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Doug Noland’s Credit Bubble Bulletin: Short-Term Unsustainable

This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.

Outstanding Treasury Securities began 2008 at $6.051 TN, or 41% of GDP. Treasuries ended 2019 at $19.019 TN, or 87% of GDP. And then, in only three quarters, Treasuries surged another $3.882 TN to $22.900 TN, or 108% of GDP. We must wait a few weeks for the Fed’s Q4’s Z.1 report, but the federal government posted a fiscal deficit of $573 billion during this period, likely pushing outstanding Treasuries to near $23.5 TN, or about 110% of GDP. Since the end of 2007, Treasuries have inflated around $17.5 TN – approaching a three-fold increase.

For years now, I’ve listened as Washington politicians and central bankers admit to the obvious – that the trajectory of our federal debt is unsustainable – while invariably arguing it was not the time to be concerned or address it. With Treasuries blowing right through the 100% of GDP milepost – and likely poised to reach 125% within the next year or two – there’s no time like the present to recognize our nation is in serious fiscal trouble.

Senator John Thune (from Yellen’s confirmation hearing): “I’m going to try and roll a lot of thoughts and questions into sort of one big package here. But the one thing that concerns me that nobody seems to be talking about anymore is the massive amount of debt that we continue to rack up as a nation. And, in fact, the President elect has proposed a couple trillion dollar fiscal plan on top of that which we’ve already done – which would add somewhere on the order of about $5.3 trillion to deficits and that’s according to the committee for responsible budget of which you have been a board member.

That’s 25% of GDP, and it would move the additional debt above 100% debt to GDP – which is a category that we haven’t been in literally since the 1940s. And, so, what I’m concerned about is we seem to have no concern now about borrowing money in the short-term, and the argument is that interest rates are low. It’s like free money. It’s not. It has to be paid back.

And at some point, the risk/return ratio, that people who are lending us money are going to say, is not sufficient for the risk, and they’re going to demand a higher interest rate. That will happen at some point. Interest rates will start to normalize, and we have to refinance at a higher interest rate. And pretty soon the interest on the debt exceeds what we spend on even national security for our country.

Republicans traditionally have believed that we ought to reduce spending, we need to reform entitlement programs, that we need to have policies in place that create greater growth in the economy. All of which make the debt look smaller by comparison. Democrats have argued we need more revenue, more taxes…

But I just want to know what you think. Because I know in the past you’ve expressed concerns about the debt and the deficit. The two previous administrations have not been very interested in entitlement reform. We have not only the debt that we’re adding in the short-term because of the pandemic, but we have structural problems that are long-term that are going to continue to drive that debt higher in the future.

What your thoughts are with respect to reforming entitlements? With respect to the amount of the debt situation that we find ourselves in right now? And when is it enough? When is it too much? When do we hit that point where the thing starts to collapse? That’s what really concerns me. And nobody is talking about it really in either party anymore. It was something that used to occupy a lot of our discussions in the past, but nobody seems to care much about it.

And, for me, that is a huge warning sign on the horizon. The fact that we have an ever-growing deficit, an ever-growing debt and no apparent interest in taking the steps that are necessary to address it.”

Janet Yellen: “Senator, I agree with you that it’s essential that we put the federal budget on a path that’s sustainable. And that we’re responsible and make sure that what we do with respect to deficits and debt leave future generations better off. But the most important thing, in my view, that we can do today to put us on a path of fiscal sustainability is to defeat the pandemic, to provide relief to American people. And then to make long-term investments that will help the economy grow and benefit future generations.

To avoid doing what we need to do now to address the pandemic and the economic damage that it’s causing would likely leave us in a worse place fiscally and with respect to our debt situation than taking the steps that are necessary and doing that through deficit finance. We really have to worry about scarring due to this pandemic, of workers and the loss of small businesses that can really harm the long-run potential productivity of our economy and leave us with long run problems that would make it difficult to get back on the growth path that we were on.

And it’s really critically important to provide this relief now. And I believe it would be a false economy to stint. But over the longer term, I would agree with you that the long-term fiscal trajectory is a cause for concern. It’s something we will eventually need to attend to, but it’s also important for America to invest and invest in our infrastructure, invest in our workers, invest in R&D. The things that make our economy grow faster and make it more competitive and it’s important to remember that we’re in a very low interest rate environment. And that’s something that existed before the pandemic hit: interest rates were low even before the financial crisis of 2008. This has been a trend in developed economies, you can see it across the developed world, and it represents structural shifts that are likely to be with us a long time.

So, although the debt to GDP ratio has increased, it’s important to note that the interest burden of the debt – interest as a share of GDP – is no higher now than it was before the financial crisis in 2008 in spite of the fact that our debt has escalated. And, of course, interest rates can increase. Eventually we have to make sure that primary deficits in the budget are sufficiently small – that were on a sustainable path. But right now, our challenge is to get America back to work and to defeat the pandemic.”

The new administration’s view that Washington needs to be “on war footing” to win the battle over a once-in-a-century pandemic is understandable. The unemployment rate is currently 6.7%, businesses are failing, and there is even serious food insecurity in the U.S. For some perspective, the unemployment rate averaged 6.5% during the 20-year period 1980 to 1999.

This has been a terrible human tragedy, though there is light at the end of the tunnel. Millions of individuals and businesses are suffering mightily for no fault of their own. It’s terribly unfair, it sickens us, and as a nation we want to do what we can to rectify this injustice. Meanwhile, we are on trajectories that ensure a future crisis will see an even greater percentage of our population suffering mightily for no fault of their own. Dismissive talk of an unsustainable long-term debt trajectory disregards myriad frightening short-term trajectories – Fed assets, federal debt, system Credit, “money” supply, stock prices, option trading volume, etc.

The pandemic is not close to my greatest worry. These days I have greater fear for the runaway Credit Bubble. I worry about the mania that has enveloped the stock market. I fear consequences of a historic debt crisis in already contentious social and geopolitical backdrops.

February 2, 2012 – Politico (Josh Boak): “Federal Reserve Chairman Ben Bernanke told a congressional panel Thursday that shrinking the deficit ‘should be a top priority,’ saying that spending projections over the next decade are ‘clearly unsustainable.’ Stressing that the budgetary threat did not emerge from the past three years alone of $1 trillion-plus budget deficits — with a fourth expected for 2012 — meant to ease the recession and aid the recovery, Bernanke warned the debt could explode over the next 20 to 30 years to levels that could paralyze the economy. The government faces an aging population, fast-rising health care costs, and a failure to close the gap between taxes and spending.”

Between Bernanke’s 2012 “clearly unsustainable” comment and the end of his chairmanship in early 2014, the Fed expanded its balance sheet by over $1TN. The Yellen Fed added another $1 TN in 2014 – to $4.47 TN – fateful monetization in a non-crisis environment. Importantly, the Fed and global central bankers fundamentally altered market function. Treasury yields, for example, became divorced from expanding federal deficits. The Federal Reserve essentially granted Congress a blank checkbook, and the world will never be the same.

A critical issue gets zero attention these days: The pandemic struck as our nation – much of the world – was at a dangerous late-stage in a historic Bubble. We could not have been more poorly positioned. Washington will add in the neighborhood of $6 TN of debt over a couple years – part pandemic but much in response to Bubble Economy structural fragility. The Fed will expand its balance sheet upwards of $5 TN in a two-year period – part pandemic but more to sustain an increasingly erratic financial bubble. Egregious Monetary Inflation ensures Financial Bubble and Bubble Economy fragilities grow only more acute.

We’re in the throes of the greatest monetary inflation in U.S. history. Things have come home to roost – we just haven’t realized it yet. Fed liquidity is masking deep structural impairment, while Trillions necessary to stabilize a fragile Bubble Economy only push the runaway financial Bubble to more precarious extremes.

