” in Chinese bonds? EM debt – local currency and Dollar-denominated? European peripheral bonds? How levered are trades in low-yielding Treasuries, bunds and JGBs? What is the scope of fixed-income derivatives leverage, with dynamic trading programs feeding buying on the upside – and liquidity crisis lying in wait for the downside?
Loose global finance papers over scores of festering issues. Key Issue 2020: China is a bigger accident in the making than it was this time last year. With accelerated growth of increasingly unsound Credit, systemic risk continues to rise exponentially. Upwards of $4 TN of additional Credit, another year of housing Bubble excess, uneconomic enterprises piling on more debt, resource misallocation and only deeper structural economic maladjustment.
China was forced to again hit the accelerator, and Beijing will be compelled again to move to rein in system Credit excess. Last year’s crack in the small banking sector was a harbinger of liquidity and confidence issues I expect to afflict China’s broader banking system. The repeatedly extended mortgage and apartment Bubbles ensure a dreadful Day of Reckoning. China’s consumer borrowing boom – 2019’s savior - is on borrowed time. And how long can the renminbi withstand such egregious financial and economic excess?
Global currency market instability is an Issue 2020: For the most part, currencies have been seductively sedate. Perilous fault lines lacking pressure relief beckon for caution. My own theory is that a systemic global Bubble with systematic liquidity excess fosters a dysfunctional steadiness. In a world of liquidity and speculative excess backstopped by “whatever it takes” central banking, market reversals have been quickly resolved by eager speculative flows. The traditional dynamic of “hot money” reversals, de-risking/deleveraging, crises of confidence and market dislocation is contained before barely getting started.
Yet it all creates a dynamic where an abrupt bout of risk aversion risks unleashing powerful pent-up global forces. For a while now, I’ve contemplated that this could end with a “seizing up” of global markets – a systemic de-risking/deleveraging dynamic and resulting globalized market illiquidity and dislocation. After witnessing 2019 markets dynamics – the extraordinary correlations between international bond, equities, and derivatives markets, along with interconnected money markets, (synchronized Bubbles) – I have ratcheted up the probability of the “seizing up” outcome. I know, central bankers are there to ensure it can’t materialize. They were there in force in 2019, and their actions only exacerbated excesses and worsened fragilities.
January 3 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “Investors have barely set foot in the new year before getting their first reminder of the risks -- the existential and the more-manageable -- that could derail their plans for 2020. The U.S. airstrike that killed one of Iran’s most powerful generals raised security alerts around the world, and added to anxieties that could dominate markets this year. Money managers blindsided by the 2016 Brexit vote and U.S. President Donald Trump’s election know the price of ignoring politics. Uncertainties stemming from these events are still unresolved -- trade relationships between the U.K. and European Union, and the U.S. and China still hang in the balance -- and other risks are emerging.”
Geopolitical risks - where to begin. From my analytical perspective, geopolitical risks in 2020 are the greatest since WWII. Not appreciated is the role that geopolitics have played of late in perpetuating Bubbles. In the increasingly heated battle for global supremacy, strongmen leaders Trump and Xi are keenly focused on the critical roles played by finance, the markets and economic growth. And I would add that the rise of the strongman leader globally is no coincidence – and it is undoubtedly linked to the instability and insecurities associated with decades of unsound money and Credit (with its recurring booms and busts, growing inequalities and myriad stresses).
Not only have geopolitical considerations perpetuated Bubble excess. As Bubbles have continued to inflate, geopolitical rivalries have grown only more intense. As was abundantly clear in 2019, the risk of confrontation has risen significantly. Meanwhile, highly inflated Bubbles greatly increase the risk of a geopolitical event sparking market dislocation. Don’t let the markets relatively calm response to the past week’s Iranian developments fool you into complacency. Markets are today extraordinarily vulnerable.
Geopolitical is a key Issue 2020. A U.S./Iranian military confrontation is a real possibility. Recent U.S./China calm could prove short-lived. An accident in the South China See is a possibility, as is a mishap with Russia’s increasingly aggressive military. The entire Middle East remains a precarious tinderbox. China could become more confrontational with Taiwan, drawing U.S. ire. There are as well scores of other potential flashpoints.
If there weren’t enough global uncertainties, there are pivotal U.S. elections in November. 2016 elections were crazy; expect crazier for 2020. The President is vulnerable, a vulnerability that would increase in the event of market, economic or climate shocks. Booming markets currently envisage a second Trump term. Things get interesting if a geopolitical event and market disruption throw the election into disarray. Abruptly, the pro-market Trump candidacy could find itself in trouble, boosting the odds for the democrat – potentially an anti-market candidate. With a deeply divided nation in such a volatile environment, November’s election could go down to the wire between two diametrically-opposed agendas.
It’s destined to be a fascinating year. If we’re lucky, I’ll be prognosticating about the risk of a bursting Bubble in Issues 2021. There will surely be unexpected developments that shape market and economic backdrops. There are some more obvious catalysts for piercing global Bubbles. Chinese Credit remains at the top of the list.
Despite today’s amazing bullishness, there is a lengthy list of EM vulnerabilities. There are cracks in India, Indonesia and Turkey, to name a few. Asian finance, in particular, is hopelessly unsound. The huge banking systems in Hong Kong and Singapore offer potential for negative surprises. Similar to Chinese finance, the “offshore” financial centers are accidents in the making. I wouldn’t bet against global money market problems. The world is one serious bout of “risk off” deleveraging away from exposing massive leverage and chicanery. It’s difficult for me to see the year pass without serious market liquidity issues. That’s the way I see Issues 2020. I restrained myself.
For the Week:
The S&P500 gained 0.9% (up 1.1% y-t-d), and the Dow rose 0.7% (up 1.0%). The Utilities increased 0.8% (down 0.4%). The Banks dropped 1.2% (down 2.0%), while the Broker/Dealers rose 1.4% (up 1.4%). The Transports added 0.6% (up 0.7%). The S&P 400 Midcaps slipped 0.2% (down 0.6%), and the small cap Russell 2000 dipped 0.2% (down 0.6%). The Nasdaq100 jumped 2.0% (up 2.7%). The Semiconductors gained 0.7% (up 0.9%). The Biotechs surged 4.3% (up 2.6%). Though bullion gained $10, the HUI gold index dropped 3.0% (down 4.5%).
Three-month Treasury bill rates ended the week at 1.50%. Two-year government yields rose four bps to 1.57% (unchanged y-t-d). Five-year T-note yields gained four bps to 1.63% (down 6bps). Ten-year Treasury yields increased three bps to 1.82% (down 10bps). Long bond yields added three bps to 2.28% (down 11bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.62% (down 9bps).
Greek 10-year yields fell five bps to 1.35% (down 9bps y-t-d). Ten-year Portuguese yields rose four bps to 0.39% (down 5bps). Italian 10-year yields slipped three bps to 1.32% (down 9bps). Spain's 10-year yields jumped six bps to 0.44% (down 3bps). German bund yields jumped eight bps to negative 0.20% (down 1bp). French yields increased two bps to 0.04% (down 7bps). The French to German 10-year bond spread narrowed six to 24 bps. U.K. 10-year gilt yields gained three bps to 0.77% (down 5bps). U.K.'s FTSE equities index declined 0.5% (up 0.6%).
Japan's Nikkei Equities Index gained 0.8% (up 0.8% y-t-d). Japanese 10-year "JGB" yields increased a basis point to zero (up 1bp y-t-d). France's CAC40 was little changed (up 1.0%). The German DAX equities index jumped 2.0% (up 1.8%). Spain's IBEX 35 equities index fell 0.8% (up 0.3%). Italy's FTSE MIB index rose 1.3% (up 2.2%). EM equities were mixed. Brazil's Bovespa index dropped 1.9% (down 0.1%), while Mexico's Bolsa was about unchanged (up 2.6%). South Korea's Kospi index gained 1.4% (up 0.4%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange added 0.3% (up 1.4%). Turkey's Borsa Istanbul National 100 index advanced 4.4% (up 3.7%). Russia's MICEX equities index rose 1.5% (up 2.6%).
Investment-grade bond funds saw inflows surge to $8.193 billion, and junk bond funds posted inflows of $1.121 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped eight bps to 3.64% (down 81bps y-o-y). Fifteen-year rates fell nine bps to 3.07% (down 82bps). Five-year hybrid ARM rates sank 16 bps to 3.30% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 3.95% (down 45bps).
Federal Reserve Credit last week gained $6.9bn to $4.128 TN, with a 17-week gain of $401.7 billion. Over the past year, Fed Credit expanded $111.5bn, or 2.8%. Fed Credit inflated $1.317 Trillion, or 47%, over the past 374 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7 billion last week to $3.408 TN. "Custody holdings" increased $12.2 billion, or 0.4% y-o-y.
M2 (narrow) "money" supply gained $3.5bn last week to a record $15.428 TN. "Narrow money" surged $1.003 TN, or 7.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dropped $43.5bn, while Savings Deposits surged $60.8bn. Small Time Deposits were little changed. Retail Money Funds declined $6.4bn.
Total money market fund assets added $5.7bn to $3.638 TN, with institutional money fund assets down $4.1bn to $2.258 TN. Total money funds gained $571bn y-o-y, or 18.6%.
Total Commercial Paper slipped $0.5bn to $1.126 TN. CP was up $53bn, or 4.9% year-over-year.
Currency Watch:
January 10 – Financial Times (Eva Szalay in London and Colby Smith): “Unusual patterns in the dollar during the latest flare-up in tensions between the US and Iran suggest that the currency may have lost its traditional role as a retreat in times of stress. Typically, the dollar jumps, along with gold, when bouts of geopolitical nerves strike. But after the US assassination of Iranian military commander Qassem Soleimani last week the currency barely budged… This flip in the traditional behaviour of the world’s most important reserve currency has left some market-watchers puzzled.”
For the week, the U.S. dollar index increased 0.5% to 97.356 (up 0.9% y-t-d). For the week on the upside, the Mexican peso increased 0.6%, the South Korean won 0.5%, and the Singapore dollar 0.1%. On the downside, the Japanese yen declined 1.2%, the Swedish krona 1.1%, the Brazilian real 1.0%, the Australian dollar 0.7%, the Norwegian krone 0.6%, the New Zealand dollar 0.5%, the South African rand 0.5%, the Canadian dollar 0.4%, the euro 0.4% and the British pound 0.2%. The Chinese renminbi increased 0.67% versus the dollar this week (up 0.63% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index rallied 0.5% (up 0.9% y-t-d). Spot Gold gained 0.7% to $1,562 (up 2.9%). Silver slipped 0.3% to $18.105 (up 1.0%). WTI crude dropped $4.01 to $59.04 (down 3.3%). Gasoline sank 5.1% (down 2%), while Natural Gas rallied 3.4% (up 1%). Copper gained 1.0% (up 1%). Wheat jumped 1.8% (up 1%). Corn slipped 0.2% (down 1%).
Market Instability Watch:
January 5 – Bloomberg (Ranjeetha Pakiam and Justina Vasquez): “Gold surged to its highest since 2013 as rising tensions in the Middle East stoked demand for havens, with Goldman Sachs… seeing more room to run. Palladium extended gains to a fresh record. Bullion neared $1,600 an ounce after Tehran said it would no longer abide by any limits on its enrichment of uranium following the killing of General Qassem Soleimani.”
January 7 – Bloomberg (Claire Ballentine): “Welcome to the big time, bond ETFs. Long overlooked as the younger sibling of equity exchange-traded funds, strategies focused on corporate or government debt took in more than $150 billion in the U.S. last year, the most on record and just shy of the sum netted by their stock counterparts. It was the biggest annual leap for bond ETFs since 2014, boosting assets to more than $800 billion…”
January 7 – Wall Street Journal (Julia-Ambra Verlaine): “Low-rated U.S. companies are borrowing cash as 2020 kicks off, taking advantage of persistently low interest rates. Companies with junk ratings have sold $850 million of debt through Tuesday…That is on track to exceed issuance in the opening days of 2019, when high yield debt totaled $1.5 billion over the first two weeks of January… The U.S. high-yield market now totals around $1.2 trillion…, raising concerns that companies will struggle to repay investors if interest rates rise.”
Trump Administration Watch:
January 6 – Reuters (Jeff Mason): “U.S. President Donald Trump on Sunday stood by his threat to go after Iranian cultural sites, warning of a ‘major retaliation’ if Iran strikes back for the killing of one of its top military commanders… Asked about potential retaliation by Iran, Trump said: ‘If it happens, it happens. If they do anything, there will be major retaliation.’”
January 8 – Bloomberg (Sarah Ponczek): “President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records. The rebound from an overnight rout that topped 1.5% has some investors breathing a sigh of relief, but another cohort point to mounting signs that the comeback is a sign of complacency among bulls. ‘This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself,’ Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, told Bloomberg… ‘It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.’”
January 6 – Financial Times (Chloe Cornish and Andrew England): “When Donald Trump ordered the air strikes that killed Qassem Soleimani he took his highest-stakes gamble yet as he ramps up pressure on Iran and seeks to counter the Islamic regime’s regional influence. For years, Washington had viewed Soleimani as its arch-nemesis. The commander of Iran’s elite Quds force cultivated a network of Iranian proxies across the Middle East that the Trump administration accuses of attacking American targets and destabilising the region. But rather than weaken the influence of Tehran and its proxies in Iraq, the US president’s decision to eliminate Soleimani as he left Baghdad airport threatens to strengthen it, Iraqis and western analysts said. ‘Trump has accelerated Soleimani’s work in Iraq,’ said one Iraqi official. ‘They created a mess because they couldn’t understand Iraq.’”
January 9 – Reuters (Alexandra Alper and Doina Chiacu): “U.S. President Donald Trump… said his administration will start negotiating the Phase 2 U.S.-China trade agreement soon but that he might wait to complete any agreement until after November’s U.S. presidential election. ‘We’ll start negotiating right away Phase Two. It’ll take a little time,’ Trump told reporters… ‘I think I might want to wait to finish it till after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal.’”
Federal Reserve Watch:
January 4 – Reuters (Howard Schneider): “The U.S. Federal Reserve still has enough clout to fight a future downturn, but policymakers should state in advance the mix of policies and policy promises they plan to use to get the most bang for their buck, former Fed chief Ben Bernanke said… In an address to the American Economics Association, Bernanke pushed back on the notion that central banks have lost influence over the economy, and laid out his thoughts about how the Fed in particular could change its monetary policy ‘framework’ to be sure that is not the case.”
January 9 – Bloomberg (Christopher Condon): “Former Treasury Secretary Lawrence Summers dismissed the optimism of former Federal Reserve Chairman Ben Bernanke, who recently said the central bank could likely fight off the next recession despite the low level of interest rates. Bernanke’s speech was ‘a kind of last hurrah for the central bankers,’ Summers said… ‘He argued that monetary policy will be able to do it the next time,’ Summers said. ‘I think that’s pretty unlikely given that in recessions we usually cut interest rates by 5 percentage points and interest rates today are below 2%.”
January 8 – Bloomberg (Craig Torres): “One of the Federal Reserve Board’s top economists said a U.S. recession could drive both short- and longer-term Treasury yields close to zero, limiting the tools the central bank has to aid the economy. Michael Kiley, a deputy director in the Fed Board’s financial stability unit, said even a moderate recession in the U.S. ‘may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.’ The research was published on the Fed Board’s website…”
January 9 – Wall Street Journal (Michael S. Derby): “In a speech in Madison, Wis., Federal Reserve Bank of St. Louis President James Bullard said, ‘The current baseline economic outlook for 2020 suggests a reasonable chance that the soft landing will be achieved’ after the central bank lowered interest rates three times in 2019 to cushion the economy against a possible downturn. He told reporters after his speech ‘we should wait and see what the effects are’ before tweaking monetary policy again. Speaking on Fox Business…, Federal Bank of Minneapolis President Neel Kashkari also said he sees no reason to alter the current course of monetary policy. He told the network he’d hold steady ‘for the foreseeable future, the next six months, next year, but it will depend.’ He added he would be in the camp of favoring ‘more accommodation’ if ‘inflation continues to weaken or inflation expectations continue to slide.’”
January 3 – Reuters (Ann Saphir and Howard Schneider): “The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary Daly said…, and may need a new policy framework to lift inflation back up to the Fed’s 2% goal. ‘We don’t have a really good understanding of why it’s been so difficult to get inflation back up,’ Daly said at the annual American Economics Association meeting…”
U.S. Bubble Watch:
January 8 – New York Times (Jim Tankersley and Jeanna Smialek): “The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon. Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record. Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.”
January 7 – CNBC (Jeff Cox): “The U.S. trade deficit fell more than expected in November ahead of negotiations with China that cooled the simmering tariff battle between the two sides. The shortfall in goods and services declined to $43.09 billion for the month, below the $43.6 estimate… That represented the lowest deficit since October 2016. That was down sharply from $46.9 billion in October…”
January 4 – New York Times (Neal E. Boudette): “The auto industry has been on a roll for a decade, and its resurgence shows few signs of coming to a halt — at least for now. Strong employment, low interest rates and robust consumer confidence combined last year to extend a record run of auto sales. Americans are also continuing to buy ever bigger cars, at prices escalating faster than the overall inflation rate. And they are taking on more debt to do so. Nationwide, automakers sold more than 17 million new cars and light trucks in 2019… It was the fifth straight year of sales exceeding that figure, a distinction never achieved before.”
January 5 – Wall Street Journal (Andrew Ackerman): “Times are good for U.S. banks. The industry is highly profitable, lending is up and the number of problem institutions—those found to have deficiencies in their businesses—is the lowest since early 2007, according to the Federal Deposit Insurance Corp. Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building. ‘It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,’ former FDIC Vice Chairman Thomas Hoenig said…”
January 7 – CNBC (Diana Olick): “The average rate on the 30-year fixed mortgage fell to the lowest level since October this week, at 3.69%... That has an already competitive housing market heating up even more. Open houses, which are usually pretty rare the first week in January, were plentiful in markets across the nation this year, as buyers hope to get in before the competition gets even worse. Buyer sentiment in the housing market remained high in December, according to a monthly survey from Fannie Mae — the Home Purchase Sentiment Index.”
January 5 – Wall Street Journal (Nicole Friedman): “Home sales are slowing in wildfire-prone areas of California as insurers retreat from high-risk regions, say real-estate agents and homeowners. Insurance companies have continued to reduce their wildfire exposure in the past two years after paying more than $24 billion for California wildfire losses in 2017 and 2018. Home insurers have declined to renew policies for tens of thousands of homeowners across the state, and regulators expect more nonrenewals in the coming months. Real-estate agents say potential buyers are having difficulty obtaining insurance and are backing out of purchases or lowering their offers…”
January 6 – New York Times (Doug Cameron): “Boeing Co. is examining plans to raise more debt to bolster finances strained by the mounting fallout from the grounding and halted production of its 737 MAX… The aerospace giant isn’t running out of cash, but costs associated with the MAX crisis are rising, leading to the prospect of borrowing more money. Boeing plans to halt production of the plane this month, lowering some costs but pushing back the likely date at which payments for finished planes would resume.”
Fixed-Income Bubble Watch:
January 6 – Wall Street Journal (Paul J. Davies): “The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies. In the U.S. at the start of December, some 2.5% of leveraged loans were trading at less than 70% of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD… Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuance of structured loan funds known as collateralized loan obligations, or CLOs, which have been the biggest group of lenders in recent years.”
January 10 – Wall Street Journal (Matt Wirz and Tom McGinty): “When Party City Holdco Inc. reported a large decline in quarterly earnings in November, holders of the retailer’s junk-rated debt scrambled to sell. Buyers were hard to find, and prices cratered by as much as 50% before recovering some of the loss… It was the largest price move since Party City issued the debt. Such violent price swings were commonplace last fall in the riskiest segment of the roughly $2.4 trillion market for corporate bonds and loans rated below investment-grade, analysis of trade data by the Journal shows, striking a sharp contrast to the relative calm in most markets at the time.”
January 6 – Associated Press (Dee-Ann Durbin): “The U.S. dairy industry, the largest in the world, is under severe pressure as the consumption habits of Americans shift. Borden Dairy Co. filed for bankruptcy protection, the second major U.S. dairy to do so in as many months. Borden produces nearly 500 million gallons of milk each year… It employs 3,300 people and runs 12 plants across the U.S.”
China Watch:
January 8 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “China’s Vice Premier Liu He, head of the country’s negotiation team in Sino-U.S. trade talks, will sign a ‘Phase 1’ deal in Washington next week, the commerce ministry said… Liu will visit Washington on Jan. 13-15, said Gao Feng, spokesman at the commerce ministry. Negotiating teams from both sides remain in close communication on the particular arrangements of the signing, Gao told reporters…”
January 7 – CNBC (Evelyn Cheng): “China remains vague on how much the country will increase purchases of U.S. farm goods, considered a critical part of a trade agreement with Washington. Han Jun, vice minister of agriculture and rural affairs, confirmed to Chinese financial news site Caixin that import quotas for wheat, corn and rice will not increase. ‘These are global quotas. We will not adjust them just for one country,’ Han told Caixin…”
January 4 – Bloomberg: “China pledged to step up measures to shore up its troubled banks and small businesses while continuing a crackdown on shadow banking and property speculation, in a difficult balancing act that risks exacerbating a build up in bad debt at its traditional lenders. As concerns mount over the state of China’s $45 trillion financial system, the nation’s central bank and its top financial regulator used the year’s first weekend to unveil fresh details on how to combat risks amid the slowest economic expansion in three decades. The People’s Bank of China, which has been reluctant to prime the stimulus pumps too much, said on Sunday that it would ‘resolutely win the battle’ against increasing financial risks, underscoring its role as a lender of last resort while directing local governments to step up front-line support.”
January 8 – Reuters (Lusha Zhang and Ryan Woo): “Soaring pork prices that nearly doubled in December over a year ago kept inflation at a seven-year high despite government efforts to ease meat shortages caused by a disease outbreak… Surging inflation adds to challenges for communist leaders who are trying to shore up slowing economic growth and resolve a tariff war with Washington. The price of pork rose 97% over a year earlier despite increased imports of China’s staple meat and the release of thousands of tons from government stockpiles. Food prices rose 17.4% and overall consumer inflation was 4.5%, well above the ruling Communist Party’s official target of 3%. That matched November’s inflation, the highest since 2012.”
January 8 – Bloomberg: “Car sales in China continued to fall in December, capping a second straight annual drop, though a slowing pace of declines suggests the world’s biggest market may be close to a bottom. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles fell 3.6% last month from a year earlier to 2.17 million units…”
January 9 – Bloomberg: “In what’s now become a new normal for the $815 billion-plus Chinese offshore-debt market, at least seven borrowers defaulted in 2019. About $3.6 billion of bonds went into default last year, up from $3.3 billion the year before… The 2019 tally spanned a state-owned commodity trader to a onetime Coca-Cola Co. acquisition target. And with nearly half of the supply of stressed bonds -- those with yields of at least 15% -- coming due this year, the ranks of defaulters is expected to swell.”
January 9 – Financial Times (Sun Yu): “When China’s bond issuers run into trouble, investors face an increasingly tough task in extracting any returns. Bond defaults across the world’s second-biggest economy are rising, with more borrowers failing either to repay creditors’ initial investments, or make regular interest payments. Typically, some investors can find a way to hold on to so-called distressed debt and recover scraps of cash… Now, though, returns are shrinking. In 2016, 46% of borrowers in default made some sort of principal or interest payments to bondholders, according to Wind… Last year, that total dropped to 13%.”
January 7 – Bloomberg (Shirley Zhao): “China’s Communist Party issued new rules for state-owned enterprises, giving it greater control of companies that span industries from energy to banking and telecommunications. Wholly or majority state-owned companies must ‘integrate party leadership into every part of company governance,’ according to rules published Sunday on the central government’s website.”
