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Doug Noland: Junctures and New Cycles

This is a syndicated repost published with the permission of Credit Bubble Bulletin . To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The lazy days of such a sweltering summer are not when Wall Street would typically be on the lookout for market junctures. Bonds might be at a one: the so-called “year of the bond” or, instead, another year of a transformative bond bear market?

August 11 – Bloomberg (Farah Elbahrawy and Greg Ritchie): “US Treasuries are on course for a record year of inflows as investors chasing some of the highest yields in months pile into cash and bonds, according to Bank of America… Cash funds attracted $20.5 billion and investors poured $6.9 billion into bonds in the week through August 9… Meanwhile, US stocks had their first outflow in three weeks at $1.6 billion. Flows into Treasuries have reached $127 billion this year, set for an annualized record of $206 billion, BofA said.”

There were good reasons for bonds to rally, including huge investment flows. And at 3.2%, Thursday’s July headline CPI (y-o-y) was a tick better-than-expected – “smallest back-to-back gains in more than two years” – to near the lowest level since March 2021.

Ten-year Treasury yields traded at 3.97% on pleasing CPI data, the low yield for August trading. Yields then reversed and ground higher for the remainder of the session, closing Thursday up 9.5 bps at 4.11%. Benchmark MBS yields traded as low as 5.65% in early-Thursday trading, only to end the session up 13 bps on the day to 5.88%.

And while Friday’s July PPI came in a tenth higher-than-expected at 0.3% (up 0.8% y-o-y), the bond market should have taken some comfort from the University of Michigan’s one-year consumer inflation expectations component, reported two-tenths below the consensus estimate of 3.3% – equaling a more than two-year low. Beyond favorable U.S. inflation data, Treasuries would have typically responded positively to heightened financial stress and weak markets in China.

In what would have been a good week for bonds turned into an uncomfortably lousy one. Ten-year Treasury yields rose another five bps Friday, pushing the week’s gain to 12 bps (to 4.15%). Ten-year yields are again knocking on the door of the 4.24% spike high from last October. Things are looking even rougher in mortgage land. Benchmark MBS’s 11 bps Friday jump boosted the week’s yield gain to a notable 23 bps. MBS yields traded above 6% intraday Friday (closed at 5.97%), again within striking distance of the 6.10% October high.

The market’s impulse to sell the good CPI news is not confounding. The Pollyanna “immaculate disinflation” case gets tougher going forward. Energy prices have bounced back, with the Ukraine war and inhospitable climate elevating food price risks. But mainly, some prices that spiked (i.e., used cars and airline tickets) have come off the boil. Now the focus will shift to more structural issues. For one, ongoing tight labor markets virtually ensure strong wage growth and second-round inflationary pressures.

August 9 – CNBC (Leslie Josephs): “UPS’ CEO said drivers will average $170,000 in pay and benefits such as health care and pensions at the end of a five-year contract that the delivery giant struck with the Teamsters Union last month, averting a strike. The tentative agreement covers some 340,000 workers at the package carrier… ‘We expect our new labor contract to be ratified in 2 weeks,” UPS CEO Carol Tomé said… The company cut its full-year revenue and margin forecasts ‘primarily to reflect the volume impact from labor negotiations and the costs associated with the tentative agreement.’”

August 9 – Bloomberg (Michael Mackenzie): “A closely watched bond-market gauge of expected US inflation is rising back toward a nine-year high, signaling concern the Federal Reserve may continue to wrestle with elevated price pressures for years. Ahead of the latest monthly consumer-price index data…, a key long-term measure of where the market sees inflation heading has risen to around 2.5%, just shy of the peak in April 2022, when it reached the highest since 2014. The upward shift in the gauge — the so-called US five-year inflation breakeven that begins in 2028 — stands in contrast to broader speculation that the Fed’s steep interest-rate hikes are set to keep reining in the biggest consumer-price surge since the 1980s.”

Meanwhile, Crisis Dynamics have gained momentum in China. Country Garden – the former largest and “model developer” – now has a “penny stock” that traded Friday at an all-time low. The company missed a $25 million bond payment due Monday, which starts the clock ticking on a 30-day grace period before official default. Bond yields (2025) that were at 17% in February – after beginning 2022 below 7% – spiked Friday to a record 187% (trading at seven cents on the dollar). With an apology, the company announced a larger-than-expected $7.6 billion first-half loss – followed soon by a three-notch Moody’s downgrade to Caa1.

From Bloomberg: “Once considered relatively immune to the credit crunch, the Foshan-based developer has become a proxy for financial contagion in an industry that accounts for about a quarter of the country’s gross domestic product.”

With China’s system not buckling under the stress of Evergrande’s 2022 default, there is today an element of complacency in global markets. Country Garden ended 2022 with liabilities just under $200 billion. It is a household name in China, with more than 3000 complexes spread across the country (over half in smaller so-called “tier 3” and “tier 4” cities). A New York Times article referenced a disparaging online conversation that attracted 100 million views.