Traditionally, it was Federal Reserve doctrine to “lean against the wind” to at least ensure monetary policy was not exacerbating excess. The Fed some years back proclaimed it would not use rate policy to contain asset inflation and bubbles, choosing instead so-called macro-prudential measures. So how is our central bank reacting these days to such conspicuous excess: Well, it’s radio silence as they continue to pump $120bn of new liquidity monthly.

For too many years the Fed was content to disregard asset inflation and bubble dynamics. The fixation on tepid consumer price inflation has lacked credibility. The reemergence of “global savings glut” nonsense has been pathetic “analysis,” especially as unparalleled speculative leverage ballooned around the globe. The Fed was determined to sit back and keep financial conditions ultra-loose year after year, as if this would not promote historic debt growth, speculative excess and structural impairment.

Comments from Yellen and others suggest that low rates conveniently push potential issues far out into the future. Yet the problem is here and now; it’s acute – and the coronavirus is not the most pressing problem. The stock market mania is raging out of control. Debt growth is spiraling out of control. The Fed and global central banks are trapped in desperate inflationism. The Fed is poised to expand its balance sheet – add liquidity – to the tune of $1.5 TN this year with no regard for rampant asset price inflation and Bubbles. The trajectory of too many key metrics has gone parabolic, ensuring tremendous systemic damage is inflicted in a short period of time. And now the new administration has control of the blank checkbook and is determined to us it.

A day trader’s mentality has taken over our nation. There’s no long-term thinking or planning; everything is short-term focused. Ultra-loose financial conditions are supporting economic recovery. And while there are superficial short-term benefits, the costs to longer-term system stability are momentous. Washington is gambling with our nation’s future.

We’re witnessing today the consequence of the Fed and Washington’s disregard for asset inflation and Bubbles. At this point, aggressive stimulus is self-defeating. Zero rates stoke speculative excess in equities and corporate Credit. QE feeds liquidity into market Bubbles. Massive fiscal deficits inflate corporate earnings (and traders’ on-line accounts), while becoming instrumental to the bullish narrative and mania.

I wish the Biden administration nothing but success. I hope Yellen is right, because the next four years are critical for our nation. Our government today confronts major crises – the pandemic, unemployment, inequality, divisiveness and social instability, global competitiveness, climate change, mounting geopolitical risk and more. They have an aggressive agenda, and I would expect nothing less. And I don’t fault the administration for believing they will operate free of fiscal constraints.

I just can’t get over my fear that Washington is exacerbating the greatest risk to our nation’s future. M2 “money” supply has inflated a shocking $4.0 TN in 46 weeks – or 32% annualized. We’re witnessing the greatest monetary inflation the country has ever suffered – with nary a protest. The Credit Bubble is inflating the fastest ever. Arguably, stock market speculation is the most precarious since 1929. We’re witnessing the greatest redistribution of wealth in our nation’s history.

And when this Bubble eventually bursts, we’ll confront the terrible reality that the greatest expansion of non-productive debt ever fueled history’s greatest destruction of wealth.

Yellen: “The smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs.”

I hate being this pessimistic. But in no way do the long-term benefits of massive deficit spending today outweigh the cost. Current market and economic structures ensure resources are poorly utilized. The securities markets are today a powerful mechanism for resource misallocation and wealth-destruction. And I see Trillions of deficit spending generating limited sustainable economic benefit. Meanwhile, “acting big” will further fuel “Terminal Phase” excess, with terrible long-term consequences.

Yellen: “Well before COVID-19 infected a single American, we were living in a K-shaped economy, one where wealth built upon wealth while working families fell farther and farther behind.”

This “K-shape” is fundamental to Bubble Economy structure and a key manifestation of inflationism and resulting Monetary Disorder. As we’ve witnessed now for going on 10 months, throwing massive stimulus at the current structure exacerbates both Bubble excess and inequality.”

Yellen: “The world has changed. In a very low interest-rate environment like we’re in, what we’re seeing is that even though the amount of debt relative to the economy has gone up, the interest burden hasn’t.”

History will not be kind. A $3 TN plus annual deficit in the past would have been recognized as foolhardy if not negligent. It’s playing with fire. Washington has pushed things much too far – the most extreme debt growth and the most extreme Federal Reserve debt monetization. We’re witnessing an unprecedented late-cycle runaway expansion of risky non-productive debt – too much of it held by leveraged speculators. Market backlash is inevitable and overdue. I just don’t see market forces remaining inoperative indefinitely – supply and demand will matter again. The quantity and quality of system credit will prove momentously important.

Bloomberg: “‘The most important thing we can do is to defeat the pandemic, to provide relief to American people and to make long-term investments that make the economy grow and benefit future generations,’ said Yellen… Failure to address the crisis now ‘would likely leave us in a worse place fiscally,’ she said.”

The most important thing for our nation is to see a return to some semblance of fiscal and monetary sanity. I’m all for sound long-term investment, something our nation desperately needs. I’m not sure what we have to show for the $17 TN of Treasury debt accumulated since the last crisis. And it’s inexcusable that we came into the pandemic in such a fragile position – fiscally and in terms of the financial Bubble.

My biggest fear is materializing. When this historic Bubble bursts, a major crisis will unfold with our nation’s finances in complete shambles. The Fed’s “money printing” operation has gone parabolic as it desperately attempts to sustain an unsustainable Bubble. Treasury debt growth has gone parabolic as Washington tries to sustain an unsustainable economic structure. The system is on a trajectory that ensures a crisis of confidence – and I don’t see this as some long-term concern. This is an issue of short-term unsustainability.

Washington has employed massive fiscal and monetary stimulus despite ultra-loose financial conditions and booming markets. The big crisis commences – the unsustainable is no longer sustained – when financial conditions tighten and the financial Bubble bursts. The time for “acting big” is in a post-Bubble backdrop and definitely not while the Bubble is inflating madly.

For the Week:

The S&P500 rallied 1.9% (up 2.3% y-t-d), and the Dow added 0.6% (up 1.3%). The Utilities were little changed (up 0.8%). The Banks sank 2.9% (up 6.0%), and the Broker/Dealers fell 1.2% (up 4.2%). The Transports declined 0.7% (up 2.8%). The S&P 400 Midcaps rose 1.6% (up 6.8%), and the small cap Russell 2000 jumped 2.1% (up 9.8%). The Nasdaq100 surged 4.4% (up 3.7%). The Semiconductors advanced 2.7% (up 10.0%). The Biotechs rose 2.3% (up 7.4%). With bullion rallying $27, the HUI gold index recovered 1.5% (down 3.6%).

Three-month Treasury bill rates ended the week at 0.07%. Two-year government yields slipped a basis point to 0.12% (unchanged y-t-d). Five-year T-note yields declined two bps to 0.43% (up 7bps). Ten-year Treasury yields were unchanged at 1.09% (up 17bps). Long bond yields added a basis point to 1.85% (up 20bps). Benchmark Fannie Mae MBS yields fell four bps to 1.44% (up 10bps).

Greek 10-year yields increased three bps to 0.69% (up 7bps y-t-d). Ten-year Portuguese yields jumped seven bps to 0.07% (up 4bps). Italian 10-year yields surged 14 bps to 0.75% (up 21bps). Spain’s 10-year yields rose seven bps to 0.12% (up 8bps). German bund yields gained three bps to negative 0.51% (up 6bps). French yields rose four bps to negative 0.28% (up 6bps). The French to German 10-year bond spread widened one to 23 bps. U.K. 10-year gilt yields increased two bps to 0.31% (up 11bps). U.K.’s FTSE equities index declined 0.6% (up 3.6% y-t-d).