January 8 – Financial Times (Jamil Anderlini): “Of the official announcements posted on the website of China’s embassy in Sweden over the past year, nearly two thirds are vituperative attacks on individual Swedish journalists, politicians and other public figures. ‘Some people in Sweden shouldn’t expect to feel at ease after hurting the feelings of the Chinese people and the interests of the Chinese side,’ was one typical, mildly threatening, outburst. The embassy in Sweden has been the most aggressive exemplar of China’s new ‘wolf-style diplomacy’ over the past year or so. But it is far from the only one.”
January 6 – New York Times (Raymond Zhong): “At first glance, the bespectacled YouTuber railing against Taiwan’s president, Tsai Ing-wen, just seems like a concerned citizen making an appeal to his fellow Taiwanese. He speaks Taiwanese-accented Mandarin… His captions are written with the traditional Chinese characters used in Taiwan, not the simplified ones used in China. With outrage in his voice, he accuses Ms. Tsai of selling out “our beloved land of Taiwan” to Japan and the United States. The man, Zhang Xida, does not say in his videos whom he works for. But other websites and videos make it clear: He is a host for China National Radio… As Taiwan gears up for a major election this week, officials and researchers worry that China is experimenting with social media manipulation to sway the vote.”
January 8 – Wall Street Journal (Chun Han Wong and William Kazer): “Fallout from Hong Kong’s unrest is galvanizing resistance against China on another front: Taiwan. Protests in Hong Kong against Beijing’s encroachment have inspired widespread sympathy across the self-ruling island of Taiwan, a longstanding subject of tension in the region that is both claimed by Beijing and supported by the U.S. with arms sales and unofficial political ties. Sympathies in Taiwan for Hong Kong have transformed the political fortunes of the island’s leader, President Tsai Ing-wen, whose ruling party advocates a Taiwanese identity separate from China and is seen as traditionally pro-independence. She has vocally supported the Hong Kong protesters in her campaign for re-election this Saturday, contrasting herself with her main rival—who is seen as friendly with Beijing—by casting her administration as a bulwark against China’s authoritarian influence.”
Central Bank Watch:
January 5 – Bloomberg (Rich Miller and Christopher Condon): “The U.S. and the euro area face daunting economic challenges in a world of low inflation and interest rates and central banks alone don’t have the tools to cope. That’s the message delivered to the American Economic Association’s annual meeting… by former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen. ‘I believe that for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion’ if it acts comprehensively to avoid a deflationary malaise, Draghi said… ‘The euro area still has space to do this, but time is not infinite,’ he added.”
EM Watch:
January 6 – Bloomberg (Subhadip Sircar): “With credit growth at multi-year lows, Indian lenders have been binging on sovereign debt. With the government set to borrow more, the move is fraught with risk. Bond holdings as a proportion of aggregate deposits stood at about 29% in the two weeks ended Dec. 20, way higher than the 18.25% mandated by the central bank... That leaves banks exposed to losses if yields climb on higher federal borrowings.”
January 8 – Bloomberg: “India’s budget deficit could widen to 3.8% of gross domestic product in the current fiscal year, breaching a target of 3.3%... The law allows the government to exceed the target by as much as half a percentage point… The government can also miss its target if it faces acts of war, a collapse in farm output, or the economy is undergoing structural reforms with unanticipated fiscal implications.”
January 9 – Bloomberg (Divya Patil): “It’s the last thing India’s stricken credit markets need: a record debt bill. Companies must repay an unprecedented 5.9 trillion rupees ($83bn) of local notes this year, just as corporate defaults spike. Many firms are already struggling after economic growth slumped to its weakest since 2009.”
January 7 – Financial Times (Stephanie Findlay): “India’s economy is set to grow at 5% in the current financial year compared with a year earlier, its slowest pace in 11 years… Cooling private consumption, slowing industrial activity and stagnant investment have all hit the country’s growth… Over the past year New Delhi has made a series of reforms to combat a crisis in the shadow banking sector and counter the slowdown…”
January 9 – Bloomberg (Fathiya Dahrul and Harry Suhartono): “Policyholders at Indonesia’s state-owned PT Asuransi Jiwasraya are looking to the government to rescue the scandal-hit insurer, which has uncovered a $2 billion hole in its books. The crisis affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia’s audit board said…”
Europe Watch:
January 7 – Associated Press (Pan Pylas): “Inflation across the 19-country eurozone spiked to a six-month high in December even before the recent jump in oil prices in the wake of escalating U.S.-Iran tensions… Prices increased across the board during December, helping the annual rate of inflation to rise to 1.3% from the previous month’s 1%. Though inflation is at its highest level since June, when it was also 1.3%, it remains way below the European Central Bank’s goal of just below 2%.”
January 8 – Financial Times (Tommy Stubbington): “Eurozone governments are on course to raise less cash from bond investors in 2020 than any year since the financial crisis, even as the European Central Bank hoovers up fresh supply and borrowing costs hover near record lows. Analysts at JPMorgan estimate that net supply of euro-area sovereign bonds this year will come to €188bn, the lowest since 2008. That figure, based on issuance plans published by national debt agencies, is derived from €762bn of bond sales over the year, while €574bn of existing bonds mature. The drop in new borrowing, down about 4% from 2019, comes at a time when ultra-low bond yields… have cut the cost of funding for governments across the world, prompting calls for them to abandon restraint in spending.”
January 7 – Reuters (Michael Nienaber): “German industrial orders fell unexpectedly in November on weak foreign demand and a lack of major contracts…, suggesting that a manufacturing slump will continue to curtail growth in Europe’s largest economy… Contracts for German goods decreased by 1.3% from the previous month, posting the steepest drop since July…”
Japan Watch:
January 6 – Reuters (Daniel Leussink): “Japan’s services sector saw its deepest contraction in more than three years in December as business activity took a hit from weak demand at home and abroad… The final seasonally adjusted Jibun Bank Japan Services Purchasing Managers’ Index (PMI) fell to 49.4 in December from 50.3 in November…”
Global Bubble Watch:
January 8 – Reuters (David Lawder): “The World Bank… trimmed its global growth forecasts slightly for 2019 and 2020 due to a slower-than-expected recovery in trade and investment despite cooler trade tensions between the United States and China… In its latest Global Economic Prospects report, the World Bank shaved 0.2 percentage point off of growth for both years, with the 2019 global economic growth forecast at 2.4% and 2020 at 2.5%.”
January 6 – Financial Times (Monica Erickson): “Individuals and institutions alike have grown very fond of high-quality US corporate bonds, which are prized for their relative safety. But after a long rally, these bonds now pose greater risk than many may realise. The duration of this class of assets — its interest-rate risk — has increased to near record highs, while spreads over the yield of equivalent Treasuries have fallen to near record lows. A pick-up in interest rates, depending on its speed and longevity, could significantly push down prices across the market, which totals over $7tn, accounting for just over a quarter of the total US bonds outstanding. That could happen even without a deterioration in credit quality.”
January 8 – Reuters (Martin Petty and Colin Packham): “Australian authorities urged another mass evacuation across the heavily populated southeast on Thursday as a return of hot weather fanned huge bushfires threatening several towns and communities.”
Leveraged Speculation Watch:
January 7 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped to a fourth annual loss in the last five years as his bearish bets misfired amid the longest-running equities bull market in history. The Odey European Inc. hedge fund finished 2019 down 10.1% despite a late rally in December…”
January 7 – Bloomberg (Katherine Burton): “Ray Dalio suffered his first annual loss since 2000 in his most prominent fund. Bridgewater Associates Pure Alpha II fund fell 0.5% last year, even as many of his peers posted some of their best returns since 2008. It was the fourth time he has lost money in a calendar year since starting Pure Alpha II in 1991…”
January 7 – Bloomberg (Melissa Karsh): “Hedge funds rebounded in 2019, gaining 9% after posting a loss the year before. The results were nothing to celebrate -- the S&P 500 Index returned 32% last year in the longest-running bull market in history. Last year’s performance may put further pressure on an industry struggling to keep investors from bolting. Hedge funds saw $82 billion of outflows through November, more than twice the amount for all of 2018, according to eVestment data. The industry is now on pace to record more closures than startups for a fifth straight year, according to Hedge Fund Research Inc.”
Geopolitical Watch:
January 5 – Reuters (Parisa Hafezi): “Iran announced on Sunday it would abandon limitations on enriching uranium, taking a further step back from commitments to a 2015 nuclear deal with six major powers, but it would continue to cooperate with the U.N. nuclear watchdog… ‘Iran will continue its nuclear enrichment with no restrictions .... and based on its technical needs,’ a government statement cited by television said.”
January 8 – Reuters (Babak Dehghanpisheh and Ahmed Aboulenein): “Iran spurned U.S. President Donald Trump’s call for a new nuclear pact and its commanders threatened more attacks as the Middle East remained on edge following the U.S. killing of an Iranian general and Tehran’s retaliatory missile strikes. Potentially stepping up international pressure on Tehran, U.S. officials said they believed a Ukrainian passenger plane that crashed in Iran was brought down accidentally by Iranian air defenses hours after Iran launched its missiles attacks.”
January 3 – Reuters (Polina Ivanova): “Russia’s Foreign Minister Sergei Lavrov spoke with his Iranian counterpart Mohammad Javad Zarif over the phone on Friday to discuss the killing of Iran’s military chief Qassem Soleimani… ‘Lavrov expressed his condolences over the killing,’ the statement said. ‘The ministers stressed that such actions by the United States grossly violate the norms of international law.’”
January 4 – Reuters (Ryan Woo): “The United States should stop abusing the use of force and seek solutions via dialogue, China’s foreign minister said, after a U.S. air strike in Baghdad on Friday killed Iran’s most prominent military commander. The risky behavior of the U.S. military violates the basic norms of international relations and will worsen tensions and turbulence in the region, China’s Foreign Minister Wang Yi told his Iranian counterpart Mohammad Javad Zarif…”
January 6 – CNBC (Joanna Tan): “President Donald Trump threatened Sunday to slap sanctions on Iraq after its parliament passed a resolution calling for the government to expel foreign troops from the country. Tensions in the Middle East spiraled last week after Trump called for a U.S. airstrike in Baghdad that killed a top Iranian general, Qasem Soleimani. …The U.S. president said: ‘If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever. It’ll make Iranian sanctions look somewhat tame.’ ‘We have a very extraordinarily expensive air base that’s there. It cost billions of dollars to build. Long before my time. We’re not leaving unless they pay us back for it,’ Trump said.”
The S&P500 gained 0.9% (up 1.1% y-t-d), and the Dow rose 0.7% (up 1.0%). The Utilities increased 0.8% (down 0.4%). The Banks dropped 1.2% (down 2.0%), while the Broker/Dealers rose 1.4% (up 1.4%). The Transports added 0.6% (up 0.7%). The S&P 400 Midcaps slipped 0.2% (down 0.6%), and the small cap Russell 2000 dipped 0.2% (down 0.6%). The Nasdaq100 jumped 2.0% (up 2.7%). The Semiconductors gained 0.7% (up 0.9%). The Biotechs surged 4.3% (up 2.6%). Though bullion gained $10, the HUI gold index dropped 3.0% (down 4.5%).
Three-month Treasury bill rates ended the week at 1.50%. Two-year government yields rose four bps to 1.57% (unchanged y-t-d). Five-year T-note yields gained four bps to 1.63% (down 6bps). Ten-year Treasury yields increased three bps to 1.82% (down 10bps). Long bond yields added three bps to 2.28% (down 11bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.62% (down 9bps).
Greek 10-year yields fell five bps to 1.35% (down 9bps y-t-d). Ten-year Portuguese yields rose four bps to 0.39% (down 5bps). Italian 10-year yields slipped three bps to 1.32% (down 9bps). Spain's 10-year yields jumped six bps to 0.44% (down 3bps). German bund yields jumped eight bps to negative 0.20% (down 1bp). French yields increased two bps to 0.04% (down 7bps). The French to German 10-year bond spread narrowed six to 24 bps. U.K. 10-year gilt yields gained three bps to 0.77% (down 5bps). U.K.'s FTSE equities index declined 0.5% (up 0.6%).
Japan's Nikkei Equities Index gained 0.8% (up 0.8% y-t-d). Japanese 10-year "JGB" yields increased a basis point to zero (up 1bp y-t-d). France's CAC40 was little changed (up 1.0%). The German DAX equities index jumped 2.0% (up 1.8%). Spain's IBEX 35 equities index fell 0.8% (up 0.3%). Italy's FTSE MIB index rose 1.3% (up 2.2%). EM equities were mixed. Brazil's Bovespa index dropped 1.9% (down 0.1%), while Mexico's Bolsa was about unchanged (up 2.6%). South Korea's Kospi index gained 1.4% (up 0.4%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange added 0.3% (up 1.4%). Turkey's Borsa Istanbul National 100 index advanced 4.4% (up 3.7%). Russia's MICEX equities index rose 1.5% (up 2.6%).
Investment-grade bond funds saw inflows surge to $8.193 billion, and junk bond funds posted inflows of $1.121 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped eight bps to 3.64% (down 81bps y-o-y). Fifteen-year rates fell nine bps to 3.07% (down 82bps). Five-year hybrid ARM rates sank 16 bps to 3.30% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 3.95% (down 45bps).
Federal Reserve Credit last week gained $6.9bn to $4.128 TN, with a 17-week gain of $401.7 billion. Over the past year, Fed Credit expanded $111.5bn, or 2.8%. Fed Credit inflated $1.317 Trillion, or 47%, over the past 374 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7 billion last week to $3.408 TN. "Custody holdings" increased $12.2 billion, or 0.4% y-o-y.
M2 (narrow) "money" supply gained $3.5bn last week to a record $15.428 TN. "Narrow money" surged $1.003 TN, or 7.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dropped $43.5bn, while Savings Deposits surged $60.8bn. Small Time Deposits were little changed. Retail Money Funds declined $6.4bn.
Total money market fund assets added $5.7bn to $3.638 TN, with institutional money fund assets down $4.1bn to $2.258 TN. Total money funds gained $571bn y-o-y, or 18.6%.
Total Commercial Paper slipped $0.5bn to $1.126 TN. CP was up $53bn, or 4.9% year-over-year.
Currency Watch:
January 10 – Financial Times (Eva Szalay in London and Colby Smith): “Unusual patterns in the dollar during the latest flare-up in tensions between the US and Iran suggest that the currency may have lost its traditional role as a retreat in times of stress. Typically, the dollar jumps, along with gold, when bouts of geopolitical nerves strike. But after the US assassination of Iranian military commander Qassem Soleimani last week the currency barely budged… This flip in the traditional behaviour of the world’s most important reserve currency has left some market-watchers puzzled.”
For the week, the U.S. dollar index increased 0.5% to 97.356 (up 0.9% y-t-d). For the week on the upside, the Mexican peso increased 0.6%, the South Korean won 0.5%, and the Singapore dollar 0.1%. On the downside, the Japanese yen declined 1.2%, the Swedish krona 1.1%, the Brazilian real 1.0%, the Australian dollar 0.7%, the Norwegian krone 0.6%, the New Zealand dollar 0.5%, the South African rand 0.5%, the Canadian dollar 0.4%, the euro 0.4% and the British pound 0.2%. The Chinese renminbi increased 0.67% versus the dollar this week (up 0.63% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index rallied 0.5% (up 0.9% y-t-d). Spot Gold gained 0.7% to $1,562 (up 2.9%). Silver slipped 0.3% to $18.105 (up 1.0%). WTI crude dropped $4.01 to $59.04 (down 3.3%). Gasoline sank 5.1% (down 2%), while Natural Gas rallied 3.4% (up 1%). Copper gained 1.0% (up 1%). Wheat jumped 1.8% (up 1%). Corn slipped 0.2% (down 1%).
Market Instability Watch:
January 5 – Bloomberg (Ranjeetha Pakiam and Justina Vasquez): “Gold surged to its highest since 2013 as rising tensions in the Middle East stoked demand for havens, with Goldman Sachs… seeing more room to run. Palladium extended gains to a fresh record. Bullion neared $1,600 an ounce after Tehran said it would no longer abide by any limits on its enrichment of uranium following the killing of General Qassem Soleimani.”
January 7 – Bloomberg (Claire Ballentine): “Welcome to the big time, bond ETFs. Long overlooked as the younger sibling of equity exchange-traded funds, strategies focused on corporate or government debt took in more than $150 billion in the U.S. last year, the most on record and just shy of the sum netted by their stock counterparts. It was the biggest annual leap for bond ETFs since 2014, boosting assets to more than $800 billion…”
January 7 – Wall Street Journal (Julia-Ambra Verlaine): “Low-rated U.S. companies are borrowing cash as 2020 kicks off, taking advantage of persistently low interest rates. Companies with junk ratings have sold $850 million of debt through Tuesday…That is on track to exceed issuance in the opening days of 2019, when high yield debt totaled $1.5 billion over the first two weeks of January… The U.S. high-yield market now totals around $1.2 trillion…, raising concerns that companies will struggle to repay investors if interest rates rise.”
Trump Administration Watch:
January 6 – Reuters (Jeff Mason): “U.S. President Donald Trump on Sunday stood by his threat to go after Iranian cultural sites, warning of a ‘major retaliation’ if Iran strikes back for the killing of one of its top military commanders… Asked about potential retaliation by Iran, Trump said: ‘If it happens, it happens. If they do anything, there will be major retaliation.’”
January 8 – Bloomberg (Sarah Ponczek): “President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records. The rebound from an overnight rout that topped 1.5% has some investors breathing a sigh of relief, but another cohort point to mounting signs that the comeback is a sign of complacency among bulls. ‘This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself,’ Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, told Bloomberg… ‘It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.’”
January 6 – Financial Times (Chloe Cornish and Andrew England): “When Donald Trump ordered the air strikes that killed Qassem Soleimani he took his highest-stakes gamble yet as he ramps up pressure on Iran and seeks to counter the Islamic regime’s regional influence. For years, Washington had viewed Soleimani as its arch-nemesis. The commander of Iran’s elite Quds force cultivated a network of Iranian proxies across the Middle East that the Trump administration accuses of attacking American targets and destabilising the region. But rather than weaken the influence of Tehran and its proxies in Iraq, the US president’s decision to eliminate Soleimani as he left Baghdad airport threatens to strengthen it, Iraqis and western analysts said. ‘Trump has accelerated Soleimani’s work in Iraq,’ said one Iraqi official. ‘They created a mess because they couldn’t understand Iraq.’”
January 9 – Reuters (Alexandra Alper and Doina Chiacu): “U.S. President Donald Trump… said his administration will start negotiating the Phase 2 U.S.-China trade agreement soon but that he might wait to complete any agreement until after November’s U.S. presidential election. ‘We’ll start negotiating right away Phase Two. It’ll take a little time,’ Trump told reporters… ‘I think I might want to wait to finish it till after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal.’”
Federal Reserve Watch:
January 4 – Reuters (Howard Schneider): “The U.S. Federal Reserve still has enough clout to fight a future downturn, but policymakers should state in advance the mix of policies and policy promises they plan to use to get the most bang for their buck, former Fed chief Ben Bernanke said… In an address to the American Economics Association, Bernanke pushed back on the notion that central banks have lost influence over the economy, and laid out his thoughts about how the Fed in particular could change its monetary policy ‘framework’ to be sure that is not the case.”
January 9 – Bloomberg (Christopher Condon): “Former Treasury Secretary Lawrence Summers dismissed the optimism of former Federal Reserve Chairman Ben Bernanke, who recently said the central bank could likely fight off the next recession despite the low level of interest rates. Bernanke’s speech was ‘a kind of last hurrah for the central bankers,’ Summers said… ‘He argued that monetary policy will be able to do it the next time,’ Summers said. ‘I think that’s pretty unlikely given that in recessions we usually cut interest rates by 5 percentage points and interest rates today are below 2%.”
January 8 – Bloomberg (Craig Torres): “One of the Federal Reserve Board’s top economists said a U.S. recession could drive both short- and longer-term Treasury yields close to zero, limiting the tools the central bank has to aid the economy. Michael Kiley, a deputy director in the Fed Board’s financial stability unit, said even a moderate recession in the U.S. ‘may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.’ The research was published on the Fed Board’s website…”
January 9 – Wall Street Journal (Michael S. Derby): “In a speech in Madison, Wis., Federal Reserve Bank of St. Louis President James Bullard said, ‘The current baseline economic outlook for 2020 suggests a reasonable chance that the soft landing will be achieved’ after the central bank lowered interest rates three times in 2019 to cushion the economy against a possible downturn. He told reporters after his speech ‘we should wait and see what the effects are’ before tweaking monetary policy again. Speaking on Fox Business…, Federal Bank of Minneapolis President Neel Kashkari also said he sees no reason to alter the current course of monetary policy. He told the network he’d hold steady ‘for the foreseeable future, the next six months, next year, but it will depend.’ He added he would be in the camp of favoring ‘more accommodation’ if ‘inflation continues to weaken or inflation expectations continue to slide.’”
January 3 – Reuters (Ann Saphir and Howard Schneider): “The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary Daly said…, and may need a new policy framework to lift inflation back up to the Fed’s 2% goal. ‘We don’t have a really good understanding of why it’s been so difficult to get inflation back up,’ Daly said at the annual American Economics Association meeting…”
U.S. Bubble Watch:
January 8 – New York Times (Jim Tankersley and Jeanna Smialek): “The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon. Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record. Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.”
January 7 – CNBC (Jeff Cox): “The U.S. trade deficit fell more than expected in November ahead of negotiations with China that cooled the simmering tariff battle between the two sides. The shortfall in goods and services declined to $43.09 billion for the month, below the $43.6 estimate… That represented the lowest deficit since October 2016. That was down sharply from $46.9 billion in October…”
January 4 – New York Times (Neal E. Boudette): “The auto industry has been on a roll for a decade, and its resurgence shows few signs of coming to a halt — at least for now. Strong employment, low interest rates and robust consumer confidence combined last year to extend a record run of auto sales. Americans are also continuing to buy ever bigger cars, at prices escalating faster than the overall inflation rate. And they are taking on more debt to do so. Nationwide, automakers sold more than 17 million new cars and light trucks in 2019… It was the fifth straight year of sales exceeding that figure, a distinction never achieved before.”
January 5 – Wall Street Journal (Andrew Ackerman): “Times are good for U.S. banks. The industry is highly profitable, lending is up and the number of problem institutions—those found to have deficiencies in their businesses—is the lowest since early 2007, according to the Federal Deposit Insurance Corp. Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building. ‘It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,’ former FDIC Vice Chairman Thomas Hoenig said…”
January 7 – CNBC (Diana Olick): “The average rate on the 30-year fixed mortgage fell to the lowest level since October this week, at 3.69%... That has an already competitive housing market heating up even more. Open houses, which are usually pretty rare the first week in January, were plentiful in markets across the nation this year, as buyers hope to get in before the competition gets even worse. Buyer sentiment in the housing market remained high in December, according to a monthly survey from Fannie Mae — the Home Purchase Sentiment Index.”
January 5 – Wall Street Journal (Nicole Friedman): “Home sales are slowing in wildfire-prone areas of California as insurers retreat from high-risk regions, say real-estate agents and homeowners. Insurance companies have continued to reduce their wildfire exposure in the past two years after paying more than $24 billion for California wildfire losses in 2017 and 2018. Home insurers have declined to renew policies for tens of thousands of homeowners across the state, and regulators expect more nonrenewals in the coming months. Real-estate agents say potential buyers are having difficulty obtaining insurance and are backing out of purchases or lowering their offers…”
January 6 – New York Times (Doug Cameron): “Boeing Co. is examining plans to raise more debt to bolster finances strained by the mounting fallout from the grounding and halted production of its 737 MAX… The aerospace giant isn’t running out of cash, but costs associated with the MAX crisis are rising, leading to the prospect of borrowing more money. Boeing plans to halt production of the plane this month, lowering some costs but pushing back the likely date at which payments for finished planes would resume.”