Reuters (Alun John): “Credit distress at Chinese private developer Country Garden is likely to spill over to the country’s property and financial markets, weakening sentiment and delaying the recovery of the property sector, Moody’s… said.”

To better appreciate unfolding China risks, it’s important to recognize the Ponzi Finance elements to the Chinese housing market. Buyers of new apartments typically must provide large down payments prior to the start of construction – funds often used to complete previously sold units. The Evergrande default sent shock-waves through housing markets, with project delays/cancelations leading to widespread public outrage and protests. Potential buyers have backed away from the more troubled developers and the entire group of private developers, more generally, choosing instead to purchase from public and quasi-public builders.

Country Garden’s July sales were down 60% from July 2022 (75% from July 2021). This week’s news will have a further chilling effect on company sales and housing sentiment. So far, apartment price deflation has been relatively moderate compared to the scope of deteriorating fundamentals. Country Garden and other private developers will increasingly resort to aggressive discounting to drive sales. Analysts expect Country Garden to make bond payments over the next month to avoid imminent default. But absent a Beijing bailout, prospects for recovery appear dim.

Moody’s: “These developments would likely drive potential homebuyers away from privately owned developers to state-owned developers—if not from the property markets—in the near term.”

For years, land sales have been a major source of local government revenues, ballooning cash flows that spurred unending borrowing and spending on infrastructure and pet projects. The apartment bust has weakened this critical revenue stream. It appears (Ponzi-like) purchases by local government financing vehicles (LGFV) sustained this game over the past year, with LGFVs piling on more debt for land purchases that funneled cash into local government coffers.

The Country Garden solvency crisis risks accelerating the jump of Crisis Dynamics from housing to local government finance.

August 11 – Bloomberg: “China will allow provincial-level governments to raise about 1 trillion yuan ($139bn) via bond sales to repay the debt of local-government financing vehicles and other off-balance sheet issuers, a small step toward addressing one of the biggest threats to the nation’s economy and financial stability… The program will in effect bail out weaker issuers including LGFVs, shifting the debt burden to provincial governments instead.”

August 10 – Financial Times (Cheng Leng, Qianer Liu and Sun Yu): “Beijing is making one of its biggest top-down efforts in years to tackle the debts racked up by local governments in a sign of authorities’ mounting concern over the risk to financial stability… China’s State Council, the country’s cabinet, is sending teams of officials to more than 10 of the financially weakest provinces to scrutinise their books — including the liabilities of opaque off-balance sheet entities — and find ways to cut their debts… The enormous debts accumulated by China’s provinces have become an urgent problem for policymakers as they try to end the country’s long reliance on a debt-fuelled infrastructure binge to drive economic growth. One Goldman Sachs estimate puts the total local government debt pile at Rmb94tn ($13tn), including the liabilities of the off-balance sheet entities known as local government financing vehicles.”

Some might ponder why Beijing doesn’t just bite the bullet and commit to a $1 TN developer bailout. Perhaps it’s because they confront a much bigger festering crisis, with $13 TN of local government debt spread across hundreds of entities – some accounted for, but much of the hidden variety.

Like the scores of stimulus measures announced over recent months, this week’s plan to transfer $139 billion of LGFV debts to the books of provincial governments is understandably viewed in the markets as a drop in the bucket. It’s interesting to contemplate the massive $600 billion response to the “great financial crisis.” With China’s banking system having inflated to $60 TN, even a 10-fold increase of 2009 stimulus would today provide little more than a jug of water in the bucket.

Ponzi: developer trouble curtails big consumer down payments, which spurs developer industry insolvency that ends a key source of finance for highly over-levered local governments – that places an egregiously bloated banking system in harm’s way. The commonly cited statistic of real estate accounting for 25% of Chinese GDP surely understates the role history’s greatest apartment Bubble has played in fueling China’s Bubble Economy structure.

August 9 – Reuters (Liangping Gao and Ryan Woo): “China’s consumer sector fell into deflation and factory-gate prices extended declines in July, as the world’s second-largest economy struggled to revive demand and pressure mounted on Beijing to release more direct policy stimulus. Anxiety is rising that China is entering an era of much slower economic growth akin to the period of Japan’s ‘lost decades’, which saw consumer prices and wages stagnate for a generation, a stark contrast to the rapid inflation seen elsewhere. The consumer price index (CPI) dropped 0.3% year-on-year in July… It was the first decline since February 2021.”

I proceed cautiously when using the “deflation” label. After all, I’ve listened to its recurring use throughout three decades of history’s greatest Credit Bubble. It’s a challenge analytically to suggest China is in deflation, with Aggregate Financing (China’s metric of system Credit) having expanded almost $4.5 TN, or 9.2%, over the past year – and with the M2 monetary aggregate having inflated $3.8 TN, or 10.7%, to $39.42 TN.