Japan’s Nikkei Equities Index added 0.4% (up 4.3% y-t-d). Japanese 10-year “JGB” yields added one basis point to 0.05% (up 3bps y-t-d). France’s CAC40 declined 0.9% (up 0.1%). The German DAX equities index increased 0.6% (up 1.1%). Spain’s IBEX 35 equities index dropped 2.6% (down 0.5%). Italy’s FTSE MIB index fell 1.3% (down 0.7%). EM equities were mixed. Brazil’s Bovespa index dropped 2.5% (down 1.4%), and Mexico’s Bolsa sank 2.6% (up 1.4%). South Korea’s Kospi index gained 1.8% (up 9.3%). India’s Sensex equities index slipped 0.3% (up 2.4%). China’s Shanghai Exchange rose 1.1% (up 3.8%). Turkey’s Borsa Istanbul National 100 index added 1.2% (up 4.5%). Russia’s MICEX equities index fell 2.0% (up 2.9%).

Investment-grade bond funds saw inflows of $8.248 billion, while junk bond funds posted outflows of $905 million (from Lipper).

Federal Reserve Credit last week jumped $90.6bn to $7.372 TN. Over the past year, Fed Credit expanded $3.258 TN, or 79%. Fed Credit inflated $4.561 Trillion, or 162%, over the past 428 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $24.4bn to a record $3.541 TN. “Custody holdings” were up $128bn, or 3.8%, y-o-y.

M2 (narrow) “money” supply surged $369bn last week to $19.548 TN, with an unprecedented 46-week gain of $4.040 TN. “Narrow money” surged $4.171 TN, or 27.1%, over the past year. For the week, Currency increased $10.8bn. Total Checkable Deposits jumped $45.8bn, and Savings Deposits surged $315.2bn. Small Time deposits dipped $2.8bn. Retail Money Funds were little changed.

Total money market fund assets declined $8.3bn to $4.307 TN. Total money funds surged $673bn y-o-y, or 18.8%.

Total Commercial Paper slipped $2.7bn to $1.058 TN. CP was down $56.9bn, or 5.1%, year-over-year.

Freddie Mac 30-year fixed mortgage rates declined two bps to 2.77% (down 83bps y-o-y). Fifteen-year rates slipped two bps to 2.21% (down 83bps). Five-year hybrid ARM rates fell back 32 bps to 2.80% (down 48bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 2.91% (down 104bps).

Currency Watch:

For the week, the U.S. dollar index declined 0.6% to 90.212 (up 0.3% y-t-d). For the week on the upside, the Swedish krona increased 1.2%, the Norwegian krone 0.9%, the New Zealand dollar 0.8%, the euro 0.7%, the British pound 0.7%, the Swiss franc 0.6%, the South African rand 0.6%, the Australian dollar 0.2%, and the Singapore dollar 0.1%. On the downside, the Brazilian real declined 3.1%, the Mexican peso 0.9% and the South Korean won 0.3%. The Chinese renminbi was about unchanged versus the dollar this week (up 0.71% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 1.7% (up 1.4% y-t-d). Spot Gold gained 1.5% to $1,856 (down 2.3%). Silver jumped 2.8% to $25.556 (down 3.2%). WTI crude slipped nine cents to $52.27 (up 8%). Gasoline gained 1.3% (up 10%), and Natural Gas sank 10.6% (down 4%). Copper added 0.7% (up 3.0%). Wheat dropped 6.1% (down 1%). Corn sank 5.8% (up 3%). Bitcoin sank $2,939, or 8.1%, this week to $33,322 (up 14.6%).

Coronavirus Watch:

January 18 – New York Post (Yaron Steinbuch): “Almost a third of recovered COVID-19 patients in a UK study ended up back in the hospital within five months — and up to one in eight died of complications from the illness… Researchers at the UK’s Leicester University and the Office for National Statistics found that out of 47,780 people discharged from the hospital, 29.4% were readmitted within 140 days… Of the total, 12.3% ended up dying, it added… Many people who suffer long-lasting effects of the coronavirus develop heart problems, diabetes and chronic liver and kidney conditions, according to the report.”

January 19 – Associated Press (Merilynn Marchione): “The race against the virus that causes COVID-19 has taken a new turn: Mutations are rapidly popping up, and the longer it takes to vaccinate people, the more likely it is that a variant that can elude current tests, treatments and vaccines could emerge. The coronavirus is becoming more genetically diverse, and health officials say the high rate of new cases is the main reason. Each new infection gives the virus a chance to mutate as it makes copies of itself, threatening to undo the progress made so far to control the pandemic. On Friday, the World Health Organization urged more effort to detect new variants. The U.S. Centers for Disease Control and Prevention said a new version first identified in the United Kingdom may become dominant in the U.S. by March.”

January 20 – New York Times (Apoorva Mandavilli): “The steady drumbeat of reports about new variants of the coronavirus — first in Britain, then in South Africa, Brazil and the United States — have brought a new worry: Will vaccines protect against these altered versions of the virus? The answer so far is yes, several experts said… But two small new studies… suggest that some variants may pose unexpected challenges to the immune system, even in those who have been vaccinated — a development that most scientists had not anticipated seeing for months, even years… But experts who reviewed the papers agreed that the findings raised two disturbing possibilities. People who had survived mild infections with the coronavirus may still be vulnerable to infection with a new variant; and more worryingly, the vaccines may be less effective against the variants.”

January 17 – Wall Street Journal (Elizabeth Findell, Jared S. Hopkins and Dan Frosch): “In Texas, a man slept in his car for two nights straight to keep his place in a vaccination line. In Kentucky, residents registered online for shots, but found when they arrived that their doses were taken by walk-ins. In New Mexico, state officials scrambled to hire more people after a vaccination hotline was overwhelmed with calls. The biggest challenge in America’s Covid-19 vaccination effort is getting shots into the arms of the right people. By Friday morning, some 31 million vaccine doses had been distributed nationwide, but only about 12 million administered…”

January 19 – New York Times (Carl Zimmer): “In late December, scientists in California began searching coronavirus samples for a fast-spreading new variant that had just been identified in Britain. They found it, though in relatively few samples. But in the process, the scientists made another unwelcome discovery: California had produced a variant of its own. That mutant… seemed to have popped up in July but lay low till November. Then it began to quickly spread. CAL.20C accounted for more than half of the virus genome samples collected in Los Angeles laboratories on Jan. 13… There’s no evidence that CAL.20C is more lethal… But Eric Vail, the director of molecular pathology at Cedars-Sinai, said it was possible that CAL.20C is playing a large part in the surge of cases… ‘I’m decently confident that this is a more infectious strain of the virus,’ Dr. Vail said.”

January 18 – Associated Press (Robert Jablon): “California… became the first state to record more than 3 million known coronavirus infections. The grim milestone… wasn’t entirely unexpected in a state with 40 million residents but its speed stunning. The state only reached 2 million reported cases on Dec. 24.”

Market Mania Watch:

January 22 – CNBC (Bob Pisani): “Stock trading volumes are through the roof. It’s not just equity prices that are hitting new highs in 2021. Trading volumes for stocks and options are at records as well. ‘For trading volumes, the new year starts at a consistent, unprecedented strong & record pace,’ according to Rich Repetto, who tracks trading volumes at Piper Sandler. Much of it is being driven by retail investors, who are continuing the high level of engagement that began in 2020… Year over year, January volumes are up 92%, and from December, they are up 33%.”

January 19 – Reuters (Marc Jones): “Nearly 90% of respondents in Deutsche Bank’s monthly investor survey said financial markets now had a number of price bubbles, with cryptocurrency Bitcoin and U.S. tech stocks top of the list.”