Fixed-Income Bubble Watch:
January 6 – Wall Street Journal (Paul J. Davies): “The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies. In the U.S. at the start of December, some 2.5% of leveraged loans were trading at less than 70% of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD… Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuance of structured loan funds known as collateralized loan obligations, or CLOs, which have been the biggest group of lenders in recent years.”
January 10 – Wall Street Journal (Matt Wirz and Tom McGinty): “When Party City Holdco Inc. reported a large decline in quarterly earnings in November, holders of the retailer’s junk-rated debt scrambled to sell. Buyers were hard to find, and prices cratered by as much as 50% before recovering some of the loss… It was the largest price move since Party City issued the debt. Such violent price swings were commonplace last fall in the riskiest segment of the roughly $2.4 trillion market for corporate bonds and loans rated below investment-grade, analysis of trade data by the Journal shows, striking a sharp contrast to the relative calm in most markets at the time.”
January 6 – Associated Press (Dee-Ann Durbin): “The U.S. dairy industry, the largest in the world, is under severe pressure as the consumption habits of Americans shift. Borden Dairy Co. filed for bankruptcy protection, the second major U.S. dairy to do so in as many months. Borden produces nearly 500 million gallons of milk each year… It employs 3,300 people and runs 12 plants across the U.S.”
China Watch:
January 8 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “China’s Vice Premier Liu He, head of the country’s negotiation team in Sino-U.S. trade talks, will sign a ‘Phase 1’ deal in Washington next week, the commerce ministry said… Liu will visit Washington on Jan. 13-15, said Gao Feng, spokesman at the commerce ministry. Negotiating teams from both sides remain in close communication on the particular arrangements of the signing, Gao told reporters…”
January 7 – CNBC (Evelyn Cheng): “China remains vague on how much the country will increase purchases of U.S. farm goods, considered a critical part of a trade agreement with Washington. Han Jun, vice minister of agriculture and rural affairs, confirmed to Chinese financial news site Caixin that import quotas for wheat, corn and rice will not increase. ‘These are global quotas. We will not adjust them just for one country,’ Han told Caixin…”
January 4 – Bloomberg: “China pledged to step up measures to shore up its troubled banks and small businesses while continuing a crackdown on shadow banking and property speculation, in a difficult balancing act that risks exacerbating a build up in bad debt at its traditional lenders. As concerns mount over the state of China’s $45 trillion financial system, the nation’s central bank and its top financial regulator used the year’s first weekend to unveil fresh details on how to combat risks amid the slowest economic expansion in three decades. The People’s Bank of China, which has been reluctant to prime the stimulus pumps too much, said on Sunday that it would ‘resolutely win the battle’ against increasing financial risks, underscoring its role as a lender of last resort while directing local governments to step up front-line support.”
January 8 – Reuters (Lusha Zhang and Ryan Woo): “Soaring pork prices that nearly doubled in December over a year ago kept inflation at a seven-year high despite government efforts to ease meat shortages caused by a disease outbreak… Surging inflation adds to challenges for communist leaders who are trying to shore up slowing economic growth and resolve a tariff war with Washington. The price of pork rose 97% over a year earlier despite increased imports of China’s staple meat and the release of thousands of tons from government stockpiles. Food prices rose 17.4% and overall consumer inflation was 4.5%, well above the ruling Communist Party’s official target of 3%. That matched November’s inflation, the highest since 2012.”
January 8 – Bloomberg: “Car sales in China continued to fall in December, capping a second straight annual drop, though a slowing pace of declines suggests the world’s biggest market may be close to a bottom. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles fell 3.6% last month from a year earlier to 2.17 million units…”
January 9 – Bloomberg: “In what’s now become a new normal for the $815 billion-plus Chinese offshore-debt market, at least seven borrowers defaulted in 2019. About $3.6 billion of bonds went into default last year, up from $3.3 billion the year before… The 2019 tally spanned a state-owned commodity trader to a onetime Coca-Cola Co. acquisition target. And with nearly half of the supply of stressed bonds -- those with yields of at least 15% -- coming due this year, the ranks of defaulters is expected to swell.”
January 9 – Financial Times (Sun Yu): “When China’s bond issuers run into trouble, investors face an increasingly tough task in extracting any returns. Bond defaults across the world’s second-biggest economy are rising, with more borrowers failing either to repay creditors’ initial investments, or make regular interest payments. Typically, some investors can find a way to hold on to so-called distressed debt and recover scraps of cash… Now, though, returns are shrinking. In 2016, 46% of borrowers in default made some sort of principal or interest payments to bondholders, according to Wind… Last year, that total dropped to 13%.”
January 7 – Bloomberg (Shirley Zhao): “China’s Communist Party issued new rules for state-owned enterprises, giving it greater control of companies that span industries from energy to banking and telecommunications. Wholly or majority state-owned companies must ‘integrate party leadership into every part of company governance,’ according to rules published Sunday on the central government’s website.”
January 8 – Financial Times (Jamil Anderlini): “Of the official announcements posted on the website of China’s embassy in Sweden over the past year, nearly two thirds are vituperative attacks on individual Swedish journalists, politicians and other public figures. ‘Some people in Sweden shouldn’t expect to feel at ease after hurting the feelings of the Chinese people and the interests of the Chinese side,’ was one typical, mildly threatening, outburst. The embassy in Sweden has been the most aggressive exemplar of China’s new ‘wolf-style diplomacy’ over the past year or so. But it is far from the only one.”
January 6 – New York Times (Raymond Zhong): “At first glance, the bespectacled YouTuber railing against Taiwan’s president, Tsai Ing-wen, just seems like a concerned citizen making an appeal to his fellow Taiwanese. He speaks Taiwanese-accented Mandarin… His captions are written with the traditional Chinese characters used in Taiwan, not the simplified ones used in China. With outrage in his voice, he accuses Ms. Tsai of selling out “our beloved land of Taiwan” to Japan and the United States. The man, Zhang Xida, does not say in his videos whom he works for. But other websites and videos make it clear: He is a host for China National Radio… As Taiwan gears up for a major election this week, officials and researchers worry that China is experimenting with social media manipulation to sway the vote.”
January 8 – Wall Street Journal (Chun Han Wong and William Kazer): “Fallout from Hong Kong’s unrest is galvanizing resistance against China on another front: Taiwan. Protests in Hong Kong against Beijing’s encroachment have inspired widespread sympathy across the self-ruling island of Taiwan, a longstanding subject of tension in the region that is both claimed by Beijing and supported by the U.S. with arms sales and unofficial political ties. Sympathies in Taiwan for Hong Kong have transformed the political fortunes of the island’s leader, President Tsai Ing-wen, whose ruling party advocates a Taiwanese identity separate from China and is seen as traditionally pro-independence. She has vocally supported the Hong Kong protesters in her campaign for re-election this Saturday, contrasting herself with her main rival—who is seen as friendly with Beijing—by casting her administration as a bulwark against China’s authoritarian influence.”
Central Bank Watch:
January 5 – Bloomberg (Rich Miller and Christopher Condon): “The U.S. and the euro area face daunting economic challenges in a world of low inflation and interest rates and central banks alone don’t have the tools to cope. That’s the message delivered to the American Economic Association’s annual meeting… by former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen. ‘I believe that for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion’ if it acts comprehensively to avoid a deflationary malaise, Draghi said… ‘The euro area still has space to do this, but time is not infinite,’ he added.”
EM Watch:
January 6 – Bloomberg (Subhadip Sircar): “With credit growth at multi-year lows, Indian lenders have been binging on sovereign debt. With the government set to borrow more, the move is fraught with risk. Bond holdings as a proportion of aggregate deposits stood at about 29% in the two weeks ended Dec. 20, way higher than the 18.25% mandated by the central bank... That leaves banks exposed to losses if yields climb on higher federal borrowings.”
January 8 – Bloomberg: “India’s budget deficit could widen to 3.8% of gross domestic product in the current fiscal year, breaching a target of 3.3%... The law allows the government to exceed the target by as much as half a percentage point… The government can also miss its target if it faces acts of war, a collapse in farm output, or the economy is undergoing structural reforms with unanticipated fiscal implications.”
January 9 – Bloomberg (Divya Patil): “It’s the last thing India’s stricken credit markets need: a record debt bill. Companies must repay an unprecedented 5.9 trillion rupees ($83bn) of local notes this year, just as corporate defaults spike. Many firms are already struggling after economic growth slumped to its weakest since 2009.”
January 7 – Financial Times (Stephanie Findlay): “India’s economy is set to grow at 5% in the current financial year compared with a year earlier, its slowest pace in 11 years… Cooling private consumption, slowing industrial activity and stagnant investment have all hit the country’s growth… Over the past year New Delhi has made a series of reforms to combat a crisis in the shadow banking sector and counter the slowdown…”
January 9 – Bloomberg (Fathiya Dahrul and Harry Suhartono): “Policyholders at Indonesia’s state-owned PT Asuransi Jiwasraya are looking to the government to rescue the scandal-hit insurer, which has uncovered a $2 billion hole in its books. The crisis affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia’s audit board said…”
Europe Watch:
January 7 – Associated Press (Pan Pylas): “Inflation across the 19-country eurozone spiked to a six-month high in December even before the recent jump in oil prices in the wake of escalating U.S.-Iran tensions… Prices increased across the board during December, helping the annual rate of inflation to rise to 1.3% from the previous month’s 1%. Though inflation is at its highest level since June, when it was also 1.3%, it remains way below the European Central Bank’s goal of just below 2%.”
January 8 – Financial Times (Tommy Stubbington): “Eurozone governments are on course to raise less cash from bond investors in 2020 than any year since the financial crisis, even as the European Central Bank hoovers up fresh supply and borrowing costs hover near record lows. Analysts at JPMorgan estimate that net supply of euro-area sovereign bonds this year will come to €188bn, the lowest since 2008. That figure, based on issuance plans published by national debt agencies, is derived from €762bn of bond sales over the year, while €574bn of existing bonds mature. The drop in new borrowing, down about 4% from 2019, comes at a time when ultra-low bond yields… have cut the cost of funding for governments across the world, prompting calls for them to abandon restraint in spending.”
January 7 – Reuters (Michael Nienaber): “German industrial orders fell unexpectedly in November on weak foreign demand and a lack of major contracts…, suggesting that a manufacturing slump will continue to curtail growth in Europe’s largest economy… Contracts for German goods decreased by 1.3% from the previous month, posting the steepest drop since July…”
Japan Watch:
January 6 – Reuters (Daniel Leussink): “Japan’s services sector saw its deepest contraction in more than three years in December as business activity took a hit from weak demand at home and abroad… The final seasonally adjusted Jibun Bank Japan Services Purchasing Managers’ Index (PMI) fell to 49.4 in December from 50.3 in November…”
Global Bubble Watch:
January 8 – Reuters (David Lawder): “The World Bank… trimmed its global growth forecasts slightly for 2019 and 2020 due to a slower-than-expected recovery in trade and investment despite cooler trade tensions between the United States and China… In its latest Global Economic Prospects report, the World Bank shaved 0.2 percentage point off of growth for both years, with the 2019 global economic growth forecast at 2.4% and 2020 at 2.5%.”
January 6 – Financial Times (Monica Erickson): “Individuals and institutions alike have grown very fond of high-quality US corporate bonds, which are prized for their relative safety. But after a long rally, these bonds now pose greater risk than many may realise. The duration of this class of assets — its interest-rate risk — has increased to near record highs, while spreads over the yield of equivalent Treasuries have fallen to near record lows. A pick-up in interest rates, depending on its speed and longevity, could significantly push down prices across the market, which totals over $7tn, accounting for just over a quarter of the total US bonds outstanding. That could happen even without a deterioration in credit quality.”
January 8 – Reuters (Martin Petty and Colin Packham): “Australian authorities urged another mass evacuation across the heavily populated southeast on Thursday as a return of hot weather fanned huge bushfires threatening several towns and communities.”
Leveraged Speculation Watch:
January 7 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped to a fourth annual loss in the last five years as his bearish bets misfired amid the longest-running equities bull market in history. The Odey European Inc. hedge fund finished 2019 down 10.1% despite a late rally in December…”
January 7 – Bloomberg (Katherine Burton): “Ray Dalio suffered his first annual loss since 2000 in his most prominent fund. Bridgewater Associates Pure Alpha II fund fell 0.5% last year, even as many of his peers posted some of their best returns since 2008. It was the fourth time he has lost money in a calendar year since starting Pure Alpha II in 1991…”
January 7 – Bloomberg (Melissa Karsh): “Hedge funds rebounded in 2019, gaining 9% after posting a loss the year before. The results were nothing to celebrate -- the S&P 500 Index returned 32% last year in the longest-running bull market in history. Last year’s performance may put further pressure on an industry struggling to keep investors from bolting. Hedge funds saw $82 billion of outflows through November, more than twice the amount for all of 2018, according to eVestment data. The industry is now on pace to record more closures than startups for a fifth straight year, according to Hedge Fund Research Inc.”
Geopolitical Watch:
January 5 – Reuters (Parisa Hafezi): “Iran announced on Sunday it would abandon limitations on enriching uranium, taking a further step back from commitments to a 2015 nuclear deal with six major powers, but it would continue to cooperate with the U.N. nuclear watchdog… ‘Iran will continue its nuclear enrichment with no restrictions .... and based on its technical needs,’ a government statement cited by television said.”
January 8 – Reuters (Babak Dehghanpisheh and Ahmed Aboulenein): “Iran spurned U.S. President Donald Trump’s call for a new nuclear pact and its commanders threatened more attacks as the Middle East remained on edge following the U.S. killing of an Iranian general and Tehran’s retaliatory missile strikes. Potentially stepping up international pressure on Tehran, U.S. officials said they believed a Ukrainian passenger plane that crashed in Iran was brought down accidentally by Iranian air defenses hours after Iran launched its missiles attacks.”
January 3 – Reuters (Polina Ivanova): “Russia’s Foreign Minister Sergei Lavrov spoke with his Iranian counterpart Mohammad Javad Zarif over the phone on Friday to discuss the killing of Iran’s military chief Qassem Soleimani… ‘Lavrov expressed his condolences over the killing,’ the statement said. ‘The ministers stressed that such actions by the United States grossly violate the norms of international law.’”
January 4 – Reuters (Ryan Woo): “The United States should stop abusing the use of force and seek solutions via dialogue, China’s foreign minister said, after a U.S. air strike in Baghdad on Friday killed Iran’s most prominent military commander. The risky behavior of the U.S. military violates the basic norms of international relations and will worsen tensions and turbulence in the region, China’s Foreign Minister Wang Yi told his Iranian counterpart Mohammad Javad Zarif…”
January 6 – CNBC (Joanna Tan): “President Donald Trump threatened Sunday to slap sanctions on Iraq after its parliament passed a resolution calling for the government to expel foreign troops from the country. Tensions in the Middle East spiraled last week after Trump called for a U.S. airstrike in Baghdad that killed a top Iranian general, Qasem Soleimani. …The U.S. president said: ‘If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever. It’ll make Iranian sanctions look somewhat tame.’ ‘We have a very extraordinarily expensive air base that’s there. It cost billions of dollars to build. Long before my time. We’re not leaving unless they pay us back for it,’ Trump said.”
January 5 – Reuters (Ahmed Rasheed, Ahmed Aboulenein and Jeff Mason): “Iraq’s parliament called… for U.S. and other foreign troops to leave as a backlash grows against the U.S. killing of a top Iranian general, and President Donald Trump doubled down on threats to target Iranian cultural sites if Tehran retaliates. Deepening a crisis that has heightened fears of a major Middle East conflagration, Iran said it was taking another step back from commitments under a 2015 nuclear deal with six major powers.”
January 9 – Associated Press (Samya Kullab and Qassim Abdul-Zahra): “Iraq’s caretaker prime minister asked the U.S. secretary of state to start working out a road map for an American troop withdrawal from Iraq…, signaling his insistence on ending the U.S. military presence despite recent moves to de-escalate tensions between Iran and the U.S. Adel Abdul-Mahdi made the request… with Secretary of State Mike Pompeo… He also told Pompeo that recent U.S. strikes in Iraq were an unacceptable breach of Iraqi sovereignty and a violation of the two countries’ security agreements. The Iraqi leader asked Pompeo to ‘send delegates to Iraq to prepare a mechanism to carry out the parliament’s resolution regarding the withdrawal of foreign troops from Iraq’…”
January 8 – Financial Times (Kathrin Hille and Christian Shepherd): “There was a funfair atmosphere when Tainan Air Base in south Taiwan opened its doors to the public one Saturday morning in October. Multicoloured banners fluttered in the breeze, children pushed to get a front row spot and a ‘flying tigers’ team of pilots looped their planes overhead. But the motivation behind the display is deadly serious. Concerns are building in both Taipei and in the US — the unofficial guarantor of the island’s security — that China could be moving closer to launching the attack which it has been threatening for 70 years. ‘Militarily, the other side has been doing [its] homework for a couple of decades. The threat is real,’ says Enoch Wu, a Taiwanese former special forces office... ‘The [People’s Liberation Army] will achieve a certain credible capability to give that option to Beijing and say, here is that button you can push.’”
January 8 – Financial Times (Andrew England): “’Keep your hands off Libya’ was the blunt message delivered by Ghassan Salame, the frustrated UN envoy, when asked this week what he had to say to the foreign powers fuelling a civil war in the north African state. It is a sentiment shared by millions of Libyans whose devastated nation challenges war-torn Syria for the unwanted title of being home to the world’s most internationalised conflict. And there have been signs this week that it was about to get worse. On Sunday, Recep Tayyip Erdogan, Turkey’s president, announced that Turkish troops had been deployed to support the besieged UN-backed government in Tripoli. Hours later, General Khalifa Haftar, who triggered the conflict by launching an offensive on the Libyan capital in April, seized Sirte, a strategically and symbolically important port city. Both moves signalled a dangerous escalation.”
January 9 – Associated Press (Samya Kullab and Qassim Abdul-Zahra): “Iraq’s caretaker prime minister asked the U.S. secretary of state to start working out a road map for an American troop withdrawal from Iraq…, signaling his insistence on ending the U.S. military presence despite recent moves to de-escalate tensions between Iran and the U.S. Adel Abdul-Mahdi made the request… with Secretary of State Mike Pompeo… He also told Pompeo that recent U.S. strikes in Iraq were an unacceptable breach of Iraqi sovereignty and a violation of the two countries’ security agreements. The Iraqi leader asked Pompeo to ‘send delegates to Iraq to prepare a mechanism to carry out the parliament’s resolution regarding the withdrawal of foreign troops from Iraq’…”
January 8 – Financial Times (Kathrin Hille and Christian Shepherd): “There was a funfair atmosphere when Tainan Air Base in south Taiwan opened its doors to the public one Saturday morning in October. Multicoloured banners fluttered in the breeze, children pushed to get a front row spot and a ‘flying tigers’ team of pilots looped their planes overhead. But the motivation behind the display is deadly serious. Concerns are building in both Taipei and in the US — the unofficial guarantor of the island’s security — that China could be moving closer to launching the attack which it has been threatening for 70 years. ‘Militarily, the other side has been doing [its] homework for a couple of decades. The threat is real,’ says Enoch Wu, a Taiwanese former special forces office... ‘The [People’s Liberation Army] will achieve a certain credible capability to give that option to Beijing and say, here is that button you can push.’”
January 8 – Financial Times (Andrew England): “’Keep your hands off Libya’ was the blunt message delivered by Ghassan Salame, the frustrated UN envoy, when asked this week what he had to say to the foreign powers fuelling a civil war in the north African state. It is a sentiment shared by millions of Libyans whose devastated nation challenges war-torn Syria for the unwanted title of being home to the world’s most internationalised conflict. And there have been signs this week that it was about to get worse. On Sunday, Recep Tayyip Erdogan, Turkey’s president, announced that Turkish troops had been deployed to support the besieged UN-backed government in Tripoli. Hours later, General Khalifa Haftar, who triggered the conflict by launching an offensive on the Libyan capital in April, seized Sirte, a strategically and symbolically important port city. Both moves signalled a dangerous escalation.”
Thursday, January 9, 2020
Friday's News Links
[Reuters] Stocks march higher as Middle East tensions ease
[CNBC] US added 145,000 jobs in December, vs 160,000 expected
[AP] Boeing papers show employees slid 737 Max problems past FAA
[Reuters] Explainer: What is at stake in Taiwan's election
[MarketWatch] Opinion: Americans own a lot of stock right now — and that’s a bad sign
[Reuters] EU watchdog warns fund investors over cash back promises
[AP] Iraqi PM tells US to decide the mechanism for troop withdrawal
[Reuters] Australia urges quarter of a million to flee as winds fan huge bushfires
[Bloomberg] Summers Calls Bernanke Speech ‘Last Hurrah’ for Central Bankers
[Bloomberg] China’s Offshore Bond Defaults Increased to $3.6 Billion in 2019
[Bloomberg] China 2019 Offshore-Bond Defaulters Span an Airport, Solar Tech
[Bloomberg] Europe’s New Bond Sales Top $100 Billion in Record-Shattering Week
[Bloomberg] It's a Tidal Wave of Liquidity. And Waves Crash.
[WSJ] Fed’s Bullard, Kashkari Favor Holding Interest Rates Steady
[WSJ] Money-Losing Companies Mushroom Even as Stocks Hit New Highs
[WSJ] Low Liquidity Fueled Hidden Flash Crash in Junk Bonds
[WSJ] Chinese Developers Flock to Issue Dollar Debt
[FT] US-Iran tensions cast doubt on dollar’s haven credentials
[CNBC] US added 145,000 jobs in December, vs 160,000 expected
[AP] Boeing papers show employees slid 737 Max problems past FAA
[Reuters] Explainer: What is at stake in Taiwan's election
[MarketWatch] Opinion: Americans own a lot of stock right now — and that’s a bad sign
[Reuters] EU watchdog warns fund investors over cash back promises
[AP] Iraqi PM tells US to decide the mechanism for troop withdrawal
[Reuters] Australia urges quarter of a million to flee as winds fan huge bushfires
[Bloomberg] Summers Calls Bernanke Speech ‘Last Hurrah’ for Central Bankers
[Bloomberg] China’s Offshore Bond Defaults Increased to $3.6 Billion in 2019
[Bloomberg] China 2019 Offshore-Bond Defaulters Span an Airport, Solar Tech
[Bloomberg] Europe’s New Bond Sales Top $100 Billion in Record-Shattering Week
[Bloomberg] It's a Tidal Wave of Liquidity. And Waves Crash.