January 22 – Wall Street Journal (David Benoit): “In 2020, underwriters were the kings of Wall Street. The biggest investment banks recorded better-than-expected years, even though a global pandemic sent shockwaves through businesses and households. No business grew more than their operations selling stocks. In the spring, clients bracing for economic trouble turned to stock markets to raise cash. In the latter part of 2020, it was the SPACs—special-purpose acquisition vehicles—that raised billions of dollars as a quick and suddenly popular way to get more companies into the public markets’ wide-open arms.”

January 19 – Bloomberg (Sridhar Natarajan): “Goldman Sachs Group Inc.’s dealmakers capped their record year with a fourth-quarter revenue jump that helped the bank double its profit. Investment-banking revenue climbed 27% from a year earlier as fees from equity underwriting nearly tripled. The firm’s stock traders delivered a 40% revenue increase… Net income more than doubled to $4.51 billion in the quarter, the highest in more than a decade…”

January 17 – Financial Times (Laura Noonan): “JPMorgan… and Citigroup’s fourth straight quarter of blowout trading results have tempered fears that Wall Street’s boom was running out of steam… JPMorgan reported a 20% increase in trading revenues year on year, led by a 32% jump in revenues from stock trading. Citi’s stock trading revenues were up 57% on the same basis, while its total revenues from trading stocks, bonds and derivatives were up 14%. The strong quarter capped off a bumper year for Wall Street as the volatility inspired by the coronavirus pandemic — and central bank actions designed to ease the economic impact — led to market conditions described as ‘nirvana’ by the head of trading at one large bank.”

January 22 – Wall Street Journal (Karen Langley): “Public companies have been taking advantage of a hot stock market by issuing shares at record pace in January. U.S.-listed companies have conducted 57 follow-on stock offerings this year through Wednesday, raising $12.35 billion. Both numbers are records for this point in the year, according to Dealogic… Many of the offerings have been from small pharmaceutical and other health-care firms.”

January 19 – Bloomberg (Catherine Traywick, Josh Saul, Mark Chediak and David R. Baker): “Fuelcell Energy Inc., a clean-energy developer that hasn’t reported an annual profit in 20 years, is hardly a household name. But thanks to the mania for green stocks, the company’s market value has soared 800% in recent months to reach $5.6 billion. It’s not alone. Since November, a wave of once-obscure clean-energy companies have seen their valuations skyrocket into the billions — despite generating little or no net income. Some of them are riding Tesla Inc.’s coattails after the industry giant’s own market capitalization reached a record $834 billion this month…”

January 20 – Reuters (Thyagaraju Adinarayan and Saikat Chatterjee): “A 1000% jump in the penny stock of a company with no staff and a high school investing club that doubled its money are just two examples of the big gains to be made from a retail share trading boom that shows no sign of flagging in 2021. Three weeks into the year, as world markets hit new record highs, retail investors, often trading from home on mobile phones, are credited with boosting the fortunes of the small-cap Russell 3,000 share index, where 10 of the top 20 best performers have surged by around 75% since the start of 2021. There is little or no research coverage on some of these companies… Shares in an over-the-counter traded U.S. healthcare company Signal Advance soared to $70 from 70 cents in under a week after Signal was mistaken for an unlisted texting app also called Signal that Tesla founder Elon Musk had tweeted about… ‘These are not normal markets!!’ — Deutsche Bank strategist Jim Reid said.”

January 21 – Wall Street Journal (Michael Wursthorn): “The U.S. stock market’s most popular financial services exchange-traded fund is hovering near an all-time high for the first time since the onset of the Covid-19 pandemic, propelled by a handful of big stocks. The Financial Select Sector SPDR ETF, which has roughly $30 billion in assets and tracks the S&P 500’s financial sector, reached $31.46 a share last week, eclipsing its February 2020 high.”

Market Instability Watch:

January 20 – Bloomberg (Lu Wang): “After gutting buybacks to conserve cash, American corporations are repurchasing shares again. Corporate officers, on the other hand, are showing a bit less enthusiasm for their employers’ shares. In the first two weeks of the new year, a total of 1,000 insiders sold their own stock and 128 bought shares, leaving the sell-to-buy ratio poised for the highest monthly reading in data going back to 1988… Meanwhile, corporations announced $29 billion of buybacks over the stretch, up 46% from a year earlier, data compiled by Birinyi Associates show.”

January 21 – Wall Street Journal (Matt Wirz): “Investment-grade corporate bonds have been among the poorest performers in debt markets this year and rising U.S. Treasury yields are stoking worries that worse has yet to come. Investors who hold bonds from highly rated companies lost about 0.90% on average this year through Jan. 20… That compares with a 0.63% return on high-yield bonds and a 0.10% performance from municipal debt.”

January 16 – Financial Times (Joe Rennison): “For one influential watcher of the credit world, conditions in the corporate bond market are starting to look unnerving. Matt Mish, who heads up UBS’s credit strategy team, likens the current state of the market to a tower of Jenga blocks. At the moment, crucial support is being provided by central bank buying across the globe, holding borrowing costs low and providing a backstop if investor demand falls. As that support is removed, piece by piece, the tower could begin to wobble. ‘At some point, investors are going to realise that the Jenga puzzle is losing more and more pieces,’ said Mr Mish. ‘It doesn’t mean the tower will definitely collapse but it has the potential to create more volatility.’”

January 22 – Bloomberg (Michael Msika): “Bank of America Corp. strategists warned the ‘extreme rally’ on Wall Street that has pushed stocks to record highs, fueled by strong U.S. policy stimulus, is forming a bubble in asset prices. ‘D.C.’s policy bubble is fueling Wall St’s asset price bubble,’ strategists led by Michael Hartnett wrote… ‘When those who want to stay rich start acting like those who want to get rich, it suggests a late-stage speculative blow-off.’ The strategists predict a market correction and for positioning to peak in the first quarter, with the BofA Bull & Bear Indicator closing in on a ‘sell signal.’”

Social, Political and Environmental Instability Watch:

January 17 – The Hill (John Bowden): “Seven in 10 Americans say democracy and the rule of law in the U.S. are ‘threatened,’ according to a CBS News survey. The survey… found just 29% of Americans say that a democratic system of government is ‘secure’ or ‘very secure,’ while 71% said that it was at risk.”

January 18 – Bloomberg (Mark Chediak and Brian K. Sullivan): “California utilities started cutting power to residents to prevent wildfires in an unprecedented move for this time of year. The measure is designed to prevent live wires from sparking blazes as high winds are set to sweep through the drought-weary state amid summer-like temperatures. More than 290,000 homes and business are at risk of losing electricity…”Global Bubble Watch:

January 18 – Reuters (Andrea Shalal and Simon Johnson): “The head of the International Monetary Fund… said the global lender needed more resources to help heavily indebted countries, citing a highly uncertain global economic outlook and a growing divergence between rich and poor countries. IMF Managing Director Kristalina Georgieva, who has long advocated a new allocation of the IMF’s own currency, Special Drawing Rights (SDRs), said doing so now would give more funds to use address both the health and economic crisis, and accelerate moves to a digital and green economy.”

Biden Administration Watch:

January 20 – Yahoo News (David Knowles and Brittany Shepherd): “President Biden issued a warning Wednesday to his appointees that a hostile workplace will not be allowed in his administration. Addressing approximately 1,000 political appointees during a virtual swearing-in ceremony on his first day in the White House, Biden said: ‘I’m not joking when I say this: If you ever work with me and I hear you treat another colleague with disrespect, talk down to someone, I will fire you on the spot. No ifs, ands or buts.’”

January 18 – Wall Street Journal (Gerald F. Seib): “Every new president and Congress face their own particular set of challenges, which tend at the outset to feel both unique and daunting—though sometimes they actually aren’t as new and momentous as they seem. Such, however, isn’t the case as President-elect Joe Biden and a reconfigured Congress take office. It isn’t hyperbole to describe the tasks facing Washington’s new political alignment as unprecedented. Mr. Biden starts off with two broad problems no modern president has ever faced: a continuing pandemic and a predecessor who has worked tirelessly to convince Americans that the past election was illegitimate… Pile on top of that a Congress that is more evenly divided between the two parties than at any point in 20 years, the largest federal debt as a share of the economy since World War II and a rising global competitor in China…”

January 22 – The Hill (Jordain Carney): “Biden pledged to unify the country after the tumultuous years of the Trump presidency, and Democrats are vowing to use their first unified government in more than a decade to enact a ‘bold’ agenda. But they are facing significant hurdles to getting anything done fast. There’s a looming second impeachment trial for former President Trump and, in the meantime, a chaotic Senate that is stuck in limbo amid a standoff on a power-sharing agreement with Republicans. ‘Things are on hold. I’ve got a lot of things I want to do,’ Sen. Dick Durbin (D-Ill.) said of the impact of not having a power-sharing deal on Biden’s agenda. Biden’s problems are two-fold: His Cabinet nominees appear poised to move at a sluggish pace and two of his legislative priorities – coronavirus relief and immigration reform – are already being panned by top Republicans.”

January 21 – Bloomberg (Mike Dorning and Steven T. Dennis): “Joe Biden began Inauguration Day joining in prayer at a church service with the Democrats’ legislative nemesis, Mitch McConnell, a gesture of unity after four years of division and bitterness that will quickly be tested by the new president’s ambitious plans. No relationship may be more important to the tone and domestic agenda of Biden’s presidency than his dealings with McConnell, the Senate Republican leader who bestowed on himself the nickname ‘Grim Reaper’ of Democrats’ plans as he regularly obstructed Obama administration priorities.”

January 21 – CNBC (Thomas Franck and Jacob Pramuk): “President Joe Biden’s first Covid-19 package is already facing hurdles in Congress that threaten to force the fledgling administration to curb some of its more progressive aims just one week after the proposal’s debut. Early critiques from Republican Sens. Lisa Murkowski of Alaska and Mitt Romney of Utah, two members of the bipartisan group of senators who crafted the framework for December’s stimulus package, challenged the $1.9 trillion plan. Both expressed doubts… over the need for another bill, especially one with such a price tag, less than one month after Congress passed the $900 billion measure just before the Christmas break.”

January 18 – Wall Street Journal (Kate Davidson and Jon Hilsenrath): “A big question hangs over Janet Yellen this week at her confirmation hearing to become U.S. Treasury secretary: How much debt is too much? In the past four years, U.S. government debt held by the public has increased by $7 trillion to $21.6 trillion. President-elect Joe Biden has committed to a spending program that could add trillions more in the year ahead. At 100.1% of gross domestic product, the debt already exceeds the annual output of the economy, putting the U.S. in company with economies including Greece, Italy and Japan. When Ms. Yellen served in the Clinton administration as Chairwoman of the White House Council of Economic Advisers, she was among those who pushed for a balanced budget.”

January 19 – Bloomberg (Saleha Mohsin): “Janet Yellen encountered early Republican resistance to President-elect Joe Biden’s $1.9 trillion Covid-19 relief plan in her confirmation hearing…, as she sought backing for what she described as vital support for the economy. ‘Right now, short term, I feel that we can afford what it takes to get the economy back on its feet, to get us through the pandemic,’ Yellen told the Senate Finance Committee… Republicans are already balking, at both the size and at components tied to longstanding Democratic goals such as raising the minimum wage to $15 an hour and expanding family and medical leave. ‘Now is not the time to enact a laundry list of liberal structural economic reforms,’ Republican Senator Chuck Grassley said…”

January 19 – New York Times (Alan Rappeport): “Janet L. Yellen… vowed… to pursue policies to help workers whose livelihoods have been upended by the pandemic as she warned lawmakers that the U.S. economy faced a painful stretch… Ms. Yellen made her comments at her confirmation hearing before the Senate Finance Committee. A former Federal Reserve chair, she enjoys bipartisan support and is expected to win confirmation. But the hearing underscored the challenges that the Biden administration will face in trying to put its economic agenda into place, with Republican lawmakers drawing early battle lines and voicing opposition to the $1.9 trillion stimulus package… ‘We’re looking at another spending blowout,’ said Senator Patrick J. Toomey… ‘The only organizing principle I can understand, it seems, is to spend as much money as possible, seemingly for the sake of spending it.’”

January 20 – Reuters (David Lawder, Andrea Shalal, Ann Saphir and David Shepardson): “Janet Yellen, U.S. President-elect Joe Biden’s nominee for Treasury Secretary, urged lawmakers… to ‘act big’ on coronavirus relief spending, arguing that the economic benefits far outweigh the risks of a higher debt burden. In more than three hours of confirmation hearing testimony, the former Federal Reserve chair laid out a vision of a more muscular Treasury that would act aggressively to reduce economic inequality, fight climate change and counter China’s unfair trade and subsidy practices. Taxes on corporations and the wealthy will eventually need to rise to help finance Biden’s ambitious plans for investing in infrastructure, research and development, and for worker training to improve the U.S. economy’s competitiveness, she told… the Senate Finance Committee.”

January 20 – Bloomberg (Saleha Mohsin, Christopher Condon and Rich Miller): “Janet Yellen invoked an enduring era of low interest rates in delivering the Biden administration’s opening argument to lawmakers for its $1.9 trillion Covid-19 relief proposal. President-elect Joe Biden’s pick for Treasury secretary told the Senate Finance Committee… the slew of spending — from aid to small businesses and the unemployed to funding for state governments — was needed to fight the pandemic, while playing down concerns about the debt it creates. ‘The world has changed,’ Yellen… said… ‘In a very low interest-rate environment like we’re in, what we’re seeing is that even though the amount of debt relative to the economy has gone up, the interest burden hasn’t.’”

January 20 – Financial Times (Ruchir Sharma): “New US president Joe Biden arrives at the White House… with splashy plans for $1.9tn in new stimulus, buoyed by a solidifying consensus in the American elite that deficits don’t matter. Warnings that rising deficits will reignite inflation and undermine the dollar have proved wrong for decades, so deficit hawks are increasingly easy to mock as crotchety old scolds. The new view, expressed by leading figures from the IMF, academia and media, is that with inflation long dead and interest rates at record lows, it would be unwise, even irresponsible, not to borrow to boost the economy. The amounts — billions, trillions — hardly matter, especially not for the US, which still has the world’s most coveted currency. Mr Biden captured this elite view perfectly when he said… ‘With interest rates at historic lows, we cannot afford inaction.’ This view overlooks the corrosive effects that ever higher deficits and debt have already had on the global economy.”

January 19 – Bloomberg (Saleha Mohsin): “Janet Yellen said the U.S. won’t seek a weaker exchange rate to gain advantage over other nations, and said if confirmed as Treasury secretary that she will work against any moves by other countries to pursue such a strategy. ‘The United States does not seek a weaker currency to gain competitive advantage and we should oppose attempts by other countries to do so,’ Yellen said…”

January 19 – Financial Times (James Politi and Colby Smith): “Janet Yellen warned US trading partners against currency manipulation and touted the importance of market-based exchange rates in her most exhaustive comments yet on the incoming Biden administration’s approach to international economic policy. Ms Yellen… said ‘the intentional targeting of exchange rates to gain commercial advantage is unacceptable’ and that she would ‘oppose any and all attempts by foreign countries to artificially manipulate currency values to gain an unfair advantage in trade’.”

January 19 – Bloomberg (Liz Capo McCormick): “All it took was a non-committal comment from Janet Yellen to persuade Treasury traders there’s a chance the U.S. will finally expand maturities in the world’s biggest bond market beyond 30 years… ‘There is an advantage to funding the debt, especially when interest rates are very low, by issuing long-term debt, and I would be very pleased to look at this issue and examine what the market would be like for bonds of this maturity,’ Yellen said when asked about longer-term debt, including 50-year Treasuries.”