[WSJ] Fed’s Bullard, Kashkari Favor Holding Interest Rates Steady
[WSJ] Money-Losing Companies Mushroom Even as Stocks Hit New Highs
[WSJ] Low Liquidity Fueled Hidden Flash Crash in Junk Bonds
[WSJ] Chinese Developers Flock to Issue Dollar Debt
[FT] US-Iran tensions cast doubt on dollar’s haven credentials
Thursday Evening Links
[Reuters] Wall Street notches records on trade optimism, Apple gains
[Reuters] Trump says he may wait to finish Phase 2 China trade deal until after November
[Reuters] Fed's Evans says there could be no interest rate changes this year
[Reuters] 'Empty chairs' across Canada’s academic community after Iran plane crash
[Reuters] Iran likely downed Ukraine airliner with missiles -Canada's Trudeau, citing intelligence
[Bloomberg] Companies Are Rushing to Borrow Cheaply While They Still Can
[Bloomberg] A Record $83 Billion Bond Bill Is Looming Over Indian Companies
[Bloomberg] Insurer Facing $2 Billion Financial Hole Sparks Call for Rescue
[FT] Investors still snapping up short-term loans from Fed
[FT] China bond investors battle to claim cash after defaults
[FT] Taiwan’s main parties claim dirty tricks ahead of election
[Reuters] Trump says he may wait to finish Phase 2 China trade deal until after November
[Reuters] Fed's Evans says there could be no interest rate changes this year
[Reuters] 'Empty chairs' across Canada’s academic community after Iran plane crash
[Reuters] Iran likely downed Ukraine airliner with missiles -Canada's Trudeau, citing intelligence
[Bloomberg] Companies Are Rushing to Borrow Cheaply While They Still Can
[Bloomberg] A Record $83 Billion Bond Bill Is Looming Over Indian Companies
[Bloomberg] Insurer Facing $2 Billion Financial Hole Sparks Call for Rescue
[FT] Investors still snapping up short-term loans from Fed
[FT] China bond investors battle to claim cash after defaults
[FT] Taiwan’s main parties claim dirty tricks ahead of election
Wednesday, January 8, 2020
Thursday's News Links
[Reuters] Tech rally, trade hopes boost Wall Street to record highs
[Reuters] Oil steadies around levels prevailing before U.S.-Iran attacks
[Reuters] China's Vice Premier Liu to sign U.S. trade deal in Washington next week
[Reuters] Trump pulls back from more military action in Iran crisis, promises new sanctions
[AP] Soaring pork prices keep China’s inflation at 7-year high
[Reuters] China's December factory-gate price deflation eases, CPI remains high
[Reuters] Fed's Clarida says rate cuts were 'well timed,' policy likely to remain appropriate
[CNBC] Nearly all corporate CFOs say the economy is going to slow and the stock market is overvalued
[Reuters] Australia calls for another mass evacuation as monster bushfires return
[Bloomberg] Fed Economist Sees Long-Term Rates Near Zero in Mild Downturn
[Bloomberg] World’s Largest Car Market Reports Second Straight Annual Decline
[NYT] The Economy Is Expanding. Why Are Economists So Glum?
[FT] EM banks exposed to stress in FX swaps, a spillover from US repo markets
[FT] Taiwan: fears grow over China’s invasion threat
[FT] China is taking its ideological fight abroad
[FT] Eurozone governments rein in borrowing despite ultra-low rates
[Reuters] Oil steadies around levels prevailing before U.S.-Iran attacks
[Reuters] China's Vice Premier Liu to sign U.S. trade deal in Washington next week
[Reuters] Trump pulls back from more military action in Iran crisis, promises new sanctions
[AP] Soaring pork prices keep China’s inflation at 7-year high
[Reuters] China's December factory-gate price deflation eases, CPI remains high
[Reuters] Fed's Clarida says rate cuts were 'well timed,' policy likely to remain appropriate
[CNBC] Nearly all corporate CFOs say the economy is going to slow and the stock market is overvalued
[Reuters] Australia calls for another mass evacuation as monster bushfires return
[Bloomberg] Fed Economist Sees Long-Term Rates Near Zero in Mild Downturn
[Bloomberg] World’s Largest Car Market Reports Second Straight Annual Decline
[NYT] The Economy Is Expanding. Why Are Economists So Glum?
[FT] EM banks exposed to stress in FX swaps, a spillover from US repo markets
[FT] Taiwan: fears grow over China’s invasion threat
[FT] China is taking its ideological fight abroad
[FT] Eurozone governments rein in borrowing despite ultra-low rates
Wednesday Evening Links
[Reuters] Wall Street rises but ends well off day's highs amid renewed Middle East jitters
[Reuters] Oil prices sink nearly 5% to under $60 after Trump says Iran is standing down in Middle East fight
[CNBC] Two rockets reportedly hit Baghdad Green Zone, day after Iran missile attacks on US targets in Iraq
[Reuters] World Bank trims 2020 growth forecast amid slow recovery for trade, investment
[Bloomberg] Red Flags Emerge With Record-High Stocks Brushing Aside Political Turmoil
[WSJ] Low-Rated Companies Open 2020 With Debt Sales
[WSJ] Fed Clashes With Other U.S. Regulators Over Low-Income Loan Rules
[WSJ] ‘Taiwan Cannot Become Like Hong Kong’: A Fresh Challenge to China
[FT] Risks of US-Iran conflict will not quickly subside
[Reuters] Oil prices sink nearly 5% to under $60 after Trump says Iran is standing down in Middle East fight
[CNBC] Two rockets reportedly hit Baghdad Green Zone, day after Iran missile attacks on US targets in Iraq
[Reuters] World Bank trims 2020 growth forecast amid slow recovery for trade, investment
[Bloomberg] Red Flags Emerge With Record-High Stocks Brushing Aside Political Turmoil
[WSJ] Low-Rated Companies Open 2020 With Debt Sales
[WSJ] Fed Clashes With Other U.S. Regulators Over Low-Income Loan Rules
[WSJ] ‘Taiwan Cannot Become Like Hong Kong’: A Fresh Challenge to China
[FT] Risks of US-Iran conflict will not quickly subside
Tuesday, January 7, 2020
Wednesday's News Links
[Yahoo/Bloomberg] U.S. Stocks Lead Rebound as Iran Jolt Fades: Markets Wrap
[Reuters] Oil, gold prices retreat as worries abate over larger Mideast conflict
[Reuters] U.S. private payrolls accelerate in December
[Reuters] U.S. response awaited after Iran strikes at U.S. troops in Iraq to avenge general's killing
[Yahoo Finance] 5 major themes from this year's largest gathering of economists
[Reuters] Germany's 'misery continues' as industrial orders fall unexpectedly
[Reuters] Australian authorities warn bushfire reprieve will be over soon
[Bloomberg] Indian Official Sees Budget Gap Widening to 3.8%, Above Target
[Bloomberg] Gold Tops $1,600 After Iran Attacks Spark Flight to Havens
[Bloomberg] One Billion Animals Now Feared Dead in Australia’s Wildfires
[Bloomberg] China Steps Up Communist Party Control in State-Owned Firms
[WSJ] Iran Threatens Further Retaliation After Missile Strikes Against U.S.
[FT] India cuts growth forecast to slowest pace in 11 years
[FT] Foreign meddling and west’s impotence fuel Libyan chaos
[Reuters] Oil, gold prices retreat as worries abate over larger Mideast conflict
[Reuters] U.S. private payrolls accelerate in December
[Reuters] U.S. response awaited after Iran strikes at U.S. troops in Iraq to avenge general's killing
[Yahoo Finance] 5 major themes from this year's largest gathering of economists
[Reuters] Germany's 'misery continues' as industrial orders fall unexpectedly
[Reuters] Australian authorities warn bushfire reprieve will be over soon
[Bloomberg] Indian Official Sees Budget Gap Widening to 3.8%, Above Target
[Bloomberg] Gold Tops $1,600 After Iran Attacks Spark Flight to Havens
[Bloomberg] One Billion Animals Now Feared Dead in Australia’s Wildfires
[Bloomberg] China Steps Up Communist Party Control in State-Owned Firms
[WSJ] Iran Threatens Further Retaliation After Missile Strikes Against U.S.
[FT] India cuts growth forecast to slowest pace in 11 years
[FT] Foreign meddling and west’s impotence fuel Libyan chaos
Tuesday Evening Links
[CNBC] Dow futures fall more than 400 points following attack on airbase in Iraq
[Reuters] Stocks tumble, gold and crude soar after Iran strike on U.S. forces
[CNBC] Oil prices surge 4% following attack on Iraq airbase
[AFR] ASX turns lower on Iraq attacks, gold tops $US1600
[CNBC] Trump responds to Iranian attacks: ‘All is well!’
[Fox] Iran launches 'more than a dozen' missiles into Iraq targeting US, coalition forces, Pentagon says
[Reuters] Attacks underway on multiple locations in Iraq: U.S. official
[Daily Mail] Iran fires TENS of ballistic missiles at US bases in Iraq in operation 'Martyr Soleimani'
[CNN] Iranians take credit for rocket attack on base housing US troops
[AP] Iran warns US not retaliate over missile attack in Iraq
[Bloomberg] Stocks Plunge on Iran Escalation; Gold, Oil Surge: Markets Wrap
[Reuters] S&P 500, Dow dip as Middle East concerns persist; chips rally
[Reuters] Treasuries - Yields flat on mixed data; 10-year TIPS turn positive
[CNBC] December’s ISM non-manufacturing index signals better-than-expected expansion
[CNBC] Mortgage rates fall further, as buyers rush into the first open houses of 2020
[Reuters] 'We're going to war, bro': Fort Bragg's 82nd Airborne deploys to the Middle East
[Bloomberg] Wall Street Is Gaming Out All the Possible U.S.-Iran Scenarios
[Bloomberg] Bond ETFs Come of Age After $150 Billion Year Heralds New Order
[Bloomberg] Hedge Funds See 9% Gain in 2019 After Previous Year’s Losses
[Bloomberg] Ray Dalio’s Pure Alpha II Funds Loses Money for First Time Since 2000
[Bloomberg] Odey Hedge Fund Slips to Fourth Annual Loss in Five Years
[Reuters] Stocks tumble, gold and crude soar after Iran strike on U.S. forces
[CNBC] Oil prices surge 4% following attack on Iraq airbase
[AFR] ASX turns lower on Iraq attacks, gold tops $US1600
[CNBC] Trump responds to Iranian attacks: ‘All is well!’
[Fox] Iran launches 'more than a dozen' missiles into Iraq targeting US, coalition forces, Pentagon says
[Reuters] Attacks underway on multiple locations in Iraq: U.S. official
[Daily Mail] Iran fires TENS of ballistic missiles at US bases in Iraq in operation 'Martyr Soleimani'
[CNN] Iranians take credit for rocket attack on base housing US troops
[AP] Iran warns US not retaliate over missile attack in Iraq
[Bloomberg] Stocks Plunge on Iran Escalation; Gold, Oil Surge: Markets Wrap
[Reuters] S&P 500, Dow dip as Middle East concerns persist; chips rally
[Reuters] Treasuries - Yields flat on mixed data; 10-year TIPS turn positive
[CNBC] December’s ISM non-manufacturing index signals better-than-expected expansion
[CNBC] Mortgage rates fall further, as buyers rush into the first open houses of 2020
[Reuters] 'We're going to war, bro': Fort Bragg's 82nd Airborne deploys to the Middle East
[Bloomberg] Wall Street Is Gaming Out All the Possible U.S.-Iran Scenarios
[Bloomberg] Bond ETFs Come of Age After $150 Billion Year Heralds New Order
[Bloomberg] Hedge Funds See 9% Gain in 2019 After Previous Year’s Losses
[Bloomberg] Ray Dalio’s Pure Alpha II Funds Loses Money for First Time Since 2000
[Bloomberg] Odey Hedge Fund Slips to Fourth Annual Loss in Five Years
Monday, January 6, 2020
Tuesday's News Links
[Reuters] Stocks flat, oil cools as anxiety over Mideast recedes
[CNBC] US trade deficit falls more than expected to hit lowest level in three years
[CNBC] How the world’s most important oil chokepoint could factor into escalating US-Iran tensions
[Global Times] China, US could possibly sign phase one trade deal next week: sources
[Reuters] Japan December services sector shrinks at fastest pace in over three years: PMI
[CNBC] China keeps grain import quotas steady despite promise to buy more American, report says
[AP] Eurozone inflation hits 6-month high before oil price spike
[Reuters] Saudi deputy defence minister met Esper, discussed ongoing military cooperation - tweet
[Reuters] Australia readies as renewed bushfire threat looms, economic costs soar
[Bloomberg] China’s Inflation May Hit 5% in January on Oil Spike, Citi Says
[Bloomberg] China’s Next Crisis Brews in Taiwan’s Upcoming Election
[Bloomberg] Risks Loom for Indian State Banks Binging on Sovereign Bonds
[FT] Why top-tier bonds are not as safe as they might seem
[FT] Economists fear US is approaching limit of monetary policy
[CNBC] US trade deficit falls more than expected to hit lowest level in three years
[CNBC] How the world’s most important oil chokepoint could factor into escalating US-Iran tensions
[Global Times] China, US could possibly sign phase one trade deal next week: sources
[Reuters] Japan December services sector shrinks at fastest pace in over three years: PMI
[CNBC] China keeps grain import quotas steady despite promise to buy more American, report says
[AP] Eurozone inflation hits 6-month high before oil price spike
[Reuters] Saudi deputy defence minister met Esper, discussed ongoing military cooperation - tweet
[Reuters] Australia readies as renewed bushfire threat looms, economic costs soar
[Bloomberg] China’s Inflation May Hit 5% in January on Oil Spike, Citi Says
[Bloomberg] China’s Next Crisis Brews in Taiwan’s Upcoming Election
[Bloomberg] Risks Loom for Indian State Banks Binging on Sovereign Bonds
[FT] Why top-tier bonds are not as safe as they might seem
[FT] Economists fear US is approaching limit of monetary policy
Monday Evening Links
[Reuters] Wall St. brushes off Middle East tensions as tech-related shares gain
[MarketWatch] Gold closes at nearly 7-year high
[Reuters] Oil steadies as market ponders Iran's next move
[AP] Another major US dairy, Borden, seeks bankruptcy protection
[Bloomberg] China Needs More Than Just Rules to Tackle Rising Bond Defaults
[NYT] Awash in Disinformation Before Vote, Taiwan Points Finger at China
[WSJ] Iranians Rally in Display of Unity as Calls for Revenge on U.S. Deepen
[WSJ] Boeing Considers Raising Debt as MAX Crisis Takes Toll
[FT] US-Iran tensions bring risk back to markets
[FT] US influence in Iraq wanes as Iran strengthens grip
[MarketWatch] Gold closes at nearly 7-year high
[Reuters] Oil steadies as market ponders Iran's next move
[AP] Another major US dairy, Borden, seeks bankruptcy protection
[Bloomberg] China Needs More Than Just Rules to Tackle Rising Bond Defaults
[NYT] Awash in Disinformation Before Vote, Taiwan Points Finger at China
[WSJ] Iranians Rally in Display of Unity as Calls for Revenge on U.S. Deepen
[WSJ] Boeing Considers Raising Debt as MAX Crisis Takes Toll
[FT] US-Iran tensions bring risk back to markets
[FT] US influence in Iraq wanes as Iran strengthens grip
Sunday, January 5, 2020
Monday's News Links
[Reuters] Stocks wipe out new year gains; gold, oil soar on U.S.-Iran threat
[Reuters] Mideast tensions send yen to three-month peak
[Reuters] Trump stands by threat on Iranian cultural sites, warns of 'major retaliation'
[Reuters] Trump threatens to slap sanctions on Iraq ‘like they’ve never seen before’
[Reuters] Fed focuses on repo market exit strategy after avoiding year-end crunch
[Reuters] Fed faces new trade-offs, hunts for new model, in low-rate world
[Reuters] Fed's Williams says it is important to keep 2% inflation target amid low rates: WSJ
[Reuters] Huge crowds in Iran for general's funeral as new commander promises revenge
[AP] Asian countries brace to evacuate workers in Iraq, Iran
[Bloomberg] Why So Many Emerging Markets Are Blowing Up Right Now
[Bloomberg] Iran’s Currency Feels the Squeeze as Trump Intensifies Rhetoric
[WSJ] Iranians Rally in Display of Unity as Calls for Revenge on U.S. Deepen
[WSJ] It’s White-Knuckle Time for Buyers of Riskier Corporate Loans
[FT] Fed looks forward to ‘boring’ 2020 after frenetic year
[FT] US debt investors seek protection against inflation
[Reuters] Mideast tensions send yen to three-month peak
[Reuters] Trump stands by threat on Iranian cultural sites, warns of 'major retaliation'
[Reuters] Trump threatens to slap sanctions on Iraq ‘like they’ve never seen before’
[Reuters] Fed focuses on repo market exit strategy after avoiding year-end crunch
[Reuters] Fed faces new trade-offs, hunts for new model, in low-rate world
[Reuters] Fed's Williams says it is important to keep 2% inflation target amid low rates: WSJ
[Reuters] Huge crowds in Iran for general's funeral as new commander promises revenge
[AP] Asian countries brace to evacuate workers in Iraq, Iran
[Bloomberg] Why So Many Emerging Markets Are Blowing Up Right Now
[Bloomberg] Iran’s Currency Feels the Squeeze as Trump Intensifies Rhetoric
[WSJ] Iranians Rally in Display of Unity as Calls for Revenge on U.S. Deepen
[WSJ] It’s White-Knuckle Time for Buyers of Riskier Corporate Loans
[FT] Fed looks forward to ‘boring’ 2020 after frenetic year
[FT] US debt investors seek protection against inflation
Sunday Evening Links
[Reuters] Gold, oil surge in Asia as U.S., Iran exchange threats
[CNBC] Oil prices rise 1% in early trading as tensions in the Middle East mount
[Reuters] Iraq wants foreign troops out after air strike; U.S. urges leaders to reconsider
[Reuters] Iran says no limits on enrichment, stepping further from 2015 deal: TV
[Reuters] NATO to hold urgent meeting on Monday over Iraq-Iran crisis
[Reuters] Chinese delegation plans to travel to Washington to sign trade deal: SCMP
[Bloomberg] Gold Climbs to Highest Level Since 2013 on Iran-U.S. Tension
[Bloomberg] Draghi, Yellen Warn of Risks Facing Policy in Low-Rate World
[WSJ] Few Bank Failures Could Be a Warning Sign for U.S. Financial System
[CNBC] Oil prices rise 1% in early trading as tensions in the Middle East mount
[Reuters] Iraq wants foreign troops out after air strike; U.S. urges leaders to reconsider
[Reuters] Iran says no limits on enrichment, stepping further from 2015 deal: TV
[Reuters] NATO to hold urgent meeting on Monday over Iraq-Iran crisis
[Reuters] Chinese delegation plans to travel to Washington to sign trade deal: SCMP
[Bloomberg] Gold Climbs to Highest Level Since 2013 on Iran-U.S. Tension
[Bloomberg] Draghi, Yellen Warn of Risks Facing Policy in Low-Rate World
[WSJ] Few Bank Failures Could Be a Warning Sign for U.S. Financial System
Sunday's News Links
[Reuters] Gulf markets plunge on U.S.-Iran tensions, Aramco at lowest since IPO
[Reuters] Bernanke: Fed has ample clout to fight downturn if toolkit used properly
[Reuters] China's central bank says will keep monetary policy prudent, flexible and appropriate
[Reuters] Iran condemns Trump as 'terrorist in a suit' after attack threat
[Bloomberg] Saudi Default Risk Jumps as U.S.-Iran Tensions Flare: Chart
[NYT] Low Rates, Cheap Gas and Deeper Debt Sustain Car Buying Boom
[WSJ] High Cost of Wildfire Insurance Hurts California Home Sales
[Reuters] Bernanke: Fed has ample clout to fight downturn if toolkit used properly
[Reuters] China's central bank says will keep monetary policy prudent, flexible and appropriate
[Reuters] Iran condemns Trump as 'terrorist in a suit' after attack threat
[Bloomberg] Saudi Default Risk Jumps as U.S.-Iran Tensions Flare: Chart
[NYT] Low Rates, Cheap Gas and Deeper Debt Sustain Car Buying Boom
[WSJ] High Cost of Wildfire Insurance Hurts California Home Sales
Saturday, January 4, 2020
Saturday's News Links
[Reuters] Fed may need new approach to boost inflation, Daly says
[AP] New vehicle sales in US fell 1.3% in 2019 but still healthy
[Reuters] Tens of thousands march in Baghdad to mourn Soleimani, others killed in U.S. air strike
[Reuters] Russia's Lavrov, Iran's Zarif discuss Soleimani killing: statement
[Reuters] China tells Iran foreign minister that U.S. should stop 'abusing' use of force
[Reuters] Bushfires rage out of control across southeast Australia
[Bloomberg] Iran Flashpoint Confronts Investors With Unpriceable 2020 Risks
[Bloomberg] China to Support Troubled Financial Firms, Curb Property Risks
[AP] New vehicle sales in US fell 1.3% in 2019 but still healthy
[Reuters] Tens of thousands march in Baghdad to mourn Soleimani, others killed in U.S. air strike
[Reuters] Russia's Lavrov, Iran's Zarif discuss Soleimani killing: statement
[Reuters] China tells Iran foreign minister that U.S. should stop 'abusing' use of force
[Reuters] Bushfires rage out of control across southeast Australia
[Bloomberg] Iran Flashpoint Confronts Investors With Unpriceable 2020 Risks
[Bloomberg] China to Support Troubled Financial Firms, Curb Property Risks
Friday, January 3, 2020
Weekly Commentary: 2019 in Review
It cannot be overstated: Bubbles are of paramount importance – for markets, finance more generally, economies, and social and geopolitical stability. Two U.S. bursting episodes over the past twenty years would seem to make this proposition indisputable. I would add that Bubble Dynamics have never been more pertinent than they became over the past year. Apply monetary stimulus to a historic financial Bubble and you’re asking for serious trouble: The Story of a Perilous 2019.
Yet “Bubble” these days has no part in conventional analysis or dialogue – for central bankers, economists or market pundits. To even utter the word on CNBC or Bloomberg would suggest one is hopelessly detached from reality. From my vantage point, bullishness and New Paradigm thinking these days rivals that of the early-2000 peak. Today’s faith in central banking is unrivaled – the willingness to embrace egregious excess unmatched.
To summarize the 2019 policy backdrop in one word: capitulation. It was to be a year of monetary policy normalization. The new Fed chairman was to finally return policy rates to a more reasonable level. After leaving rates near zero for seven years, the Fed belatedly took a baby step in December 2015. A full year went by before mustering the courage for a second cautious step. And a year full later (December 2017) rates were still at 1.00%.
Policy rates were only up to 1.25% to 1.50% when Powell took the reins. Having delayed the process much too long, “normalization” was not going to go smoothly. Rates were taken to 2.25% (to 2.5%) by the end of 2018, and the wheels almost came off. Powell’s January 4th dovish U-turn essentially ended any notion of rate normalization. Avoiding market instability was the priority – and celebratory markets took full advantage. In 2019, the odds central bankers would ever actually tighten monetary conditions became exceedingly low.
To accurately comprehend 2019 demands attention to key Bubble Dynamics. First of all, to employ monetary stimulus in the late stage of a Bubble ensures instability. Conventional thinking – both in policy circles and the markets – was that with limited ammunition central bankers should utilize stimulus early and aggressively. Late-cycle Bubbles, by their nature, connote financial and economic fragilities.
There are at the same time powerfully-entrenched inflationary biases – including expansive infrastructures fostering higher asset prices. Policymaker focus on bolstering system resiliency ensures a precarious extension of “Terminal Phase” excess – in Credit, speculation, speculative leverage, risk intermediation, malfunctioning markets, resource misallocation and associated financial and economic maladjustment.
In the late phase of history’s greatest global financial Bubble, there’s the thinnest of lines between the onset of crisis and rip-roaring bull markets.
On Thursday, January 3rd, Goldman Sachs Credit default swap (5yr CDS) prices surged 19 to 131 bps – the high since March 2016 and the largest one-day move since 2013. In the currency markets, a “flash crash” saw stunning moves including an 8% intraday move in the Japanese yen/Australian dollar. Dislocation had begun to unfold across global derivatives markets. Panic buying saw Treasury yields sink 15 bps, pushing the collapse from November 8th highs (3.24%) to 70 bps. Corporate Credit spreads were blowing out, especially in junk debt. Deleveraging dynamics were global. For example, the spread between 10-year German bunds and the European periphery (i.e. Italy and Portugal) widened markedly. A major de-risking/deleveraging event had gathered momentum. Equities were under pressure, with the DJIA sinking 660 points during that fateful session.
The following day Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at a meeting of the American Economic Association. Only two weeks since the Fed’s December 19th rate increase and press conference, Powell’s comments were not expected to be monetary policy-focused. But the Chairman pulled out prepared comments and orchestrated a dramatic “dovish U-turn”: “…Policy is very much about risk management.” “We will be patient as we watch to see how the economy evolves…” “…Always prepared to shift the stance of policy and to shift it significantly if necessary…” “We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…”
Despite economic resilience and a 3.9% unemployment rate, the Fed was prepared to add monetary stimulus to support the markets. The DJIA rallied 747 points January 4th on Powell’s comments. It was a prescient market move signaling the Year of Monetary Disorder.
M2 “money” supply surged $1.024 TN, or 7.1%, in 2019, easily surpassing 2016’s record $880 billion expansion. This was 65% ahead of average annual M2 growth over the preceding decade. Moreover, Institutional Money Fund Assets (not included in M2) jumped $407 billion, or 21.9%, up from 2018’s $27 billion increase - and the strongest money market fund expansion since 2007. In a year of strong Credit growth, total third quarter U.S. Credit (Non-Financial, Financial and Foreign U.S. borrowings) jumped a nominal $1.075 TN (from Fed’s Z.1), the strongest quarterly gain since Q4 2007.
2019 was the year of “the everything rally;” FOMO – fear of missing out – the year’s amalgamation of Greed and Fear. Stocks, Treasuries, corporate Credit at home and abroad. Don’t ask why – just buy, and the more levered the better. With an enduring U.S. economic expansion, the S&P500 returned 32.61%. With Germany’s economy stagnating, the DAX index returned 25.48%. Fighting persistent recessionary forces, Italy’s MIB index returned a prosperous 33.80%. Recession or, in the case of the U.S., stagnant earnings were irrelevant.
After trading to a January high of 2.79%, 10-year yields sank below 1.50% in August. By late-July, the S&P500 had already gained more than 20%, with the Nasdaq100 up 26% and the Semiconductors surging almost 40%. Who was wrong, booming stocks or booming safe haven bonds? Monetary Disorder made everything seem right.
In a replay of the fall of 2007, Treasuries and safe haven government bonds rallied robustly in the face of bubbling equities prices. There was certainly a short squeeze element bolstering the marketplace, as hedges against Fed “normalization” were unwound. But, mainly, safe havens could monitor Bubble excess in the U.S. and a faltering Chinese Bubble and enjoy high confidence that global central bankers would be soon following through on promises to do “whatever it takes.” Lower market yields were instrumental in fostering risk market excess, and the greater the Bubbles inflated the more the safe havens anticipated rate cuts and more QE.
Treasuries, bunds, Swiss bonds, and Japan’s JGBs were transformed into the most enticing financial instruments imaginable. Central banks were essentially guaranteeing they would perform well. And in the event of global instability they would provide spectacular returns. A sure moneymaker as well as a trustworthy hedge against “risk off,” the safe haven bond rally morphed into a historic speculative blow-off. Ten-year Treasury yields traded to a low of 1.46% on August 3rd – an embarrassingly high relative yield. Bund yields collapsed all the way to negative 0.71%, with Swiss bonds down to negative 1.12%. Japanese 10-year government yields fell to negative 0.29%.
In a historic development (and emblematic of Acute Global Monetary Disorder), at the August peak $17 TN of global bonds traded with negative yields. Governments in Slovenia, Slovakia, Latvia, Austria, Ireland, Finland, Netherlands, Belgium and France enjoyed charging creditors for holding their money. After trading to 4.37%, Greek yields sank as low as 1.14%. Italian yields dropped from 2.95% to 0.81%, and Spain from 1.51% to 0.03%. Portuguese yields fell from 1.81% to 0.07%. Crazy.
May 28 – Bloomberg: “Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers. The takeover of Baoshang Bank Co. -- announced with scant explanation on Friday night -- left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades. Regulators have said they’ll guarantee Baoshang’s smaller depositors, and while they’ve warned some creditors of potential losses, they haven’t said what the final payouts could be or given public guidance on whether the takeover will be a blueprint for other lenders.”
China financial and economic fragilities were a growing market concern over the summer. Instability erupted in China’s money market, with the vulnerable (and now large) small banking sector struggling for financing. And with U.S. trade tensions escalating, the prospect of Beijing officials losing control was palpable. China’s currency faltered in August, with the dollar/renminbi breaching the key 7.00 level on August 5th – on its way to 7.18 by September 3rd.
After repeated failed attempts to rein in Credit excess, tightening measures adopted by a more resolute Beijing actually slowed Credit growth in 2018. Akin to U.S. rate “normalization”, this was not going to go smoothly. And that financial and economic vulnerabilities rapidly manifested with China in the throes of heated trade negotiations with the Trump administration ensured Beijing would once again let off the brake and pump the accelerator.
China saw record total system Credit growth (approaching $4.0 TN) in 2019 – as double-digit Credit growth compounds year after year. In the first 11 months of 2019, Aggregate Financing (excluding central government borrowings) expanded $3.028 TN, 19.3% ahead of comparable 2018 growth. November Consumer (chiefly mortgage) borrowings were up 15.3% y-o-y (36% in two, 66% in three and 139% in five years), as stimulus doused gas on China’s historic mortgage finance and apartment Bubbles.
Fueled by China, Trillion dollar U.S. fiscal deficits and fiscal stimulus around the world, 2019 likely saw record global Credit growth. In the end, systemic fears and the resulting summer global bond price melt-up bolstered vulnerable financial systems and economies. Argentine bonds and the peso crashed in August, but for the most part liquidity abundance sustained both emerging and developed market Bubbles. A less accommodative world of tighter finance and risk aversion would have been inhospitable to the likes of Turkey, Lebanon, Indonesia, Chile and many others. Booming liquidity and markets made a dud out of Brexit.
As the marginal source of EM finance and economic demand, a bursting – as opposed to inflating – Chinese Bubble would have had profoundly negative consequences. It’s remarkable how bullish markets have become on EM considering the rising vulnerability of Asia, Latin America and Eastern Europe to “risk off” trading dynamics.
From my Q3 2019 Z.1 analysis: “Total “repo” (“Federal Funds and Security Repurchase Agreements”) Liabilities jumped another $222 billion during the quarter to $4.502 TN, the high going back to Q3 2008. Over the past year, “repo” surged a record $932 billion, or 26.1%. For perspective, “repo” Liabilities rose on average $51.9 billion annually over the past five years (2014-2018). And the $932 billion gain during the past four quarters is more than double the biggest annual rise over the past decade (2010’s $422bn gain that followed the $1.672 TN two-year crisis-period contraction). Ominously, the past year’s gain also surpasses the previous record four-quarter gain ($824bn) for the period ended in June 2007.”
My thesis holds that unprecedented speculative leverage has accumulated throughout this most protracted period of monetary stimulus. Securities finance has boomed in so-called “repo” markets in the U.S., Europe and Japan, along with China and throughout Asia and the offshore financial centers (i.e. Cayman Islands, Luxembourg, etc.). Derivatives now truly rule the world. The Fed’s bullish U-turn, the ECB’s quick restart of QE, Japan’s endless stimulus, and scores of rate cuts globally incentivized wild speculative excess that culminated during the summer. “Blow-offs,” however, ensure vulnerability to abrupt reversals, deleveraging and liquidity issues.
Instability erupted in the U.S. repo market in September. Pundits pointed to a confluence of huge Treasury auctions, corporate tax payments and a shortage of available bank reserves. Yet it was no coincidence that illiquidity issues accompanied an abrupt bond market reversal. After trading at 1.47% on September 4th, 10-year Treasury yields were back up to 1.90% by September 13th.
(Worth noting at about this time, on September 16th, there were attacks on Saudi oil facilities. WTI crude prices immediately spiked from $53.94 to a high of $60.37, though prices closed back below $55 by September 27th.)
The “repo” market is sacred financial “plumbing”. It was, after all, the epicenter of 2008’s crisis eruption. Critical lessons were either never learned or conveniently forgotten. Building upon the dovish U-turn, the Powell Fed embraced “whatever it takes” to ensure liquidity was not an issue during the fourth quarter and especially for typical year-end funding pressures. Recalling Y2K, it was in the end a bogeyman that had the Fed pouring fuel on a raging speculative Bubble. Powell’s “midcycle adjustment” was completely abandoned. There was for now and the foreseeable future one cycle: easy “money” – and the only uncertainty: How easy? The Ultimate Asymmetric Policy.
Federal Reserve Credit expanded $395 billion in the final 16 weeks of year. Like rates, a year that began with expectations of Federal Reserve balance sheet “normalization” ended with aggressive quantitative easing operations. The Fed announced in October it would purchase $60 billion of T-bills monthly through at least the first-half of 2020, with Fed Credit ending 2019 at $4.121 TN (high since November 2018).
Goldman Sachs CDS ended 2019 at 52.39 bps, only a couple basis points from the low going all the way back to 2007. From a high of 465 on January 3rd, high-yield corporate CDS sank to lows since 2007 (ending 2019 at 280 bps). A notable 80 bps of the high-yield CDS decline ensued following the October announcement of the Fed’s balance sheet expansion strategy. And after trading to a high of 95.5 on December 24, 2018, investment-grade CDS closed out 2019 at 45.3, also near the lows since before the ’08 crisis.
The S&P500 returned 10.4% in the 11 weeks following the Fed’s announcement. The Nasdaq100 (NDX) returned 13.1%, while the Semiconductors (SOX) jumped 19.4%. The Banks (BKX) returned 17.9% and the Broker/Dealers (XBD) 17.3%. The small cap Russell 2000 returned 12.7% in 11 weeks. The NYSE Healthcare Index returned 14.9%, as the Biotechs (BTK) surged 21.7%.
Quite a squeeze unfolded. The Philadelphia Oil Services Index returned 26.2% between the Fed announcement and year-end. Tesla jumped 71% in 11 weeks. Advanced Micro Devices surged 62% to end 2019 with a 148% gain. Target gained 94% for the year, outpacing Chipotle’s 93.9% and Lululemon’s 90.5%. Apple rose 86.2%, trouncing Facebook (56.6%), Microsoft (55.3%), Adobe (45.8%) and Google (29.1%). Xerox jumped 86.6%. There were 56 stocks within the Nasdaq Composite that posted 2019 gains of better than 200% (174 at least doubled).
The announcement of a “phase one” U.S./China trade deal stoked the year-end rally. There is still little to indicate must substance in this agreement but, like with so many things, it doesn’t really matter. The geopolitical backdrop was fraught with great risk – that markets were content to ignore. Even Thursday night’s U.S. assassination of Iran’s Qassem Soleimani hit the S&P500 for only 0.7% (Russell 2000 down 0.35%). As has become typical, safe haven assets seem more keenly focused. Ten-year Treasury yields sank nine bps Friday to 1.79%, with bunds down six bps to negative 0.29%. Riding blustery Monetary Disorder and geopolitical tailwinds, Gold surged $42 this week to a six-year high $1,552.
It was a year of excess too many to mention. Hedge fund billionaire paid a record $238 million for a central park apartment – followed by $122 million for a London mansion and $99 million for a property neighboring his oceanside Palm Beach estate. “Beauty mogul” Kylie Jenner becomes a billionaire at 22. Art and collectable markets continued to go bananas. From MarketWatch: “An Italian artist duct-taped a banana to a gallery wall in Miami as part of the Art Basel festival — and it sold for $120,000.”
Compared to financial markets, the economy was rather mundane. Real GDP expanded 3.1% in Q1, 2.0% in Q2 and 2.1% in Q3. Inverting during the summer, the yield curve proved a much better harbinger of central bank stimulus than a predictor of the real economy. The IPO market had its ups and downs, with the more ridiculous deals (i.e. WeWork) performing poorly or not at all. While the U.S. was not immune to global manufacturing woes, the service sector boom soldiered on. Not receiving the attention it deserved, U.S. housing gathered momentum. Homebuilder confidence jumped to a 20-year high, as building starts and permits rose to the strongest levels since before the crisis.
The year of Monetary Disorder only exacerbated wealth inequalities. The country became only further divided. When it hardly seemed possible, the political environment digressed further into the embarrassing and alarming. President Trump was impeached. There should be ample shame to be spread around. Both parties should be ashamed of the fiscal recklessness that became firmly entrenched in 2019. Debt and deficits don’t matter. Where is the morality in leaving such debt to our children and grandchildren? As the Fed capitulated on “normalization,” markets completely renounced their function of disciplining excess.
In all the Roaring 2019 payoffs in securities, derivatives and asset markets, Capitalism atrophied into a shell of its former self. Chronically Unsound Money & Credit and the Inevitability of Monetary Disorder. Things can go crazy at the end of cycles. 2019 Welcomed Wacko and Unhinged. In a nutshell, it’s one hell of a portentous backdrop – that passes for now as a permanent plateau of prosperity. I’ll leave future prospects for another day.
For the Week:
The S&P500 slipped 0.2% (2019 return 31.48%), while the Dow was about unchanged (25.34%). The Utilities declined 0.8% (26.82%). The Banks lost 0.9% (36.13%), and the Broker/Dealers dipped 0.2% (24.98%). The Transports declined 0.2% (20.83%). The S&P 400 Midcaps declined 0.3% (26.17%), and the small cap Russell 2000 fell 0.5% (25.49%). The Nasdaq100 increased 0.3% (39.46%). The Semiconductors slipped 0.2% (63.25%). The Biotechs dropped 2.4% (20.43%). With bullion surging $41.6, the HUI gold index increased 03% (52.33%).
Three-month Treasury bill rates ended the week at 1.4775%. Two-year government yields declined six bps to 1.53% (down 92bps in 2019). Five-year T-note yields fell nine bps to 1.59% (down 82bps). Ten-year Treasury yields dropped nine bps to 1.79% (down 77bps). Long bond yields fell seven bps to 2.24% (down 63bps). Benchmark Fannie Mae MBS yields dropped eight bps to 2.63% (down 78bps).
Greek 10-year yields declined three bps to 1.39% (down 297bps in 2019). Ten-year Portuguese yields slipped three bps to 0.36% (down 128bps). Italian 10-year yields fell three bps to 1.35% (down 133bps). Spain's 10-year yields dipped two bps to 0.39% (down 95bps). German bund yields declined two bps to negative 0.28% (down 52bps). French yields dipped two bps to 0.03% (down 59bps). The French to German 10-year bond spread was little changed at 31 bps. U.K. 10-year gilt yields fell two bps to 0.74% (down 46bps). U.K.'s FTSE equities index declined 0.3% (2019 gain 12.1%).
Japan's Nikkei Equities Index declined 0.8% (2019 gain 18.2%). Japanese 10-year "JGB" yields slipped a basis point to negative 0.01% (down 1bp in 2019). France's CAC40 was little changed (up 26.4%). The German DAX equities index declined 0.9% (up 25.5%). Spain's IBEX 35 equities index dipped 0.6% (up 11.8%). Italy's FTSE MIB index slipped 0.2% (up 28.3%). EM equities were mostly higher. Brazil's Bovespa index gained 1.0% (up 27.1%), and Mexico's Bolsa rose 0.8% (up 4.6%). South Korea's Kospi index fell 1.3% (up 7.7%). India's Sensex equities index slipped 0.3% (up 14.4%). China's Shanghai Exchange surged 2.6% (up 22.3%). Turkey's Borsa Istanbul National 100 index was about unchanged (up 25.4%). Russia's MICEX equities index gained 0.8% (up 28.6%).
Investment-grade bond funds saw outflows of $573 million, and junk bond funds posted outflows of $445 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.72% (down 79bps y-o-y). Fifteen-year rates fell three bps to 3.16% (down 83bps). Five-year hybrid ARM rates added one basis point to 3.46% (down 52bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 4.04% (down 28bps).
Federal Reserve Credit last week added $1.0bn to $4.121 TN, with a 16-week gain of $395 billion. Over the past year, Fed Credit expanded $92.4bn, or 2.3%. Fed Credit inflated $1.311 Trillion, or 47%, over the past 373 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.0 billion last week to $3.398 TN. "Custody holdings" increased $9.2 billion, or 0.3% y-o-y.
M2 (narrow) "money" supply gained $4.7bn last week to a record $15.425 TN. "Narrow money" surged $1.024 TN, or 7.1%, over the past year. For the week, Currency slipped $0.7bn. Total Checkable Deposits gained $8.1bn, and Savings Deposits added $3.1bn. Small Time Deposits dipped $2.0bn. Retail Money Funds fell $3.8bn.
Total money market fund assets jumped $27.5bn to $3.632 TN, with institutional money fund Assets up $21.3 billion. Total money funds gained $584bn y-o-y, or 19.2%.
Total Commercial Paper declined $4.7bn to $1.126 TN. CP was up $80.4bn, or 7.7% year-over-year.
Currency Watch:
The U.S. dollar index gained 0.33% to 96.50 during 2019. For the year on the upside, the Canadian dollar increased 4.98%, the British pound 3.94%, the Mexican peso 3.82%, the South African rand 2.48%, the Swiss franc 1.60%, the Singapore dollar 1.26%, the Japanese yen 0.99% and the New Zealand dollar 0.31%. On the downside, the Swedish krona declined 5.46%, the Brazilian real 3.87%, the South Korean won 3.49%, the euro 2.22%, the Norwegian krone 1.65% and the Australian dollar 0.4%. The Chinese renminbi declined 1.22% versus the dollar in 2019.
For the week, the U.S. dollar index slipped 0.2% to 96.838. For the week on the upside, the Japanese yen increased 1.3%, the Canadian dollar 0.6%, the Singapore dollar 0.2% and the Swiss franc 0.2%. On the downside, the South African rand declined 1.9%, the Swedish krona 0.7%, the New Zealand dollar 0.5%, the South Korean won 0.4%, the Australian dollar 0.4%, the Mexican peso 0.3%, the Brazilian real 0.3%, the Norwegian krone 0.2%, and the euro 0.1%. The Chinese renminbi increased 0.4% versus the dollar this week.
Commodities Watch:
The Bloomberg Commodities Index was little changed this week (up 5.1% in 2019). Spot Gold jumped 2.8% to $1,552 (up 18.4%). Silver gained 1.2% to $18.151 (up 15.3%). WTI crude jumped $1.33 to $66.05 (up 40%). Gasoline was little changed (up 28%), while Natural Gas sank 4.5% (down 25%). Copper fell 1.5% (up 6%). Wheat slipped 0.3% (up 11%). Corn declined 0.9% (up 3%).
Market Instability Watch:
December 31 – Financial Times (Keiko Morris): “The US Federal Reserve succeeded in keeping a lid on short-term borrowing costs on the final day of the year after injecting billions of dollars into the market to ease a possible cash crunch. The cost of borrowing cash overnight in the repo market, where investors exchange high-quality collateral such as Treasuries for funding, rose to 1.88% on Tuesday before falling over the first couple of hours of trading to 1.55%... The markets arm of the central bank went all out to ensure the year-end period went smoothly, injecting $255.6bn to keep money flowing through the financial system. It had said it would offer up to $490bn, depending on demand.”
December 31 – Bloomberg (Vildana Hajric): “U.S. stocks capped one of the best years of the past decade with a slight gain, pushing the S&P 500 to an annual advance of 29% and a record $5.9 trillion in value added. The dollar fell for a fourth session and Treasuries slumped. The Nasdaq 100 Index notched a 38% gain for the year, its best since 2009… Ten-year Treasuries yielded 1.92%, down more than 75 bps in the year. Gold looked to cap its best year since 2010, while crude oil pared its rise to 35%. European equities… notched a 23% gain in 2019, the most since 2009.”
December 31 – Bloomberg (Brian Smith): “In a decade of extreme wealth creation in markets, few assets did more to enrich investors than stocks in the Nasdaq 100 Index. Their combined value jumped by more than $7 trillion, ending with the best year since the bull run began. Powered by a near-doubling in Apple Inc. and gains exceeding 50% in Microsoft Corp. and Facebook Inc., the tech-heavy gauge surged 38% over the past 12 months, the biggest increase since 2009.”
December 29 – Reuters (Saqib Iqbal Ahmed): “What do you do when daily stock market gyrations all but dry up? Apparently, trade volatility like never before. Among the myriad Wall Street legacies of the soon-ending 2010s has been the emergence of market volatility - or the magnitude of security price swings over short time spans - as an asset class unto itself. It is all the more notable against the backdrop of the decade’s fairly persistent market calm. The Cboe Volatility Index (VIX)… is on track to end the decade at a level about a third lower than its lifetime average... With the S&P 500 Index nearly tripling since the end of 2009, the average level of the VIX this decade is the lowest of the three since it launched in the early 90s, even with a number of periodic spikes higher. Nonetheless, trading volatility, or ‘vol’ in Wall Street parlance, came of age in a big way in the ‘10s.”
December 30 – Bloomberg (Masaki Kondo and Hiroko Komiya): “As Japan enters a six-day New Year break, a sense of anxiety over the possibility of another flash crash is gripping currency traders. The Financial Futures Association of Japan has already warned of market instability as the holidays create a liquidity vacuum. Meanwhile, importers are preparing to deal with a potential repeat of the turmoil that took place on Jan. 3 this year, when the yen gyrated wildly and surged against its peers. One red flag to watch for this time is the Turkish lira. Japan’s retail investors speculate on a number of currencies, and are currently most bullish on the lira…”
December 31 – Bloomberg (Paula Seligson): “Triple C bonds have had their best month since January as the energy sector rallies and trade-war induced jitters ease. The Bloomberg Barclays Caa US High Yield Index gained 4.98% in December, the first positive return since July and the best since 5.29% in January. Year to date, the broad high-yield index has returned 14.3%, compared to a 9.5% gain for CCC bonds.”
Trump Administration Watch:
December 31 – Reuters (Idrees Ali and Kanishka Singh): “U.S. President Donald Trump blamed Iran… for ‘orchestrating’ an attack on the U.S. embassy in Baghdad and said he would hold Tehran responsible, as officials said more Marines were expected to be sent to the mission. ‘Iran killed an American contractor, wounding many. We strongly responded, and always will. Now Iran is orchestrating an attack on the U.S. Embassy in Iraq. They will be held fully responsible. In addition, we expect Iraq to use its forces to protect the Embassy, and so notified,’ Trump said on Twitter.”
Federal Reserve Watch:
December 31 – Reuters (Karen Brettell): “The Federal Reserve averted a year-end funding squeeze on Tuesday as large banks took only a small portion of $150 billion on offer in its last overnight repo operation of 2019, and the cost of borrowing fell to its lowest level since March 2018… The Fed has thrown $255.6 billion into the funding market through early January to ensure the financial system operates smoothly over the choppy year-end period. It will continue pumping tens of billions a day into the repo market through the end of January at least, including up to another $185 billion in one-day and term deals on Thursday, when the market kicks off the new year.”
December 29 – Bloomberg (Alister Bull): “Federal Reserve projections show no interest-rate changes next year but the annual rotation among voters could still influence policy as incoming members include an outspoken dove while two hawks depart. Minneapolis Fed chief Neel Kashkari, who called vocally for rate cuts during 2019, is the clear dove among the four new voters. He joins alongside Robert Kaplan from Dallas, Philadelphia’s Patrick Harker and Loretta Mester from Cleveland. Interest-rate forecasts by Fed officials next year showed 13 expected no change and four penciled in a quarter percentage-point hike, according to the summary of economic projections… showing a fairly high degree of unity as the country heads into a U.S. presidential election year.”