January 22 – Financial Times (Robert Armstrong and Patrick Temple-West): “After four years of hibernation during Donald Trump’s administration, the US financial regulator charged with protecting consumers was always going to get a new lease of life under President Joe Biden. But this week’s nomination of Rohit Chopra to run it was a signal that the new administration wants it to quickly roar back into action — and Wall Street’s lobbyists have taken note. Mr Chopra, a member of the Federal Trade Commission, is a longtime ally of the fierce finance industry critic Senator Elizabeth Warren…”

January 18 – Reuters (Michelle Price): “Wall Street may be facing an uncomfortable four years after President-elect Joe Biden’s team confirmed… it planned to nominate two consumer champions to lead top financial agencies, signaling a tougher stance on the industry than many had anticipated. Gary Gensler will serve as chair of the Securities and Exchange Commission (SEC) and Federal Trade Commission member Rohit Chopra will head the Consumer Financial Protection Bureau (CFPB). Progressives see the agencies as critical to advancing policy priorities on climate change and social justice. Wall Street-friendly Republicans… criticized Biden for bowing to leftists, warning the picks would be divisive.”

January 19 – Financial Times (Katrina Manson, Aime Williams and Michael Peel): “Joe Biden has promised to put an end to Donald Trump’s isolationist, disruptive approach to global relations. But a Biden administration bid to restore American leadership will require time and political capital just when the superpower’s global role stands in doubt at home and abroad. While diplomats are not likely to hear the phrase ‘America First’ for a while, Mr Biden will face challenges including countering China, re-entering the nuclear deal with Iran, resetting relations with Europe and dealing with the fallout of Brexit on the relationship with the UK.”

January 19 – Reuters (Humeyra Pamuk, Patricia Zengerle and David Brunnstrom): “U.S. President-elect Joe Biden’s nominee to be secretary of state, Antony Blinken, said… he will work to revitalize damaged American diplomacy and build a united front to counter the challenges posed by Russia, China and Iran. At his confirmation hearing… Blinken said he would work with allies and with humility. ‘We do have a big task ahead of us in restoring, revitalizing those relationships. I do think it starts… with showing up again,’ said Blinken. ‘Some of our allies and partners question the sustainability of our commitments based on the past few years and that’s going to be a hard hill to climb.’”

January 20 – Bloomberg (Josh Wingrove and Nancy Cook): “President Joe Biden’s team is increasingly worried the coronavirus pandemic is spiraling out of control — imperiling his promise to contain the outbreak — as cases and deaths mount, vaccinations lag and a more-transmissible strain emerges in the U.S., according to people familiar… As they learned more about the federal response to the pandemic, Biden’s transition team grew alarmed at a lack of coordination with states, the people said.”

January 21 – CNBC (Yen Nee Lee): “U.S. President Joe Biden and his predecessor Donald Trump may disagree about many things, but China isn’t one of them. Biden’s team has shown early signs that it agrees with the previous administration on several ‘extremely touchy’ issues concerning China, an American public policy expert said… The ‘early signals’ show that the Biden administration ‘may change the tone and tenor of the conversation with Beijing — but they’re not really gonna change the policy,’ said Lanhee Chen, director of domestic policy studies and lecturer at Stanford University.”

January 22 – Financial Times (Aime Williams and Justin Jacobs): “China has purchased less than three-fifths of the US goods projected under the ‘phase one’ trade deal that paused a tariff dispute between the two countries a year ago, posing another challenge for the administration of Joe Biden… Under the terms of the deal, China agreed to buy $200bn more of US goods and services than it did in 2017, before the start of the trade dispute, over a two-year period to the end of 2021. Trade analysts have been measuring Beijing’s progress towards that goal, and the latest Chinese import data suggest the country is falling far behind.”

January 19 – Reuters (Diane Bartz and Nandita Bose): “The incoming administration of U.S. President-elect Joe Biden is considering creating a White House position focused on competition policy and issues relating to antitrust, two sources familiar… said. The idea remains under consideration and the Biden White House may not ultimately make the move, one of the sources said. ‘It is yet to be determined if this will be more of a coordinator kind of a role or if this person will really sit at the White House,’ said another source… Antitrust enforcement has emerged as an issue the Biden transition team has been watching closely, especially with the rise of Big Tech platforms…”

January 22 – Bloomberg (Shahien Nasiripour): “Thanks to vagaries of the accounting world, Donald Trump’s administration had a chance in the final weeks of the presidential race to cancel more than $200 billion of student loans with no immediate hit to the Department of Education’s massive portfolio. Yet it didn’t do it. Now, perhaps Joe Biden will. For years, bean counters at the department have been writing down the value of its $1.4 trillion portfolio of student debt as they adopted ever-more-pessimistic views of how much borrowers will repay. In September, the analysts made their biggest adjustment yet, valuing loans at just 82 cents on every dollar owed, down from 104 cents in 2015… The debt is now worth $258 billion less than the amount outstanding.”

Trump Administration Watch:

January 19 – Financial Times (Courtney Weaver): “Donald Trump has said the movement he started as US president was ‘only just beginning’, acknowledging the imminent handover of power while avoiding any reference to president-elect Joe Biden by name in a farewell address from the White House. In his final pre-recorded remarks posted before he departs the US capital…, Mr Trump touted his administration’s accomplishments and the personal role he played in everything from his trade war with China to the Covid-19 pandemic. ‘I took on the tough battles, the hardest fights, the most difficult choices — because that’s what you elected me to do,’ Mr Trump said…, calling himself ‘the only true outsider ever to win the presidency’.”

January 16 – Associated Press (Brian Slodysko): “Republicans are worried that a corporate backlash stirred by the deadly Capitol insurrection could crimp a vital stream of campaign cash, complicating the party’s prospects of retaking the Senate in the next election. The GOP already faces a difficult Senate map in 2022, when 14 Democratic-held seats and 20 Republican ones will be on the ballot. That includes at least two open seats that Republicans will be defending because of the retirements…”

Federal Reserve Watch:

January 20 – CNBC (Jeff Cox): “There likely will be no nasty tweets in the middle of the night excoriating the Federal Reserve to lower interest rates. Nor will its officials be called ‘boneheads’ should their actions not be in keeping with President Joe Biden’s wishes. But that doesn’t mean the U.S. central bank won’t face pressure as it looks to navigate its way through a new administration. Challenges ahead include the coronavirus pandemic, as well as demands for a more inclusive economy and a stronger approach toward social issues, such as racial equality and climate change. There also will be an interesting new dynamic, where Treasury Secretary nominee Janet Yellen will, if confirmed, have the added benefit of being a former Fed chair.”

January 21 – Bloomberg (Liz Capo McCormick and Craig Torres): “Every new sign that U.S. financial markets finally see some inflation in the pipeline is another piece of good news for the Federal Reserve. Bond-market indicators of inflation, from long-term yields to the cost of hedging, have all pushed higher in recent weeks… Investors can see price pressures waking up — perhaps more than the U.S. is accustomed to lately, but well short of Fed targets, let alone anything that would set off alarm bells… Expansionary fiscal policy is helping to drive the change in outlook. That gives the central bank, which meets next week to discuss policy, another reason to cheer.”

U.S. Bubble Watch:

January 21 – CNBC (Jeff Cox): “Americans continued to hit the unemployment line in large numbers as the ongoing surge of Covid cases added to America’s unemployment problem last week. Jobless claims totaled 900,000 for the week ended Jan. 16… That was slightly less than the Dow Jones estimate of 925,000 and below the previous week’s downwardly revised total of 926,000.”