U.S. Bubble Watch:
December 29 – Wall Street Journal (Maureen Farrell): “A government shutdown halted IPOs in January. Then ride-hailing companies Lyft Inc. and Uber Technologies Inc. debuted in March and May, respectively. Instead of being met with hype, they received wariness from investors concerned about the companies’ prolific losses. Their stocks fell. From there, investors grew increasingly nervous about the remaining slate of IPO companies bathed in red ink. Pinterest Inc., Slack Technologies Inc. and SmileDirectClub Inc.—which lose money despite being some of the fastest-growing and most highly valued startups in the world—failed to excite investors. WeWork’s parent company and Endeavor Group Holdings Inc. couldn’t even get their troubled IPOs off the ground… In 2019 through Thursday, 211 companies that went public raised $62.33 billion—far below expectations that offerings could eclipse 1999’s record of nearly $108 billion. 2019 still registered the most money raised since 2014…”
December 31 – Bloomberg (Jeff Kearns): “Home prices in 20 U.S. cities rose at the fastest pace in five months in October, posting a third straight acceleration as real estate markets showed fresh strength at the start of the fourth quarter. The S&P CoreLogic Case-Shiller index of property values advanced 2.2% from October 2018… Prices rose 0.4% from a month earlier… also topping projections. A separate report from the Federal Housing Finance Agency showed house prices climbed 0.2% in October from the previous month… Prices nationwide rose 5% from a year earlier, increasing in all nine regions measured…”
January 2 – CNBC (Diana Olick): “The severe shortage of homes for sale is upending the sales calendar for the whole housing market. Spring has historically been the busiest buying season, but as competition for homes heats up across the country, January is the new April. Spring starts now… ‘As shoppers modify their strategies for navigating a housing market that has become more competitive due to rising prices and low inventory, the search for a home is beginning earlier and earlier,’ said George Ratiu, senior economist at realtor.com. ‘With housing inventory across the U.S. expected to reach record lows in 2020, we expect to see this trend continue into the new year.’ The number of homes for sale in November… was down 9.5% annually, and the supply of entry-level homes, priced below $200,000 was a stunning 16.5% lower than in 2018.’”
January 1 – CNBC (Patti Domm): “Weekly earnings for employees of small businesses grew at an annual rate of 4.1% at the end of the year, the fastest pace since the Paychex/IHS Markit Small Business Employment Watch began. The employment report began making annual comparisons in 2011… Hours worked were up 1% from the same period last year… ‘Small business job gains have flattened in the second half of the year as labor markets prove very tight,’ said James Diffley, chief regional economist at IHS Markit. ‘In response, weekly earnings have accelerated, surging from 2.49% mid-year to 4.13% at year-end.’”
December 30 – Wall Street Journal (Yuka Hayashi): “The growth of online lending has been a boon to hair salons, bakeries and other small businesses that don’t qualify for bank credit. Yet this tech-enabled source of credit can mire some in debt they can’t repay, raising concern about inadequate regulation. Some are extending credit at sky-high rates with opaque terms for costly fees and conditions, drawing comparisons with payday lenders who target consumers in need of quick cash… ‘There is a significant number of bad actors who are mostly unregulated,’ said Luz Urrutia, chief executive of Opportunity Fund… ‘They are really wreaking havoc across America’s small businesses.’ Nearly a third of the small businesses surveyed applied for online loans in 2018, up from 19% in 2018…”
January 1 – Wall Street Journal (Ryan Dezember): “The bill is coming due for the shale industry’s price war with OPEC. North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years, starting with more than $40 billion in 2020, according to Moody’s… It is a tab that producers, pipeline operators and oil-field service companies have run up battling the Organization of the Petroleum Exporting Countries for global market share. It is unclear how they will repay it all.”
January 1 – Reuters (Jennifer Hiller and Liz Hampton): “Vastly slower U.S. oil growth this year and the prospect of a plateau for the world’s top oil producer have signaled a new and unfamiliar era of self-restraint for the go-go shale industry. Spending cuts and production declines common to shale wells mean U.S. output growth is expected to brake from 2019’s pace that pushed domestic production past 13 million barrels per day (bpd). Some analyst forecasts for next year call for growth to slow, potentially to a rate of just 100,000 new bpd.”
December 28 – CNBC (Lauren Thomas): “2019 brought with it more retail bankruptcies. And the implications have been more store closures, thousands of lost jobs and an vastly different retail landscape that doesn’t look anything like where your parents used to shop. While some retailers filed for Chapter 11 bankruptcy protection for the first time this year, others went through a so-called Chapter 22 scenario, where it was their second time in bankruptcy court. That included Z Gallerie and Charming Charlie. And some retailers, like discount chain Fred’s, ended up liquidating.”
Fixed-Income Bubble Watch:
December 31 – CNSNews (Terence P. Jeffrey): “The federal debt increased by a record $10,796,419,662,320 in the decade that is coming to a close today… This was the first decade in the history of the nation when increases in the federal debt averaged more than $1 trillion per year. The total federal debt accumulated during the decade has equaled approximately $83,967 per household.”
December 29 – Reuters (Joshua Franklin, Kate Duguid): “Whatever nickname ultimately gets attached to the now-ending Twenty-tens, on Wall Street and across Corporate America it arguably should be tagged as the ‘Decade of Debt.’ With interest rates locked in at rock-bottom levels courtesy of the Federal Reserve’s easy-money policy after the financial crisis, companies found it cheaper than ever to tap the corporate bond market… Bond issuance by American companies topped $1 trillion in each year of the decade that began on Jan. 1, 2010, and ends on Tuesday at midnight, an unmatched run… In all, corporate bond debt outstanding rocketed more than 50% and will soon top $10 trillion, versus about $6 trillion at the end of the previous decade. The largest U.S. companies - those in the S&P 500 Index account for roughly 70% of that, nearly $7 trillion.”
December 30 – Bloomberg (Caleb Mutua): “It’s been such a stellar year for U.S. corporate credit markets that it’s almost unfair for 2020. A number of Wall Street’s most prominent credit analysts say 2019 will simply be too tough to beat. The supply of new U.S. corporate investment-grade bonds in 2020 should decline with spreads expected to widen through the year, while returns are projected to significantly slip from over 14% -- currently the best in all of U.S. fixed income.”
January 2 – Bloomberg (Brandon Kochkodin): “S&P Global Ratings was the most bearish on U.S. corporate debt in 2019 than at any other point in the last decade. Last year saw the most credit ratings downgrades for U.S. companies relative to upgrades since 2009… That didn’t stop the money from piling in. The Bloomberg Barclays U.S. Aggregate Bond Index surged 8.7% in 2019, its best year since 2002… Investment grade U.S. corporate debt returned 14.5%, its best year in the decade. The credit rating agency issued downgrades for 676 issuers compared to 352 upgrades, which translated to an upgrade to downgrade ratio of 0.52 for the year. Most of those cuts, 580 in total, were applied to the high-yield corner of the market compared to just 194 upgrades.”
December 29 – Wall Street Journal (Julia-Ambra Verlaine): “Downgrades on U.S. leveraged loans are picking up, a sign of fragility in the booming corporate debt market. The ratio of downgrades to upgrades in the S&P/LSTA Leveraged Loan Index rose in the 12 months through September to nearly 3 to 1—the highest reading since 2009. A total of 282 issuers were downgraded from the beginning of January through Oct. 11, up from 244 in all of 2018 and 33 in 2017... Leveraged loans are junk-rated corporate loans, a favorite financing source of private-equity firms seeking to buy up companies they see as undervalued, or in need of a makeover to turn a profit. They are often made to highly indebted companies with poor credit ratings.”
December 30 – Bloomberg (Natalie Harrison and Kelsey Butler): “U.S. leveraged loans are on target for their best returns in three years, buoyed by a late-year rally in prices as recession fears ease and investors seek yield. Meanwhile U.S. corporate bond spreads tightened to the lowest level since February 2018. The benchmark S&P/LSTA Total Return Index rose 1.56% in December. That boosted returns for the year to 8.58%, the highest since 2016, and a strong improvement from the 0.44% gain in 2018.”
December 31 – Wall Street Journal (Keiko Morris): “The student-housing sector, which had become a darling of real-estate investors in recent years, is running into turbulence. About 3.9% of the debt backed by student housing that was converted into commercial mortgage securities was more than 60 days late at the end of November, according to Fitch… That is up from 2.78% one year earlier… By comparison, delinquencies were hitting only 0.46% of commercial mortgage securities loans backed by the broader residential rental apartment sector, which includes student housing, at the end of November… Loan delinquencies for student-housing properties have increased to about 56% of all apartment sector delinquencies in November 2019, from 42% in November 2018.”
China Watch:
December 30 – Bloomberg (Yalman Onaran): “The decade after the global financial crisis has produced a tectonic shift in debt markets: While banks and consumers across the U.S. and Europe deleveraged, Chinese borrowers went on a binge. Bonds issued by Chinese entities account for about 12% of debt securities outstanding, up from 2% in 2007, according to… the Bank for International Settlements. The U.S. share dropped by 4 percentage points to 36% while the EU’s shrank by 8 percentage points to 24%... Chinese companies and local governments have gotten more accustomed to tapping bond markets in recent years, adding to borrowing from the nation’s banks. But China’s financial system has also swelled since 2007. Assets at the country’s top four banks have quadrupled in dollar terms and now fill four of the top five spots among lenders globally.”
December 31 – Reuters (Cate Cadell and Kevin Yao): “China’s central bank said… it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91bn) in funds to shore up the slowing economy. The People’s Bank of China (PBOC) said… it will cut banks’ reserve requirement ratio (RRR) by 50 bps, effective Jan. 6. The move would bring the level for big banks down to 12.5%. The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.”
December 29 – Reuters (Kevin Yao): “China’s central bank will use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans, in a step that analysts say could help lower borrowing costs and underpin economic growth. Beijing has unveiled a raft of pro-growth measures this year, including tax cuts, more infrastructure spending, reductions in the amount of cash banks must keep on reserve and lending rates to boost credit.”
December 29 – Financial Times (William Rhodes): “Two years ago, Zhou Xiaochuan, then China’s central bank governor, told a press conference at the 19th Communist party Congress in Beijing that too many procyclical factors in the economy and excessive optimism risked generating ‘accumulating contradictions that could lead to the so-called Minsky moment’. There is still a danger of a ‘Minsky moment’ hitting China’s economy… Today, China’s debt-to-gross domestic product ratio is more than 300% and continues on a dangerously upward trajectory. The Chinese authorities are aware of the situation and the risks but they continually refrain from acting with the necessary force. They are concerned that actions to confront rising domestic debt will constrain economic growth. They are wrong in believing there will ever be a good time to curb financial excesses, as they fail to comprehend that delay now will make action in the future harder and costlier.”
December 27 – Wall Street Journal (Chao Deng): “For decades, local governments in China borrowed heavily to build urban infrastructure, helping to fuel the country’s red-hot economic growth. Now, they are under pressure to pay the bill, adding another financial worry to Chinese policy makers’ list. Independent economists estimate that China’s municipalities have racked up more than $6 trillion in debt—including debts authorities don’t acknowledge on their books. Tax revenue and returns on the roads and other infrastructure built with borrowed money aren’t enough to pay down the debts. Land sales, which local governments have relied on, have weakened as the economy slows. With nearly 3 trillion yuan ($428bn) in bonds coming due in the next two years, on top of bank loans and hidden debt, local governments need to find ways to refinance.”
December 29 – Reuters (Lusha Zhang, Yawen Chen and Tony Munroe): “China’s retail sales are expected to increase 8% in 2019 to 41.1 trillion yuan ($5.88 trillion), the official Xinhua News Agency reported… That compared with a 9% rise in retail sales in 2018.”
December 30 – Reuters (Stella Qiu and Kevin Yao): “Manufacturing activity in China expanded for a second straight month in December as seasonal demand and signs of progress in trade talks with Washington boosted factories’ output and order books. China’s official Purchasing Managers’ Index (PMI) was unchanged at 50.2 in December from November…, slightly higher than the 50.1 expected…”
December 29 – Financial Times (Editorial Board): “There was a time when Beijing knew how to make concessions in its own interest. It made many to the US to gain accession to the World Trade Organization in 2001, enabling economic take-off. In the same decade it showed flexibility towards Hong Kong and Taiwan because, as former premier Zhu Rongji said, concessions to fellow Chinese are concessions to the Chinese nation. But the art of conceding to reap benefits now seems lost. In its place an unbending, autocratic regime led by Xi Jinping, the strongman leader of the Communist party, has grown up. This authoritarian lurch may suit Beijing at home but it is bedevilling China’s relationship with much of the outside world, not only in Washington but also in European and Asian capitals. The issue highlights a paradox. The international acceptance towards Beijing that underpinned its rise during the ‘reform and opening’ era that began 40 years ago this month is now in retreat, imperilling the ecosystem that allowed China to prosper.”
December 29 – Bloomberg: “China’s big bang opening of its $45 trillion financial industry begins in earnest next year -- a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms. Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs..., JPMorgan… and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth.”
Brexit Watch:
January 2 – Reuters (Andy Bruce and David Milliken): “British factory output fell in December at the fastest rate since 2012 as a tepid global economy hurt demand and businesses further reduced stocks of goods they had built up in case of a no-deal Brexit… The output gauge in the IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to 45.6 from 49.1 in November…”
EM Watch:
January 2 – Bloomberg (Aline Oyamada): “It was the decade when Chinese markets came of age, moving from a bit player to center stage in stocks, bonds and currencies for developing nations. And as China expanded, so did emerging markets as a whole, taking an ever larger share of global trading. The share capitalization of developing nations almost doubled, bond issuance tripled and trading in their currencies rose to more than a quarter of the global total.”
Europe Watch:
January 2 – Bloomberg (John Follain and Alberto Brambilla): “Italian Prime Minister Giuseppe Conte already exceeded the expectations of most of his political opponents by surviving the collapse of his first government last summer. But his second coalition is so fragile that a host of issues could trip him up as early as this month. Conte was fished out of obscurity in June 2018 to head a coalition between the anti-establishment Five Star Movement and the right-wing populists of the League. When that agreement broke down, he helped to stitch together a fresh alliance with Five Star and Italy’s traditional center-left group the Democratic Party.”
Global Bubble Watch:
December 30 – Bloomberg (Samuel Potter): “The world looks poised to begin 2020 with almost $12 trillion of bonds carrying a negative yield, up 40% from the start of this somewhat volatile year. While the pool of sub-zero debt is significantly smaller than the $17 trillion peak in August, there are signs of stabilization at current levels.”
January 1 – Bloomberg (Anchalee Worrachate): “The world’s biggest economies may roll over $8.7 trillion of debt maturing this year, but it won’t go far in sating almost bottomless demand for government bonds. The value of bills, notes and bonds coming due for the Group of Seven nations plus key emerging markets is up 25% from five years ago and slightly higher than the $8.6 trillion last year… Refinancing needs look set to be dominated by the U.S., which has $4.87 trillion of debt coming due, followed by Japan with $1.92 trillion. China’s tab will drop to $351 billion from $632 billion.”
December 30 – Wall Street Journal (Cara Lombardo and Dana Cimilluca): “This year was a big one for mergers and acquisitions, but it could have been even better. The value of deals announced globally reached $3.8 trillion through Dec. 27, making 2019 the fourth-best year on record for M&A. The combined value of deals fell just 4% short of last year’s total, according to Dealogic… Companies struck 12 deals worth more than $25 billion, twice last year’s total, led by United Technologies Corp. ’s $86 billion combination with defense contractor Raytheon… The U.S. was the standout region, with total deal value up 12% to $1.8 trillion.”
December 30 – Financial Times (Arash Massoudi, James Fontanella-Khan and Eric Platt): “Dealmakers outside the US cast an envious eye towards their American counterparts in 2019. As cross-border mergers and acquisitions plummeted to their lowest level since 2013, US companies struck big transactions at home, accounting for 15 out of the year’s biggest 20 deals. Nearly half of the $3.9tn in global M&A recorded this year involved US targets — a 6% rise from a year ago, according to data provider Refinitiv. The boom in the US contrasted with lacklustre dealmaking in European and Asian markets, which recorded $742bn and $757bn respectively in total acquisition value, a 25% decline for Europe and a 16% drop for Asia. The US activity was enough to power global M&A to its fourth-highest level on record.”
December 29 – Financial Times (Robin Wigglesworth): “One of the biggest trends in finance over the past decade has been the explosive growth of cheap, passive investment vehicles known as exchange traded funds. Although the ETF was first invented back in the early 1990s as a way to invigorate trading on the now-defunct American Stock Exchange, the industry has expanded dramatically in size and breadth since the financial crisis. The ETF universe has grown sixfold since the end of 2009 to almost $6tn today… Investor interest been fuelled by rising focus on cost — ETFs usually cost a fraction of actively managed, traditional mutual funds — and the continued inability of most active fund portfolio managers to beat their benchmarks.”
December 29 – Bloomberg (Emily Barrett, Chikako Mogi, and James Hirai): “The new decade could be the dawn of a tougher era for bond investors, as conditions that sustained the historic bull run in government debt fall away. Unprecedented central bank action has dominated economic stimulus since the global crisis and suppressed yields around the world. The skew may now be shifting more toward fiscal expansion that could pressure rates higher. Austerity is on the wane in Europe, spending packages are landing in Asia, and U.S. borrowing is on track for even bigger records in the next couple of years. The handoff from monetary to fiscal policy is a longer-run investment theme…”
December 30 – Reuters (Kane Wu): “China’s outbound mergers and acquisitions (M&As) clocked their weakest year in a decade in 2019, as an escalated U.S.-China trade war and tightened regulatory scrutiny of Chinese companies impacted appetite for overseas dealmaking. Chinese acquirers announced $41 billion in outbound deals this year, nearly halving from 2018 and less than a fifth of the 2016 peak… The number was only slightly higher than 2009 when dealmaking plunged after the financial crisis. Outbound deals into the United States dropped 80% this year from last to $2 billion.”
Leveraged Speculation Watch:
December 29 – Bloomberg (Nishant Kumar): “The pain kept coming for hedge funds in 2019: if they weren’t being killed off, they were bleeding cash or wringing out dismal returns. The industry is now on track to record more closures than launches for a fifth straight year, a blow to a market that once minted millionaires at a heady pace. More than 4,000 funds have been liquidated in the past five years… Investors are pulling money at an accelerated pace as high fees and mediocre returns send them searching for yield elsewhere. They’ve yanked $81.5 billion this year through November, more than twice the amount for the whole of 2018… As for returns, there’s little to cheer there. While the S&P 500 delivered a 28% gain this year through November, the Bloomberg Equity Hedge Fund Index only managed 10%.”
December 29 – Wall Street Journal (Rachael Levy): “Hedge funds are paying top dollar to bring in new employees with quantitative skills, underscoring the desperation some funds face to bulk up their abilities around big data and algorithms. A new survey from Baruch College’s financial engineering program found that recent graduates working at hedge funds made significantly more than their peers working at banks. Baruch’s master’s program teaches students skills like data science and financial modeling. At hedge funds, Baruch graduates’ pay ranged from around $200,000 to more than $1 million, the survey found. But for those alumni working at banks, pay ranged from about $100,000 to $400,000 a year.”
Yet “Bubble” these days has no part in conventional analysis or dialogue – for central bankers, economists or market pundits. To even utter the word on CNBC or Bloomberg would suggest one is hopelessly detached from reality. From my vantage point, bullishness and New Paradigm thinking these days rivals that of the early-2000 peak. Today’s faith in central banking is unrivaled – the willingness to embrace egregious excess unmatched.
To summarize the 2019 policy backdrop in one word: capitulation. It was to be a year of monetary policy normalization. The new Fed chairman was to finally return policy rates to a more reasonable level. After leaving rates near zero for seven years, the Fed belatedly took a baby step in December 2015. A full year went by before mustering the courage for a second cautious step. And a year full later (December 2017) rates were still at 1.00%.
Policy rates were only up to 1.25% to 1.50% when Powell took the reins. Having delayed the process much too long, “normalization” was not going to go smoothly. Rates were taken to 2.25% (to 2.5%) by the end of 2018, and the wheels almost came off. Powell’s January 4th dovish U-turn essentially ended any notion of rate normalization. Avoiding market instability was the priority – and celebratory markets took full advantage. In 2019, the odds central bankers would ever actually tighten monetary conditions became exceedingly low.
To accurately comprehend 2019 demands attention to key Bubble Dynamics. First of all, to employ monetary stimulus in the late stage of a Bubble ensures instability. Conventional thinking – both in policy circles and the markets – was that with limited ammunition central bankers should utilize stimulus early and aggressively. Late-cycle Bubbles, by their nature, connote financial and economic fragilities.
There are at the same time powerfully-entrenched inflationary biases – including expansive infrastructures fostering higher asset prices. Policymaker focus on bolstering system resiliency ensures a precarious extension of “Terminal Phase” excess – in Credit, speculation, speculative leverage, risk intermediation, malfunctioning markets, resource misallocation and associated financial and economic maladjustment.
In the late phase of history’s greatest global financial Bubble, there’s the thinnest of lines between the onset of crisis and rip-roaring bull markets.
On Thursday, January 3rd, Goldman Sachs Credit default swap (5yr CDS) prices surged 19 to 131 bps – the high since March 2016 and the largest one-day move since 2013. In the currency markets, a “flash crash” saw stunning moves including an 8% intraday move in the Japanese yen/Australian dollar. Dislocation had begun to unfold across global derivatives markets. Panic buying saw Treasury yields sink 15 bps, pushing the collapse from November 8th highs (3.24%) to 70 bps. Corporate Credit spreads were blowing out, especially in junk debt. Deleveraging dynamics were global. For example, the spread between 10-year German bunds and the European periphery (i.e. Italy and Portugal) widened markedly. A major de-risking/deleveraging event had gathered momentum. Equities were under pressure, with the DJIA sinking 660 points during that fateful session.
The following day Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at a meeting of the American Economic Association. Only two weeks since the Fed’s December 19th rate increase and press conference, Powell’s comments were not expected to be monetary policy-focused. But the Chairman pulled out prepared comments and orchestrated a dramatic “dovish U-turn”: “…Policy is very much about risk management.” “We will be patient as we watch to see how the economy evolves…” “…Always prepared to shift the stance of policy and to shift it significantly if necessary…” “We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…”
Despite economic resilience and a 3.9% unemployment rate, the Fed was prepared to add monetary stimulus to support the markets. The DJIA rallied 747 points January 4th on Powell’s comments. It was a prescient market move signaling the Year of Monetary Disorder.
M2 “money” supply surged $1.024 TN, or 7.1%, in 2019, easily surpassing 2016’s record $880 billion expansion. This was 65% ahead of average annual M2 growth over the preceding decade. Moreover, Institutional Money Fund Assets (not included in M2) jumped $407 billion, or 21.9%, up from 2018’s $27 billion increase - and the strongest money market fund expansion since 2007. In a year of strong Credit growth, total third quarter U.S. Credit (Non-Financial, Financial and Foreign U.S. borrowings) jumped a nominal $1.075 TN (from Fed’s Z.1), the strongest quarterly gain since Q4 2007.
2019 was the year of “the everything rally;” FOMO – fear of missing out – the year’s amalgamation of Greed and Fear. Stocks, Treasuries, corporate Credit at home and abroad. Don’t ask why – just buy, and the more levered the better. With an enduring U.S. economic expansion, the S&P500 returned 32.61%. With Germany’s economy stagnating, the DAX index returned 25.48%. Fighting persistent recessionary forces, Italy’s MIB index returned a prosperous 33.80%. Recession or, in the case of the U.S., stagnant earnings were irrelevant.
After trading to a January high of 2.79%, 10-year yields sank below 1.50% in August. By late-July, the S&P500 had already gained more than 20%, with the Nasdaq100 up 26% and the Semiconductors surging almost 40%. Who was wrong, booming stocks or booming safe haven bonds? Monetary Disorder made everything seem right.
In a replay of the fall of 2007, Treasuries and safe haven government bonds rallied robustly in the face of bubbling equities prices. There was certainly a short squeeze element bolstering the marketplace, as hedges against Fed “normalization” were unwound. But, mainly, safe havens could monitor Bubble excess in the U.S. and a faltering Chinese Bubble and enjoy high confidence that global central bankers would be soon following through on promises to do “whatever it takes.” Lower market yields were instrumental in fostering risk market excess, and the greater the Bubbles inflated the more the safe havens anticipated rate cuts and more QE.
Treasuries, bunds, Swiss bonds, and Japan’s JGBs were transformed into the most enticing financial instruments imaginable. Central banks were essentially guaranteeing they would perform well. And in the event of global instability they would provide spectacular returns. A sure moneymaker as well as a trustworthy hedge against “risk off,” the safe haven bond rally morphed into a historic speculative blow-off. Ten-year Treasury yields traded to a low of 1.46% on August 3rd – an embarrassingly high relative yield. Bund yields collapsed all the way to negative 0.71%, with Swiss bonds down to negative 1.12%. Japanese 10-year government yields fell to negative 0.29%.
In a historic development (and emblematic of Acute Global Monetary Disorder), at the August peak $17 TN of global bonds traded with negative yields. Governments in Slovenia, Slovakia, Latvia, Austria, Ireland, Finland, Netherlands, Belgium and France enjoyed charging creditors for holding their money. After trading to 4.37%, Greek yields sank as low as 1.14%. Italian yields dropped from 2.95% to 0.81%, and Spain from 1.51% to 0.03%. Portuguese yields fell from 1.81% to 0.07%. Crazy.
May 28 – Bloomberg: “Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers. The takeover of Baoshang Bank Co. -- announced with scant explanation on Friday night -- left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades. Regulators have said they’ll guarantee Baoshang’s smaller depositors, and while they’ve warned some creditors of potential losses, they haven’t said what the final payouts could be or given public guidance on whether the takeover will be a blueprint for other lenders.”
China financial and economic fragilities were a growing market concern over the summer. Instability erupted in China’s money market, with the vulnerable (and now large) small banking sector struggling for financing. And with U.S. trade tensions escalating, the prospect of Beijing officials losing control was palpable. China’s currency faltered in August, with the dollar/renminbi breaching the key 7.00 level on August 5th – on its way to 7.18 by September 3rd.
After repeated failed attempts to rein in Credit excess, tightening measures adopted by a more resolute Beijing actually slowed Credit growth in 2018. Akin to U.S. rate “normalization”, this was not going to go smoothly. And that financial and economic vulnerabilities rapidly manifested with China in the throes of heated trade negotiations with the Trump administration ensured Beijing would once again let off the brake and pump the accelerator.
China saw record total system Credit growth (approaching $4.0 TN) in 2019 – as double-digit Credit growth compounds year after year. In the first 11 months of 2019, Aggregate Financing (excluding central government borrowings) expanded $3.028 TN, 19.3% ahead of comparable 2018 growth. November Consumer (chiefly mortgage) borrowings were up 15.3% y-o-y (36% in two, 66% in three and 139% in five years), as stimulus doused gas on China’s historic mortgage finance and apartment Bubbles.
Fueled by China, Trillion dollar U.S. fiscal deficits and fiscal stimulus around the world, 2019 likely saw record global Credit growth. In the end, systemic fears and the resulting summer global bond price melt-up bolstered vulnerable financial systems and economies. Argentine bonds and the peso crashed in August, but for the most part liquidity abundance sustained both emerging and developed market Bubbles. A less accommodative world of tighter finance and risk aversion would have been inhospitable to the likes of Turkey, Lebanon, Indonesia, Chile and many others. Booming liquidity and markets made a dud out of Brexit.
As the marginal source of EM finance and economic demand, a bursting – as opposed to inflating – Chinese Bubble would have had profoundly negative consequences. It’s remarkable how bullish markets have become on EM considering the rising vulnerability of Asia, Latin America and Eastern Europe to “risk off” trading dynamics.
From my Q3 2019 Z.1 analysis: “Total “repo” (“Federal Funds and Security Repurchase Agreements”) Liabilities jumped another $222 billion during the quarter to $4.502 TN, the high going back to Q3 2008. Over the past year, “repo” surged a record $932 billion, or 26.1%. For perspective, “repo” Liabilities rose on average $51.9 billion annually over the past five years (2014-2018). And the $932 billion gain during the past four quarters is more than double the biggest annual rise over the past decade (2010’s $422bn gain that followed the $1.672 TN two-year crisis-period contraction). Ominously, the past year’s gain also surpasses the previous record four-quarter gain ($824bn) for the period ended in June 2007.”
My thesis holds that unprecedented speculative leverage has accumulated throughout this most protracted period of monetary stimulus. Securities finance has boomed in so-called “repo” markets in the U.S., Europe and Japan, along with China and throughout Asia and the offshore financial centers (i.e. Cayman Islands, Luxembourg, etc.). Derivatives now truly rule the world. The Fed’s bullish U-turn, the ECB’s quick restart of QE, Japan’s endless stimulus, and scores of rate cuts globally incentivized wild speculative excess that culminated during the summer. “Blow-offs,” however, ensure vulnerability to abrupt reversals, deleveraging and liquidity issues.
Instability erupted in the U.S. repo market in September. Pundits pointed to a confluence of huge Treasury auctions, corporate tax payments and a shortage of available bank reserves. Yet it was no coincidence that illiquidity issues accompanied an abrupt bond market reversal. After trading at 1.47% on September 4th, 10-year Treasury yields were back up to 1.90% by September 13th.
(Worth noting at about this time, on September 16th, there were attacks on Saudi oil facilities. WTI crude prices immediately spiked from $53.94 to a high of $60.37, though prices closed back below $55 by September 27th.)
The “repo” market is sacred financial “plumbing”. It was, after all, the epicenter of 2008’s crisis eruption. Critical lessons were either never learned or conveniently forgotten. Building upon the dovish U-turn, the Powell Fed embraced “whatever it takes” to ensure liquidity was not an issue during the fourth quarter and especially for typical year-end funding pressures. Recalling Y2K, it was in the end a bogeyman that had the Fed pouring fuel on a raging speculative Bubble. Powell’s “midcycle adjustment” was completely abandoned. There was for now and the foreseeable future one cycle: easy “money” – and the only uncertainty: How easy? The Ultimate Asymmetric Policy.
Federal Reserve Credit expanded $395 billion in the final 16 weeks of year. Like rates, a year that began with expectations of Federal Reserve balance sheet “normalization” ended with aggressive quantitative easing operations. The Fed announced in October it would purchase $60 billion of T-bills monthly through at least the first-half of 2020, with Fed Credit ending 2019 at $4.121 TN (high since November 2018).
Goldman Sachs CDS ended 2019 at 52.39 bps, only a couple basis points from the low going all the way back to 2007. From a high of 465 on January 3rd, high-yield corporate CDS sank to lows since 2007 (ending 2019 at 280 bps). A notable 80 bps of the high-yield CDS decline ensued following the October announcement of the Fed’s balance sheet expansion strategy. And after trading to a high of 95.5 on December 24, 2018, investment-grade CDS closed out 2019 at 45.3, also near the lows since before the ’08 crisis.
The S&P500 returned 10.4% in the 11 weeks following the Fed’s announcement. The Nasdaq100 (NDX) returned 13.1%, while the Semiconductors (SOX) jumped 19.4%. The Banks (BKX) returned 17.9% and the Broker/Dealers (XBD) 17.3%. The small cap Russell 2000 returned 12.7% in 11 weeks. The NYSE Healthcare Index returned 14.9%, as the Biotechs (BTK) surged 21.7%.
Quite a squeeze unfolded. The Philadelphia Oil Services Index returned 26.2% between the Fed announcement and year-end. Tesla jumped 71% in 11 weeks. Advanced Micro Devices surged 62% to end 2019 with a 148% gain. Target gained 94% for the year, outpacing Chipotle’s 93.9% and Lululemon’s 90.5%. Apple rose 86.2%, trouncing Facebook (56.6%), Microsoft (55.3%), Adobe (45.8%) and Google (29.1%). Xerox jumped 86.6%. There were 56 stocks within the Nasdaq Composite that posted 2019 gains of better than 200% (174 at least doubled).
The announcement of a “phase one” U.S./China trade deal stoked the year-end rally. There is still little to indicate must substance in this agreement but, like with so many things, it doesn’t really matter. The geopolitical backdrop was fraught with great risk – that markets were content to ignore. Even Thursday night’s U.S. assassination of Iran’s Qassem Soleimani hit the S&P500 for only 0.7% (Russell 2000 down 0.35%). As has become typical, safe haven assets seem more keenly focused. Ten-year Treasury yields sank nine bps Friday to 1.79%, with bunds down six bps to negative 0.29%. Riding blustery Monetary Disorder and geopolitical tailwinds, Gold surged $42 this week to a six-year high $1,552.
It was a year of excess too many to mention. Hedge fund billionaire paid a record $238 million for a central park apartment – followed by $122 million for a London mansion and $99 million for a property neighboring his oceanside Palm Beach estate. “Beauty mogul” Kylie Jenner becomes a billionaire at 22. Art and collectable markets continued to go bananas. From MarketWatch: “An Italian artist duct-taped a banana to a gallery wall in Miami as part of the Art Basel festival — and it sold for $120,000.”
Compared to financial markets, the economy was rather mundane. Real GDP expanded 3.1% in Q1, 2.0% in Q2 and 2.1% in Q3. Inverting during the summer, the yield curve proved a much better harbinger of central bank stimulus than a predictor of the real economy. The IPO market had its ups and downs, with the more ridiculous deals (i.e. WeWork) performing poorly or not at all. While the U.S. was not immune to global manufacturing woes, the service sector boom soldiered on. Not receiving the attention it deserved, U.S. housing gathered momentum. Homebuilder confidence jumped to a 20-year high, as building starts and permits rose to the strongest levels since before the crisis.
The year of Monetary Disorder only exacerbated wealth inequalities. The country became only further divided. When it hardly seemed possible, the political environment digressed further into the embarrassing and alarming. President Trump was impeached. There should be ample shame to be spread around. Both parties should be ashamed of the fiscal recklessness that became firmly entrenched in 2019. Debt and deficits don’t matter. Where is the morality in leaving such debt to our children and grandchildren? As the Fed capitulated on “normalization,” markets completely renounced their function of disciplining excess.
In all the Roaring 2019 payoffs in securities, derivatives and asset markets, Capitalism atrophied into a shell of its former self. Chronically Unsound Money & Credit and the Inevitability of Monetary Disorder. Things can go crazy at the end of cycles. 2019 Welcomed Wacko and Unhinged. In a nutshell, it’s one hell of a portentous backdrop – that passes for now as a permanent plateau of prosperity. I’ll leave future prospects for another day.
For the Week:
The S&P500 slipped 0.2% (2019 return 31.48%), while the Dow was about unchanged (25.34%). The Utilities declined 0.8% (26.82%). The Banks lost 0.9% (36.13%), and the Broker/Dealers dipped 0.2% (24.98%). The Transports declined 0.2% (20.83%). The S&P 400 Midcaps declined 0.3% (26.17%), and the small cap Russell 2000 fell 0.5% (25.49%). The Nasdaq100 increased 0.3% (39.46%). The Semiconductors slipped 0.2% (63.25%). The Biotechs dropped 2.4% (20.43%). With bullion surging $41.6, the HUI gold index increased 03% (52.33%).
Three-month Treasury bill rates ended the week at 1.4775%. Two-year government yields declined six bps to 1.53% (down 92bps in 2019). Five-year T-note yields fell nine bps to 1.59% (down 82bps). Ten-year Treasury yields dropped nine bps to 1.79% (down 77bps). Long bond yields fell seven bps to 2.24% (down 63bps). Benchmark Fannie Mae MBS yields dropped eight bps to 2.63% (down 78bps).
Greek 10-year yields declined three bps to 1.39% (down 297bps in 2019). Ten-year Portuguese yields slipped three bps to 0.36% (down 128bps). Italian 10-year yields fell three bps to 1.35% (down 133bps). Spain's 10-year yields dipped two bps to 0.39% (down 95bps). German bund yields declined two bps to negative 0.28% (down 52bps). French yields dipped two bps to 0.03% (down 59bps). The French to German 10-year bond spread was little changed at 31 bps. U.K. 10-year gilt yields fell two bps to 0.74% (down 46bps). U.K.'s FTSE equities index declined 0.3% (2019 gain 12.1%).
Japan's Nikkei Equities Index declined 0.8% (2019 gain 18.2%). Japanese 10-year "JGB" yields slipped a basis point to negative 0.01% (down 1bp in 2019). France's CAC40 was little changed (up 26.4%). The German DAX equities index declined 0.9% (up 25.5%). Spain's IBEX 35 equities index dipped 0.6% (up 11.8%). Italy's FTSE MIB index slipped 0.2% (up 28.3%). EM equities were mostly higher. Brazil's Bovespa index gained 1.0% (up 27.1%), and Mexico's Bolsa rose 0.8% (up 4.6%). South Korea's Kospi index fell 1.3% (up 7.7%). India's Sensex equities index slipped 0.3% (up 14.4%). China's Shanghai Exchange surged 2.6% (up 22.3%). Turkey's Borsa Istanbul National 100 index was about unchanged (up 25.4%). Russia's MICEX equities index gained 0.8% (up 28.6%).
Investment-grade bond funds saw outflows of $573 million, and junk bond funds posted outflows of $445 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.72% (down 79bps y-o-y). Fifteen-year rates fell three bps to 3.16% (down 83bps). Five-year hybrid ARM rates added one basis point to 3.46% (down 52bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 4.04% (down 28bps).
Federal Reserve Credit last week added $1.0bn to $4.121 TN, with a 16-week gain of $395 billion. Over the past year, Fed Credit expanded $92.4bn, or 2.3%. Fed Credit inflated $1.311 Trillion, or 47%, over the past 373 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.0 billion last week to $3.398 TN. "Custody holdings" increased $9.2 billion, or 0.3% y-o-y.
M2 (narrow) "money" supply gained $4.7bn last week to a record $15.425 TN. "Narrow money" surged $1.024 TN, or 7.1%, over the past year. For the week, Currency slipped $0.7bn. Total Checkable Deposits gained $8.1bn, and Savings Deposits added $3.1bn. Small Time Deposits dipped $2.0bn. Retail Money Funds fell $3.8bn.
Total money market fund assets jumped $27.5bn to $3.632 TN, with institutional money fund Assets up $21.3 billion. Total money funds gained $584bn y-o-y, or 19.2%.
Total Commercial Paper declined $4.7bn to $1.126 TN. CP was up $80.4bn, or 7.7% year-over-year.
Currency Watch:
The U.S. dollar index gained 0.33% to 96.50 during 2019. For the year on the upside, the Canadian dollar increased 4.98%, the British pound 3.94%, the Mexican peso 3.82%, the South African rand 2.48%, the Swiss franc 1.60%, the Singapore dollar 1.26%, the Japanese yen 0.99% and the New Zealand dollar 0.31%. On the downside, the Swedish krona declined 5.46%, the Brazilian real 3.87%, the South Korean won 3.49%, the euro 2.22%, the Norwegian krone 1.65% and the Australian dollar 0.4%. The Chinese renminbi declined 1.22% versus the dollar in 2019.
For the week, the U.S. dollar index slipped 0.2% to 96.838. For the week on the upside, the Japanese yen increased 1.3%, the Canadian dollar 0.6%, the Singapore dollar 0.2% and the Swiss franc 0.2%. On the downside, the South African rand declined 1.9%, the Swedish krona 0.7%, the New Zealand dollar 0.5%, the South Korean won 0.4%, the Australian dollar 0.4%, the Mexican peso 0.3%, the Brazilian real 0.3%, the Norwegian krone 0.2%, and the euro 0.1%. The Chinese renminbi increased 0.4% versus the dollar this week.
Commodities Watch:
The Bloomberg Commodities Index was little changed this week (up 5.1% in 2019). Spot Gold jumped 2.8% to $1,552 (up 18.4%). Silver gained 1.2% to $18.151 (up 15.3%). WTI crude jumped $1.33 to $66.05 (up 40%). Gasoline was little changed (up 28%), while Natural Gas sank 4.5% (down 25%). Copper fell 1.5% (up 6%). Wheat slipped 0.3% (up 11%). Corn declined 0.9% (up 3%).
Market Instability Watch:
December 31 – Financial Times (Keiko Morris): “The US Federal Reserve succeeded in keeping a lid on short-term borrowing costs on the final day of the year after injecting billions of dollars into the market to ease a possible cash crunch. The cost of borrowing cash overnight in the repo market, where investors exchange high-quality collateral such as Treasuries for funding, rose to 1.88% on Tuesday before falling over the first couple of hours of trading to 1.55%... The markets arm of the central bank went all out to ensure the year-end period went smoothly, injecting $255.6bn to keep money flowing through the financial system. It had said it would offer up to $490bn, depending on demand.”
December 31 – Bloomberg (Vildana Hajric): “U.S. stocks capped one of the best years of the past decade with a slight gain, pushing the S&P 500 to an annual advance of 29% and a record $5.9 trillion in value added. The dollar fell for a fourth session and Treasuries slumped. The Nasdaq 100 Index notched a 38% gain for the year, its best since 2009… Ten-year Treasuries yielded 1.92%, down more than 75 bps in the year. Gold looked to cap its best year since 2010, while crude oil pared its rise to 35%. European equities… notched a 23% gain in 2019, the most since 2009.”
December 31 – Bloomberg (Brian Smith): “In a decade of extreme wealth creation in markets, few assets did more to enrich investors than stocks in the Nasdaq 100 Index. Their combined value jumped by more than $7 trillion, ending with the best year since the bull run began. Powered by a near-doubling in Apple Inc. and gains exceeding 50% in Microsoft Corp. and Facebook Inc., the tech-heavy gauge surged 38% over the past 12 months, the biggest increase since 2009.”
December 29 – Reuters (Saqib Iqbal Ahmed): “What do you do when daily stock market gyrations all but dry up? Apparently, trade volatility like never before. Among the myriad Wall Street legacies of the soon-ending 2010s has been the emergence of market volatility - or the magnitude of security price swings over short time spans - as an asset class unto itself. It is all the more notable against the backdrop of the decade’s fairly persistent market calm. The Cboe Volatility Index (VIX)… is on track to end the decade at a level about a third lower than its lifetime average... With the S&P 500 Index nearly tripling since the end of 2009, the average level of the VIX this decade is the lowest of the three since it launched in the early 90s, even with a number of periodic spikes higher. Nonetheless, trading volatility, or ‘vol’ in Wall Street parlance, came of age in a big way in the ‘10s.”
December 30 – Bloomberg (Masaki Kondo and Hiroko Komiya): “As Japan enters a six-day New Year break, a sense of anxiety over the possibility of another flash crash is gripping currency traders. The Financial Futures Association of Japan has already warned of market instability as the holidays create a liquidity vacuum. Meanwhile, importers are preparing to deal with a potential repeat of the turmoil that took place on Jan. 3 this year, when the yen gyrated wildly and surged against its peers. One red flag to watch for this time is the Turkish lira. Japan’s retail investors speculate on a number of currencies, and are currently most bullish on the lira…”
December 31 – Bloomberg (Paula Seligson): “Triple C bonds have had their best month since January as the energy sector rallies and trade-war induced jitters ease. The Bloomberg Barclays Caa US High Yield Index gained 4.98% in December, the first positive return since July and the best since 5.29% in January. Year to date, the broad high-yield index has returned 14.3%, compared to a 9.5% gain for CCC bonds.”
Trump Administration Watch:
December 31 – Reuters (Idrees Ali and Kanishka Singh): “U.S. President Donald Trump blamed Iran… for ‘orchestrating’ an attack on the U.S. embassy in Baghdad and said he would hold Tehran responsible, as officials said more Marines were expected to be sent to the mission. ‘Iran killed an American contractor, wounding many. We strongly responded, and always will. Now Iran is orchestrating an attack on the U.S. Embassy in Iraq. They will be held fully responsible. In addition, we expect Iraq to use its forces to protect the Embassy, and so notified,’ Trump said on Twitter.”
Federal Reserve Watch:
December 31 – Reuters (Karen Brettell): “The Federal Reserve averted a year-end funding squeeze on Tuesday as large banks took only a small portion of $150 billion on offer in its last overnight repo operation of 2019, and the cost of borrowing fell to its lowest level since March 2018… The Fed has thrown $255.6 billion into the funding market through early January to ensure the financial system operates smoothly over the choppy year-end period. It will continue pumping tens of billions a day into the repo market through the end of January at least, including up to another $185 billion in one-day and term deals on Thursday, when the market kicks off the new year.”
December 29 – Bloomberg (Alister Bull): “Federal Reserve projections show no interest-rate changes next year but the annual rotation among voters could still influence policy as incoming members include an outspoken dove while two hawks depart. Minneapolis Fed chief Neel Kashkari, who called vocally for rate cuts during 2019, is the clear dove among the four new voters. He joins alongside Robert Kaplan from Dallas, Philadelphia’s Patrick Harker and Loretta Mester from Cleveland. Interest-rate forecasts by Fed officials next year showed 13 expected no change and four penciled in a quarter percentage-point hike, according to the summary of economic projections… showing a fairly high degree of unity as the country heads into a U.S. presidential election year.”
U.S. Bubble Watch:
December 29 – Wall Street Journal (Maureen Farrell): “A government shutdown halted IPOs in January. Then ride-hailing companies Lyft Inc. and Uber Technologies Inc. debuted in March and May, respectively. Instead of being met with hype, they received wariness from investors concerned about the companies’ prolific losses. Their stocks fell. From there, investors grew increasingly nervous about the remaining slate of IPO companies bathed in red ink. Pinterest Inc., Slack Technologies Inc. and SmileDirectClub Inc.—which lose money despite being some of the fastest-growing and most highly valued startups in the world—failed to excite investors. WeWork’s parent company and Endeavor Group Holdings Inc. couldn’t even get their troubled IPOs off the ground… In 2019 through Thursday, 211 companies that went public raised $62.33 billion—far below expectations that offerings could eclipse 1999’s record of nearly $108 billion. 2019 still registered the most money raised since 2014…”
December 31 – Bloomberg (Jeff Kearns): “Home prices in 20 U.S. cities rose at the fastest pace in five months in October, posting a third straight acceleration as real estate markets showed fresh strength at the start of the fourth quarter. The S&P CoreLogic Case-Shiller index of property values advanced 2.2% from October 2018… Prices rose 0.4% from a month earlier… also topping projections. A separate report from the Federal Housing Finance Agency showed house prices climbed 0.2% in October from the previous month… Prices nationwide rose 5% from a year earlier, increasing in all nine regions measured…”
January 2 – CNBC (Diana Olick): “The severe shortage of homes for sale is upending the sales calendar for the whole housing market. Spring has historically been the busiest buying season, but as competition for homes heats up across the country, January is the new April. Spring starts now… ‘As shoppers modify their strategies for navigating a housing market that has become more competitive due to rising prices and low inventory, the search for a home is beginning earlier and earlier,’ said George Ratiu, senior economist at realtor.com. ‘With housing inventory across the U.S. expected to reach record lows in 2020, we expect to see this trend continue into the new year.’ The number of homes for sale in November… was down 9.5% annually, and the supply of entry-level homes, priced below $200,000 was a stunning 16.5% lower than in 2018.’”
January 1 – CNBC (Patti Domm): “Weekly earnings for employees of small businesses grew at an annual rate of 4.1% at the end of the year, the fastest pace since the Paychex/IHS Markit Small Business Employment Watch began. The employment report began making annual comparisons in 2011… Hours worked were up 1% from the same period last year… ‘Small business job gains have flattened in the second half of the year as labor markets prove very tight,’ said James Diffley, chief regional economist at IHS Markit. ‘In response, weekly earnings have accelerated, surging from 2.49% mid-year to 4.13% at year-end.’”