January 21 – Bloomberg (Reade Pickert): “U.S. home construction starts rose in December to the best pace since late 2006 as builders responded to the robust demand for single-family housing. Residential starts climbed by 5.8% to a 1.67 million annualized rate… That topped all estimates in a Bloomberg survey… that had a median forecast of 1.56 million and compared with an upwardly revised 1.58 million rate in November… The Federal Reserve’s ultra-easy monetary policy has helped push mortgage rates to record lows that are attracting more potential home buyers and underpinning historically strong demand.”

January 20 – Wall Street Journal (Dan Gallagher): “Wireless carriers clearly believe their own press about 5G. And they are wagering a huge sum to prove it. The latest auction of wireless spectrum licenses by the Federal Communications Commission ended… with a total of $80.9 billion. Adding in an estimated $13 billion to $14 billion in clearing costs to help move satellite operators to new frequencies will bring the total bill for this latest auction to around $95 billion—roughly triple what many analysts had projected. All for the purpose of securing the necessary capacity for the latest standard of wireless networking known as 5G.”

January 17 – Bloomberg (Davide Scigliuzzo): “Americans have become, by some measures, richer during the pandemic than ever before. It’s a difficult thing to fathom, what with the economic collapse and the surge in the ranks of the jobless, the homeless and the hungry. But there’s a whole class of people — at least the top 20% or so of earners — who’ve had to worry little about such matters. For them, not only has it been relatively easy to carry out their white-collar jobs from home. But the Federal Reserve’s unprecedented emergency measures… have padded their wallets too. They’ve refinanced their mortgages at record low rates, purchased second homes to get away from cities and watched the value of the stocks and bonds in their investment accounts surge. Their massive wealth accumulation is, in large part, obscuring the toll felt by all those who don’t enjoy the same easy access to credit or financial markets. As household net worth surged to a fresh record, hundreds of thousands of businesses are estimated to have permanently shut, over 10 million Americans remain jobless, and nearly three times as many are going hungry at night.”

January 19 – Wall Street Journal (Anne Tergesen): “How much has the pandemic hurt Americans’ retirement security? Not as much as you might think. After improving slightly in 2019, the outlook for financial security in retirement for workers ages 30 to 59 deteriorated in 2020, according to a study… by Boston College’s Center for Retirement Research. According to the study, 51% of U.S. households are now at risk of being unable to maintain their standard of living in retirement. That is up from 49% in 2019.”

January 19 – Reuters (Koh Gui Qing, Michelle Price and Pete Schroeder): “The U.S. government is pressuring large lenders to go live this week with another round of a key federal pandemic loan program despite many unresolved issues, sparking an industry scramble to get lending platforms ready… The Paycheck Protection Program (PPP) reopens to large lenders on Tuesday, with many big banks including JPMorgan…, Wells Fargo… and Bank of America, ready to start accepting applications, their representatives said.”

January 19 – Bloomberg (Stacie Sherman): “New York Governor Andrew Cuomo warned of tax increases on the wealthy and cuts to schools, local government and social services unless the state gets a budget-balancing $15 billion infusion from President-elect Joe Biden’s $350 billion stimulus proposal. Cuomo, 63, presented a state budget for fiscal 2022… with two scenarios: ‘worst case’ and ‘fair funding.’ Under the former, New York receives about $6 billion from the federal government, which he said would force him to raise revenue, cut expenses and turn to ‘significant borrowing.’”

January 20 – Bloomberg (Patrick Clark): “U.S. hotels recorded the lowest occupancy rates on record in 2020, as the Covid-19 pandemic kept travelers at home and ate up lodging industry profits. Hotel occupancy was just 44% for the year, down from 66% in 2019 and the lowest number on record, according to… STR.”

Fixed Income Watch:

January 19 – Reuters (Gertrude Chavez-Dreyfuss): “Foreign holdings of U.S. Treasuries declined for a fourth straight month in November, with Japan reducing its load of U.S. debt for four consecutive months as well… Foreign investors held $7.053 trillion in U.S. government debt in November, down from $7.068 trillion the previous month. Japan’s holdings, the largest non-U.S. holder of Treasuries, slipped to $1.260 trillion in November from $1.269 trillion in October.”

China Watch:

January 19 – Reuters (Winni Zhou and Andrew Galbraith): “China’s primary short-term money rates surged on Wednesday to the highest level since the early days of the coronavirus pandemic a year ago, driven by rising seasonal cash demand, despite the central bank offering huge amounts of short-term funds. The Shanghai Interbank Offered Rate (Shibor) for one-week tenor… jumped 22.6 bps (bps) to 2.493% on Wednesday, the loftiest level since Feb. 3, 2020, from 2.267%…”

January 18 – Financial Times (Thomas Hale and Sun Yu): “China’s gross domestic product expanded 6.5% in the fourth quarter of 2020, beating forecasts and making the country one of the few in the world to register positive growth for the year. Year-on-year GDP growth for the final quarter beat expectations…, with the Chinese economy expanding 2.3% over the course of the full year as industrial production continued to drive the country’s recovery.”

January 20 – Bloomberg: “Defaults by Chinese companies are likely to top last year’s record as tighter monetary policy squeezes borrowers, according to China Merchants Securities Co. Some 39 Chinese companies both domestically and offshore defaulted on nearly $30 billion of bonds in 2020, pushing the total value 14% above 2019’s. ‘The central bank will implement more prudent monetary policies this year,’ said Yuze Li, a credit analyst at China Merchants Securities. ‘More companies may face refinancing pressure. As the maturities jump, the default amounts will climb by an estimated 10%-30% from the previous year,’ he said…”

January 16 – Wall Street Journal (Xie Yu and Chong Koh Ping): “China’s property developers have a mountain of international debt to refinance this year, and tight lending conditions are raising the risk of defaults. The real-estate firms need to repay up to $53.5 billion of offshore debt this year, a sharp increase from the $25.4 billion that came due in 2020…The bulk of the debt—$47.6 billion—is dollar bonds. The CreditSights figures include maturing bonds and a smaller sum of puttable debt, which has a longer maturity but which investors have the right to sell back during 2021. At the same time, support from China’s powerful state banks is waning, profits are still recovering after tumbling in the early phase of the pandemic and regulators are taking a tougher stance on financial risk in the sector.”

January 20 – Bloomberg: “A Chinese developer sold about a half of a planned new domestic bond this week, in a sign of weak demand as stronger regulatory scrutiny and repayment risks pressure the debt-laden real estate sector… Earlier this month, rival Greenland Holding Group also missed its bond sales target.”

January 20 – Bloomberg: “Shanghai housing authorities are considering tighter rules on home purchases as part of efforts to calm the market in the Chinese financial hub, the National Business Daily reported. The potential restrictions include banning prospective buyers from putting deposits on more than one new-home project…”

Central Bank Watch:

January 21 – Bloomberg (Alexander Weber): “The European Central Bank kept its monetary support for the coronavirus-stricken economy unchanged, betting that its recently scaled-up stimulus package is powerful enough to soften the impact of extended lockdowns. President Christine Lagarde and her colleagues held the pandemic bond-buying program at 1.85 trillion euros ($2.25 trillion), after a 500 billion-euro boost last month, and reiterated that it will run until at least March 2022. They left the deposit rate at -0.5%, and said they’ll continue providing ‘ample’ liquidity through long-term bank loans.”

January 21 – Financial Times (Martin Arnold): “The European Central Bank will decide how much to spend on its emergency bond-buying programme by checking if bank lending rates, corporate credit conditions and government bond yields are favourable enough to boost demand and inflation. The new details about how the ECB defines its recently added objective of ‘favourable financing conditions’ were set out by its president Christine Lagarde… after the central bank left its main stimulus policies and interest rates unchanged. The announcement came six weeks after the ECB expanded its emergency bond-buying programme to €1.85tn and extended it well into next year in response to a resurgence of coronavirus infections in the eurozone that is expected to drag the bloc into a double-dip recession this winter.”