December 30 – Wall Street Journal (Yuka Hayashi): “The growth of online lending has been a boon to hair salons, bakeries and other small businesses that don’t qualify for bank credit. Yet this tech-enabled source of credit can mire some in debt they can’t repay, raising concern about inadequate regulation. Some are extending credit at sky-high rates with opaque terms for costly fees and conditions, drawing comparisons with payday lenders who target consumers in need of quick cash… ‘There is a significant number of bad actors who are mostly unregulated,’ said Luz Urrutia, chief executive of Opportunity Fund… ‘They are really wreaking havoc across America’s small businesses.’ Nearly a third of the small businesses surveyed applied for online loans in 2018, up from 19% in 2018…”
January 1 – Wall Street Journal (Ryan Dezember): “The bill is coming due for the shale industry’s price war with OPEC. North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years, starting with more than $40 billion in 2020, according to Moody’s… It is a tab that producers, pipeline operators and oil-field service companies have run up battling the Organization of the Petroleum Exporting Countries for global market share. It is unclear how they will repay it all.”
January 1 – Reuters (Jennifer Hiller and Liz Hampton): “Vastly slower U.S. oil growth this year and the prospect of a plateau for the world’s top oil producer have signaled a new and unfamiliar era of self-restraint for the go-go shale industry. Spending cuts and production declines common to shale wells mean U.S. output growth is expected to brake from 2019’s pace that pushed domestic production past 13 million barrels per day (bpd). Some analyst forecasts for next year call for growth to slow, potentially to a rate of just 100,000 new bpd.”
December 28 – CNBC (Lauren Thomas): “2019 brought with it more retail bankruptcies. And the implications have been more store closures, thousands of lost jobs and an vastly different retail landscape that doesn’t look anything like where your parents used to shop. While some retailers filed for Chapter 11 bankruptcy protection for the first time this year, others went through a so-called Chapter 22 scenario, where it was their second time in bankruptcy court. That included Z Gallerie and Charming Charlie. And some retailers, like discount chain Fred’s, ended up liquidating.”
Fixed-Income Bubble Watch:
December 31 – CNSNews (Terence P. Jeffrey): “The federal debt increased by a record $10,796,419,662,320 in the decade that is coming to a close today… This was the first decade in the history of the nation when increases in the federal debt averaged more than $1 trillion per year. The total federal debt accumulated during the decade has equaled approximately $83,967 per household.”
December 29 – Reuters (Joshua Franklin, Kate Duguid): “Whatever nickname ultimately gets attached to the now-ending Twenty-tens, on Wall Street and across Corporate America it arguably should be tagged as the ‘Decade of Debt.’ With interest rates locked in at rock-bottom levels courtesy of the Federal Reserve’s easy-money policy after the financial crisis, companies found it cheaper than ever to tap the corporate bond market… Bond issuance by American companies topped $1 trillion in each year of the decade that began on Jan. 1, 2010, and ends on Tuesday at midnight, an unmatched run… In all, corporate bond debt outstanding rocketed more than 50% and will soon top $10 trillion, versus about $6 trillion at the end of the previous decade. The largest U.S. companies - those in the S&P 500 Index account for roughly 70% of that, nearly $7 trillion.”
December 30 – Bloomberg (Caleb Mutua): “It’s been such a stellar year for U.S. corporate credit markets that it’s almost unfair for 2020. A number of Wall Street’s most prominent credit analysts say 2019 will simply be too tough to beat. The supply of new U.S. corporate investment-grade bonds in 2020 should decline with spreads expected to widen through the year, while returns are projected to significantly slip from over 14% -- currently the best in all of U.S. fixed income.”
January 2 – Bloomberg (Brandon Kochkodin): “S&P Global Ratings was the most bearish on U.S. corporate debt in 2019 than at any other point in the last decade. Last year saw the most credit ratings downgrades for U.S. companies relative to upgrades since 2009… That didn’t stop the money from piling in. The Bloomberg Barclays U.S. Aggregate Bond Index surged 8.7% in 2019, its best year since 2002… Investment grade U.S. corporate debt returned 14.5%, its best year in the decade. The credit rating agency issued downgrades for 676 issuers compared to 352 upgrades, which translated to an upgrade to downgrade ratio of 0.52 for the year. Most of those cuts, 580 in total, were applied to the high-yield corner of the market compared to just 194 upgrades.”
December 29 – Wall Street Journal (Julia-Ambra Verlaine): “Downgrades on U.S. leveraged loans are picking up, a sign of fragility in the booming corporate debt market. The ratio of downgrades to upgrades in the S&P/LSTA Leveraged Loan Index rose in the 12 months through September to nearly 3 to 1—the highest reading since 2009. A total of 282 issuers were downgraded from the beginning of January through Oct. 11, up from 244 in all of 2018 and 33 in 2017... Leveraged loans are junk-rated corporate loans, a favorite financing source of private-equity firms seeking to buy up companies they see as undervalued, or in need of a makeover to turn a profit. They are often made to highly indebted companies with poor credit ratings.”
December 30 – Bloomberg (Natalie Harrison and Kelsey Butler): “U.S. leveraged loans are on target for their best returns in three years, buoyed by a late-year rally in prices as recession fears ease and investors seek yield. Meanwhile U.S. corporate bond spreads tightened to the lowest level since February 2018. The benchmark S&P/LSTA Total Return Index rose 1.56% in December. That boosted returns for the year to 8.58%, the highest since 2016, and a strong improvement from the 0.44% gain in 2018.”
December 31 – Wall Street Journal (Keiko Morris): “The student-housing sector, which had become a darling of real-estate investors in recent years, is running into turbulence. About 3.9% of the debt backed by student housing that was converted into commercial mortgage securities was more than 60 days late at the end of November, according to Fitch… That is up from 2.78% one year earlier… By comparison, delinquencies were hitting only 0.46% of commercial mortgage securities loans backed by the broader residential rental apartment sector, which includes student housing, at the end of November… Loan delinquencies for student-housing properties have increased to about 56% of all apartment sector delinquencies in November 2019, from 42% in November 2018.”
China Watch:
December 30 – Bloomberg (Yalman Onaran): “The decade after the global financial crisis has produced a tectonic shift in debt markets: While banks and consumers across the U.S. and Europe deleveraged, Chinese borrowers went on a binge. Bonds issued by Chinese entities account for about 12% of debt securities outstanding, up from 2% in 2007, according to… the Bank for International Settlements. The U.S. share dropped by 4 percentage points to 36% while the EU’s shrank by 8 percentage points to 24%... Chinese companies and local governments have gotten more accustomed to tapping bond markets in recent years, adding to borrowing from the nation’s banks. But China’s financial system has also swelled since 2007. Assets at the country’s top four banks have quadrupled in dollar terms and now fill four of the top five spots among lenders globally.”
December 31 – Reuters (Cate Cadell and Kevin Yao): “China’s central bank said… it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91bn) in funds to shore up the slowing economy. The People’s Bank of China (PBOC) said… it will cut banks’ reserve requirement ratio (RRR) by 50 bps, effective Jan. 6. The move would bring the level for big banks down to 12.5%. The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.”
December 29 – Reuters (Kevin Yao): “China’s central bank will use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans, in a step that analysts say could help lower borrowing costs and underpin economic growth. Beijing has unveiled a raft of pro-growth measures this year, including tax cuts, more infrastructure spending, reductions in the amount of cash banks must keep on reserve and lending rates to boost credit.”
December 29 – Financial Times (William Rhodes): “Two years ago, Zhou Xiaochuan, then China’s central bank governor, told a press conference at the 19th Communist party Congress in Beijing that too many procyclical factors in the economy and excessive optimism risked generating ‘accumulating contradictions that could lead to the so-called Minsky moment’. There is still a danger of a ‘Minsky moment’ hitting China’s economy… Today, China’s debt-to-gross domestic product ratio is more than 300% and continues on a dangerously upward trajectory. The Chinese authorities are aware of the situation and the risks but they continually refrain from acting with the necessary force. They are concerned that actions to confront rising domestic debt will constrain economic growth. They are wrong in believing there will ever be a good time to curb financial excesses, as they fail to comprehend that delay now will make action in the future harder and costlier.”
December 27 – Wall Street Journal (Chao Deng): “For decades, local governments in China borrowed heavily to build urban infrastructure, helping to fuel the country’s red-hot economic growth. Now, they are under pressure to pay the bill, adding another financial worry to Chinese policy makers’ list. Independent economists estimate that China’s municipalities have racked up more than $6 trillion in debt—including debts authorities don’t acknowledge on their books. Tax revenue and returns on the roads and other infrastructure built with borrowed money aren’t enough to pay down the debts. Land sales, which local governments have relied on, have weakened as the economy slows. With nearly 3 trillion yuan ($428bn) in bonds coming due in the next two years, on top of bank loans and hidden debt, local governments need to find ways to refinance.”
December 29 – Reuters (Lusha Zhang, Yawen Chen and Tony Munroe): “China’s retail sales are expected to increase 8% in 2019 to 41.1 trillion yuan ($5.88 trillion), the official Xinhua News Agency reported… That compared with a 9% rise in retail sales in 2018.”
December 30 – Reuters (Stella Qiu and Kevin Yao): “Manufacturing activity in China expanded for a second straight month in December as seasonal demand and signs of progress in trade talks with Washington boosted factories’ output and order books. China’s official Purchasing Managers’ Index (PMI) was unchanged at 50.2 in December from November…, slightly higher than the 50.1 expected…”
December 29 – Financial Times (Editorial Board): “There was a time when Beijing knew how to make concessions in its own interest. It made many to the US to gain accession to the World Trade Organization in 2001, enabling economic take-off. In the same decade it showed flexibility towards Hong Kong and Taiwan because, as former premier Zhu Rongji said, concessions to fellow Chinese are concessions to the Chinese nation. But the art of conceding to reap benefits now seems lost. In its place an unbending, autocratic regime led by Xi Jinping, the strongman leader of the Communist party, has grown up. This authoritarian lurch may suit Beijing at home but it is bedevilling China’s relationship with much of the outside world, not only in Washington but also in European and Asian capitals. The issue highlights a paradox. The international acceptance towards Beijing that underpinned its rise during the ‘reform and opening’ era that began 40 years ago this month is now in retreat, imperilling the ecosystem that allowed China to prosper.”
December 29 – Bloomberg: “China’s big bang opening of its $45 trillion financial industry begins in earnest next year -- a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms. Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs..., JPMorgan… and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth.”
Brexit Watch:
January 2 – Reuters (Andy Bruce and David Milliken): “British factory output fell in December at the fastest rate since 2012 as a tepid global economy hurt demand and businesses further reduced stocks of goods they had built up in case of a no-deal Brexit… The output gauge in the IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to 45.6 from 49.1 in November…”
EM Watch:
January 2 – Bloomberg (Aline Oyamada): “It was the decade when Chinese markets came of age, moving from a bit player to center stage in stocks, bonds and currencies for developing nations. And as China expanded, so did emerging markets as a whole, taking an ever larger share of global trading. The share capitalization of developing nations almost doubled, bond issuance tripled and trading in their currencies rose to more than a quarter of the global total.”
Europe Watch:
January 2 – Bloomberg (John Follain and Alberto Brambilla): “Italian Prime Minister Giuseppe Conte already exceeded the expectations of most of his political opponents by surviving the collapse of his first government last summer. But his second coalition is so fragile that a host of issues could trip him up as early as this month. Conte was fished out of obscurity in June 2018 to head a coalition between the anti-establishment Five Star Movement and the right-wing populists of the League. When that agreement broke down, he helped to stitch together a fresh alliance with Five Star and Italy’s traditional center-left group the Democratic Party.”
Global Bubble Watch:
December 30 – Bloomberg (Samuel Potter): “The world looks poised to begin 2020 with almost $12 trillion of bonds carrying a negative yield, up 40% from the start of this somewhat volatile year. While the pool of sub-zero debt is significantly smaller than the $17 trillion peak in August, there are signs of stabilization at current levels.”
January 1 – Bloomberg (Anchalee Worrachate): “The world’s biggest economies may roll over $8.7 trillion of debt maturing this year, but it won’t go far in sating almost bottomless demand for government bonds. The value of bills, notes and bonds coming due for the Group of Seven nations plus key emerging markets is up 25% from five years ago and slightly higher than the $8.6 trillion last year… Refinancing needs look set to be dominated by the U.S., which has $4.87 trillion of debt coming due, followed by Japan with $1.92 trillion. China’s tab will drop to $351 billion from $632 billion.”
December 30 – Wall Street Journal (Cara Lombardo and Dana Cimilluca): “This year was a big one for mergers and acquisitions, but it could have been even better. The value of deals announced globally reached $3.8 trillion through Dec. 27, making 2019 the fourth-best year on record for M&A. The combined value of deals fell just 4% short of last year’s total, according to Dealogic… Companies struck 12 deals worth more than $25 billion, twice last year’s total, led by United Technologies Corp. ’s $86 billion combination with defense contractor Raytheon… The U.S. was the standout region, with total deal value up 12% to $1.8 trillion.”
December 30 – Financial Times (Arash Massoudi, James Fontanella-Khan and Eric Platt): “Dealmakers outside the US cast an envious eye towards their American counterparts in 2019. As cross-border mergers and acquisitions plummeted to their lowest level since 2013, US companies struck big transactions at home, accounting for 15 out of the year’s biggest 20 deals. Nearly half of the $3.9tn in global M&A recorded this year involved US targets — a 6% rise from a year ago, according to data provider Refinitiv. The boom in the US contrasted with lacklustre dealmaking in European and Asian markets, which recorded $742bn and $757bn respectively in total acquisition value, a 25% decline for Europe and a 16% drop for Asia. The US activity was enough to power global M&A to its fourth-highest level on record.”
December 29 – Financial Times (Robin Wigglesworth): “One of the biggest trends in finance over the past decade has been the explosive growth of cheap, passive investment vehicles known as exchange traded funds. Although the ETF was first invented back in the early 1990s as a way to invigorate trading on the now-defunct American Stock Exchange, the industry has expanded dramatically in size and breadth since the financial crisis. The ETF universe has grown sixfold since the end of 2009 to almost $6tn today… Investor interest been fuelled by rising focus on cost — ETFs usually cost a fraction of actively managed, traditional mutual funds — and the continued inability of most active fund portfolio managers to beat their benchmarks.”
December 29 – Bloomberg (Emily Barrett, Chikako Mogi, and James Hirai): “The new decade could be the dawn of a tougher era for bond investors, as conditions that sustained the historic bull run in government debt fall away. Unprecedented central bank action has dominated economic stimulus since the global crisis and suppressed yields around the world. The skew may now be shifting more toward fiscal expansion that could pressure rates higher. Austerity is on the wane in Europe, spending packages are landing in Asia, and U.S. borrowing is on track for even bigger records in the next couple of years. The handoff from monetary to fiscal policy is a longer-run investment theme…”
December 30 – Reuters (Kane Wu): “China’s outbound mergers and acquisitions (M&As) clocked their weakest year in a decade in 2019, as an escalated U.S.-China trade war and tightened regulatory scrutiny of Chinese companies impacted appetite for overseas dealmaking. Chinese acquirers announced $41 billion in outbound deals this year, nearly halving from 2018 and less than a fifth of the 2016 peak… The number was only slightly higher than 2009 when dealmaking plunged after the financial crisis. Outbound deals into the United States dropped 80% this year from last to $2 billion.”
Leveraged Speculation Watch:
December 29 – Bloomberg (Nishant Kumar): “The pain kept coming for hedge funds in 2019: if they weren’t being killed off, they were bleeding cash or wringing out dismal returns. The industry is now on track to record more closures than launches for a fifth straight year, a blow to a market that once minted millionaires at a heady pace. More than 4,000 funds have been liquidated in the past five years… Investors are pulling money at an accelerated pace as high fees and mediocre returns send them searching for yield elsewhere. They’ve yanked $81.5 billion this year through November, more than twice the amount for the whole of 2018… As for returns, there’s little to cheer there. While the S&P 500 delivered a 28% gain this year through November, the Bloomberg Equity Hedge Fund Index only managed 10%.”
December 29 – Wall Street Journal (Rachael Levy): “Hedge funds are paying top dollar to bring in new employees with quantitative skills, underscoring the desperation some funds face to bulk up their abilities around big data and algorithms. A new survey from Baruch College’s financial engineering program found that recent graduates working at hedge funds made significantly more than their peers working at banks. Baruch’s master’s program teaches students skills like data science and financial modeling. At hedge funds, Baruch graduates’ pay ranged from around $200,000 to more than $1 million, the survey found. But for those alumni working at banks, pay ranged from about $100,000 to $400,000 a year.”
January 2 – Bloomberg (Nishant Kumar): “Russell Clark’s hedge fund slumped by 35% last year -- its biggest-ever annual loss -- as his short bets went awry during the longest bull market in history. The Horseman Global Fund has persistently wagered against equities since 2012, and raised its net short position to a record 111% of gross assets in October. Clark’s bold, contrarian move, which has made him one of the most watched hedge fund managers in the world, backfired as the S&P 500 index surged 31.5% last year.”
Geopolitical Watch:
January 3 – NBC (Charles W. Dunne): “Whether Americans realize it or not, the United States has just declared war on Iran. And, in part because the declaration was less than clear, that could be even more dangerous than it sounds. When the U.S. on Sunday assassinated Qassem Soleimani, a top Iranian general who directed violent anti-U.S. campaigns for more than 15 years, it transformed a long-simmering proxy tit-for-tat between the two sworn enemies to one of direct military confrontation — one to which Iran will have almost no choice but to react to forcefully (and has indeed already promised ‘revenge’).”
December 31 – Reuters (Patti Domm): “Protesters angry about U.S. air strikes on Iraq hurled stones and torched a security post at the U.S. Embassy in Baghdad on Tuesday, setting off a confrontation with guards and prompting the United States to send additional troops to the Middle East. The protests, led by Iranian-backed militias, posed a new foreign policy challenge for U.S. President Donald Trump, who faces re-election in 2020. He threatened to retaliate against Iran, but said later he does not want to go to war. The State Department said diplomatic personnel inside were safe and there were no plans to evacuate them.”
January 2 – Reuters: “A top Iranian commander said… that Iran was not moving toward a war but was not afraid of any conflict… ‘We are not leading the country to war, but we are not afraid of any war and we tell America to speak correctly with the Iranian nation. We have the power to break them several times over and are not worried,’ Revolutionary Guards Commander Brigadier General Hossein Salami was quoted… as saying.”
December 31 – Reuters (Hyonhee Shin and Sangmi Cha): “North Korea’s leader plans to further develop nuclear programs and to introduce a ‘new strategic weapon’ in the near future, state media said…, although he signaled there was still room for dialogue with the United States. Kim Jong Un presided over a four-day meeting of top Workers’ Party officials this week amid rising tensions with the United States, which has not responded to his repeated calls for concessions to reopen negotiations. Washington has dismissed the deadline as artificial.”
December 31 – Reuters (Yimou Lee): “Taiwan President Tsai Ing-wen said… the island would not accept a ‘one country, two systems’ political formula Beijing has suggested could be used to unify the democratic island, saying such an arrangement had failed in Hong Kong. China claims Taiwan as its territory, to be brought under Beijing’s control by force if necessary. Taiwan says it is an independent country called the Republic of China, its official name. Tsai, who’s seeking re-election in a Jan. 11 vote, also vowed in a New Year’s speech to defend Taiwan’s sovereignty, saying her government would build a mechanism to safeguard freedom and democracy as Beijing ramps up pressure on the island.”
December 29 – Reuters (Ece Toksabay and Ahmed Elumami): “Turkey’s foreign minister warned that the Libyan conflict risks sliding into chaos and becoming the next Syria, as he sought to speed up legislation to allow it to send troops to the North African country. Libya’s internationally recognized Government of National Accord (GNA) in Tripoli has been struggling to fend off General Khalifa Haftar’s forces, which have been supported by Russia, Egypt, the United Arab Emirates (UAE) and Jordan.”-
December 30 – Reuters (Orhan Coskun): “Turkey is considering sending allied Syrian fighters to Libya as part of planned military support for the besieged government in Tripoli…, potentially bringing more foreign influence into the complex conflict. President Tayyip Erdogan said last week Turkey would deploy troops to Libya after Fayez al-Serraj’s internationally-recognized government requested support to fend off an offensive by General Khalifa Haftar’s eastern forces.”
Geopolitical Watch:
January 3 – NBC (Charles W. Dunne): “Whether Americans realize it or not, the United States has just declared war on Iran. And, in part because the declaration was less than clear, that could be even more dangerous than it sounds. When the U.S. on Sunday assassinated Qassem Soleimani, a top Iranian general who directed violent anti-U.S. campaigns for more than 15 years, it transformed a long-simmering proxy tit-for-tat between the two sworn enemies to one of direct military confrontation — one to which Iran will have almost no choice but to react to forcefully (and has indeed already promised ‘revenge’).”
December 31 – Reuters (Patti Domm): “Protesters angry about U.S. air strikes on Iraq hurled stones and torched a security post at the U.S. Embassy in Baghdad on Tuesday, setting off a confrontation with guards and prompting the United States to send additional troops to the Middle East. The protests, led by Iranian-backed militias, posed a new foreign policy challenge for U.S. President Donald Trump, who faces re-election in 2020. He threatened to retaliate against Iran, but said later he does not want to go to war. The State Department said diplomatic personnel inside were safe and there were no plans to evacuate them.”
January 2 – Reuters: “A top Iranian commander said… that Iran was not moving toward a war but was not afraid of any conflict… ‘We are not leading the country to war, but we are not afraid of any war and we tell America to speak correctly with the Iranian nation. We have the power to break them several times over and are not worried,’ Revolutionary Guards Commander Brigadier General Hossein Salami was quoted… as saying.”
December 31 – Reuters (Hyonhee Shin and Sangmi Cha): “North Korea’s leader plans to further develop nuclear programs and to introduce a ‘new strategic weapon’ in the near future, state media said…, although he signaled there was still room for dialogue with the United States. Kim Jong Un presided over a four-day meeting of top Workers’ Party officials this week amid rising tensions with the United States, which has not responded to his repeated calls for concessions to reopen negotiations. Washington has dismissed the deadline as artificial.”
December 31 – Reuters (Yimou Lee): “Taiwan President Tsai Ing-wen said… the island would not accept a ‘one country, two systems’ political formula Beijing has suggested could be used to unify the democratic island, saying such an arrangement had failed in Hong Kong. China claims Taiwan as its territory, to be brought under Beijing’s control by force if necessary. Taiwan says it is an independent country called the Republic of China, its official name. Tsai, who’s seeking re-election in a Jan. 11 vote, also vowed in a New Year’s speech to defend Taiwan’s sovereignty, saying her government would build a mechanism to safeguard freedom and democracy as Beijing ramps up pressure on the island.”
December 29 – Reuters (Ece Toksabay and Ahmed Elumami): “Turkey’s foreign minister warned that the Libyan conflict risks sliding into chaos and becoming the next Syria, as he sought to speed up legislation to allow it to send troops to the North African country. Libya’s internationally recognized Government of National Accord (GNA) in Tripoli has been struggling to fend off General Khalifa Haftar’s forces, which have been supported by Russia, Egypt, the United Arab Emirates (UAE) and Jordan.”-
December 30 – Reuters (Orhan Coskun): “Turkey is considering sending allied Syrian fighters to Libya as part of planned military support for the besieged government in Tripoli…, potentially bringing more foreign influence into the complex conflict. President Tayyip Erdogan said last week Turkey would deploy troops to Libya after Fayez al-Serraj’s internationally-recognized government requested support to fend off an offensive by General Khalifa Haftar’s eastern forces.”
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