EM Watch:

January 21 – Bloomberg (Livia Yap): “Emerging-market stocks have set a new swath of record highs this week, driven by optimism over additional U.S. stimulus and a dovish Federal Reserve. The rally’s gaining momentum even as some technical indicators are showing a pullback is overdue. The MSCI Emerging Markets Index has now gained more than 9% this year, extending a rebound from its low during the coronavirus sell-off in March to a heady 88%… Exchange-traded funds covering developing-nation assets drew the highest inflows in more than a year last week, with traders increasing their holdings by a combined $3.56 billion… In total, that was an 11th straight week of inflows, increasing total assets to $332.1 billion…”

January 19 – Bloomberg (Divya Patil and Anil Poonia): “India’s troubled shadow banks face mounting challenges to a nascent recovery from the pandemic, with their asset quality set to deteriorate further as flagged recently by the financial regulator. Non-performing assets already swelled in the most recent data to the highest in at least five years, at 6.3% as of March 2020 even before the worst of the pandemic impact… That’s up 100 bps from a year earlier, and the RBI forecasts it’s headed higher.”

January 18 – Bloomberg (Bhuma Shrivastava, Bibhudatta Pradhan and P R Sanjai): “Two of India’s richest men have landed in an unlikely controversy over farming laws, becoming targets of protesters who allege the tycoons have benefited from their close links to Prime Minister Narendra Modi. For weeks, tens of thousands of farmers have camped outside the nation’s capital, demanding the withdrawal of recently passed legislation they say, without evidence, was designed to allow billionaires… to enter farming… More than 1,500 phone towers of Ambani’s wireless carrier were vandalized last month and some farmers called for a boycott of their businesses. The fight between the government and the farmers has revived the debate on what Modi’s critics call cozy nexus between the magnates and the popular leader…”

Europe Watch:

January 19 – Associated Press (Frances D’Emilio and Colleen Barry): “Italian Premier Giuseppe Conte squeaked through a crucial Senate confidence vote…, allowing him to keep his wobbly coalition afloat but failing to secure the reliable support needed from lawmakers to help him effectively govern the country with its pandemic-pummeled economy. The vote went 156 to 140 in his favor.”

January 20 – Reuters (Giuseppe Fonte): “Italian Prime Minister Giuseppe Conte won near unanimous parliamentary backing for extra spending for the COVID-hit economy…, just hours after he narrowly survived an attempt by a junior coalition partner to unseat him. Laying aside their normal animosity, opposition and coalition parties joined forces to approve the 32-billion-euro ($38.7bn) stimulus package in both houses of parliament… It will push the budget deficit to 8.8% of gross domestic product this year, Economy Minister Roberto Gualtieri said…, only marginally below the 10.5-10.8% seen for 2020.”

January 16 – Reuters (Giuseppe Fonte): “Italy forecasts its debt to soar to a new post-war record level of 158.5% of gross domestic output (GDP) this year, surpassing the 155.6% goal it set in September… The new estimate reflects the impact of a stimulus package worth 32 billion euros ($39bn) announced this week, which will drive the 2021 budget deficit to 8.8% of national output, up from 7% previously targeted.”

January 19 – Wall Street Journal (Margherita Stancati and Bojan Pancevski): “Covid-19 infections and deaths remain stubbornly high across much of Europe while vaccination efforts are moving so slowly that widespread immunity is unlikely in the region before the fall… With between 3,000 and 4,000 people dying from the disease every day across the European Union in recent weeks.., governments are prolonging and tightening antivirus measures such as curfews, remote learning and restaurant closures. Fears are growing, too, of more contagious variants of the virus taking hold before governments can scale up their vaccination programs.”

January 22 – Bloomberg (Birgit Jennen): “Germany cut its prediction for economic growth as the extension of coronavirus lockdowns hits activity at the start of the year. The government now expects a 3% expansion in 2021, down from 4.4% forecast at the end of October…”

January 18 – Reuters (Francesco Canepa): “The German economy is managing to stay afloat but could suffer a ‘sizeable setback’ if coronavirus curbs are extended again, the Bundesbank said… Germany has taken increasingly tight measures, such as closing some schools and shops, to curtail movement and gatherings since the autumn as it battles a second wave of infections.”

January 19 – Financial Times (Martin Arnold): “Eurozone banks scaled back lending to businesses and households late last year as a resurgence in coronavirus cases across the single currency bloc prompted fresh lockdowns which fuelled fears of rising bad debts, according to a European Central Bank survey. In the final quarter of 2020, banks tightened their lending guidelines and approval criteria for new loans to businesses by the most since the 2008 financial crisis and several of them expected to rein in access to credit further in the first quarter of this year… Banks also tightened their lending criteria for mortgages and consumer credit…”

January 18 – Reuters (Alexander Weber and Silla Brush): “The European Union needs to find new ways to recapitalize businesses so that the hole on corporate balance sheets doesn’t derail the recovery… Companies face an equity shortfall of as much as 600 billion euros ($724bn), as existing government programs and private funding won’t suffice to fully cover the roughly 1 trillion euros that businesses need to replace losses suffered during coronavirus restrictions, the Association for Financial Markets in Europe said…”

Japan Watch:

January 21 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan Governor Haruhiko Kuroda looked to keep all his options open for a policy review in March following two critical months that will likely determine whether the pandemic will ease or take a turn for the worse. Speaking… after the central bank left all of its main policy settings unchanged, Kuroda spent much of his time counting nothing out of the review into the mechanics of the bank’s stimulus program. The one point he insists will not change is the BOJ’s basic approach to stimulus.”

Leveraged Speculation Watch:

January 19 – Financial Times (Ortenca Aliaj): “Hedge fund assets hit a record last year as the industry delivered its best performance in more than a decade during the most tumultuous year for markets since the 2008 financial crisis. Assets surged $290bn during the final three months of the year, marking the biggest-ever quarterly jump and bringing total assets under management to a record $3.6tn, according to… HFR… The HFRI Fund Weighted Composite index, which tracks a range of strategies, gained 11.6% in 2020, its best return since 2009.”

January 18 – Wall Street Journal (Gregory Zuckerman): “Quant pioneer Renaissance Technologies LLC sent clients an analysis of its performance and a rationalization of recent deep losses, an unusual move for one of Wall Street’s most secretive firms. In the letter sent late Friday, the firm said losses of between 20% and 30% in 2020 for its three funds open to outside investors should have been expected at some point during the course of the funds’ histories. The letter partly blamed heightened volatility for the weak performance. Still, some clients said the letter was short on meaningful explanations.”

Geopolitical Watch:

January 20 – Reuters (Ben Blanchard): “Taiwan’s de facto ambassador in Washington attended the inauguration of U.S. President Joe Biden, hearting the Chinese-claimed island which has been nervous it would not win the same level of support from the new government as the previous one… ‘The first-ever invitation to Taiwan’s representative to the U.S. to attend the Inaugural Ceremonies, the most significant event celebrating U.S. democracy, highlights the close and cordial ties between Taiwan and the United States based on shared values,’ it said.”

January 19 – Wall Street Journal (Stephen Fidler): “The global coronavirus pandemic has intensified the rivalry between the U.S. and China, increasing future instability in international diplomatic relations, according to an annual report… from the World Economic Forum. The report, which draws on opinions of hundreds of executives and academics associated with the WEF, as well as risk-management specialists, says the pandemic threatens to widen income and other disparities within and between societies, increasing the risks of a further fracturing inside some states and in international relations. Covid-19 ‘has entrenched state power and intensified rivalry between the United States and China,’ the report says, forcing other powers to choose sides.”

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