There’s some nuance in analyzing Chinese inflation data. For one, some sectors (including energy) are carefully regulated when it comes to raising prices. The rapid deterioration in Chinese corporate profits is at least partially explained by the inability to pass along rising costs. But China clearly has massive overcapacity in some sectors, with a confluence of waning demand from an increasingly disillusioned consumer sector, collapsing investment, and waning exports depressing economic activity. What makes China’s current predicament all the more ominous is that Bubble collapse has been proceeding despite ongoing rapid Credit growth.

Data suggest a destabilizing Chinese Credit slowdown could now be unfolding. August Credit growth was abysmal. The $48 billion increase in Bank Loans was the weakest since November 2009. Aggregate Financing rose $73 billion, the smallest increase in data back to 2017.

With Consumer Loans contracting $27 billion, total Bank Loans ($48bn) were down sharply from June’s $421 billion and less than half of expectations. The lending slowdown was broad-based. The $33 billion gain in Corporate Loans was down from June’s $315 billion to the weakest level since October 2020. Corporate Bond Issuance of $118 billion slowed markedly from June’s $222 billion.

We don’t want to overreact to one month of data, especially for typically weak first months of new quarters. And while we need to be mindful of a period that includes two first months, we now have a notable four-month period of weak Credit expansion. At $1.04 TN, four-month growth in Aggregate Financing was 23% below comparable 2022 – and was the weakest since 2019. A 5.6% growth rate over four months reduced the one-year expansion to 9.2%, the weakest in data back to 2017.

The Shanghai Composite dropped 3.0% this week, the largest weekly drop since December. The CSI 300 fell 3.4%. The Hang Seng China Financials Index’s 2.1% Friday drop pushed losses for the week to 4.4%. The renminbi lost 0.92% against the dollar (down 4.66% y-t-d) to within 0.2% of a nine-month low.

The week had a New Cycle feel. Beijing just doesn’t have things under control as before, with the so-called “great meritocracy” struggling to come up with a comprehensive strategy to hold Bubble collapse at bay. Patience in this piecemeal, reactionary, finger in the dyke approach seems to be wearing thin. I have to assume the default strategy of burdening their overburdened banking system with more high-risk late-cycle loans will suffice until Xi Jinping has an epiphany (that it ain’t gonna work). At that point, the PBOC cranks up the electronic printing press. China sovereign CDS jumped seven this week to 62 bps, the largest weekly gain since March.

Returning to the U.S. bond market, it also felt New Cycle. Markets are pricing in only a 12% probability of a rate increase during the Fed’s September 20th meeting, with a 36% probability of a hike by the November 1st meeting. Fed tightening has likely concluded, according to the market. Yet bond yields are on a commanding march higher.

Market focus has shifted from Fed policy to more fundamental concerns, including persistent inflation and endless supply. It has all the makings of a paradigm shift after three decades, when inflation and supply could essentially be disregarded. And it goes without saying: the previous bond market paradigm had a momentous effect on equities valuations and global asset prices generally.

The world has changed. Covid – and the incredible monetary and fiscal pandemic responses – changed the world. Russia’s invasion of Ukraine changed the world. China’s pursuit of global superpower status, along with its partnership with Putin to establish a new world order, has changed the world. Years of runaway debt growth and inflationism forever altered the world. And now climate change is in the process of reshaping economies and societies. And the world grew so accustomed to indiscriminately inflating the quantity of financial claims year after year – with central banks ensuring ever increasing financial asset market values.

It was never going to be sustainable. The world is in the process of rapid and momentous change, and these changes are not constructive for financial assets. Perhaps the bond market is signaling a new paradigm, an unfolding New Cycle and long-overdue revaluation.


For the Week:

The S&P500 slipped 0.3% (up 16.3% y-t-d), and the Dow declined 0.6% (up 6.4%). The Utilities recovered 0.8% (down 9.9%). The Banks fell 14% (down 14.1%), and the Broker/Dealers lost 1.7% (up 10.8%). The Transports declined 0.7% (up 21.0%). The S&P 400 Midcaps fell 0.8% (up 9.5%), and the small cap Russell 2000 slumped 1.7% (up 9.3%). The Nasdaq100 dropped 1.6% (up 37.4%). The Semiconductors sank 5.0% (up 38.8%). The Biotechs rallied 1.0% (down 0.9%). With bullion falling $29, the HUI gold equities index slipped 0.2% (down 0.5%).

Three-month Treasury bill rates ended the week at 5.2625%. Two-year government yields jumped 13 bps this week to 4.89% (up 47bps y-t-d). Five-year T-note yields rose 17 bps to 4.30% (up 30bps). Ten-year Treasury yields gained 12 bps to 4.15% (up 28bps). Long bond yields increased six bps to 4.29% (up 30bps). Benchmark Fannie Mae MBS yields surged 23 bps to 5.97% (up 59bps).

Greek 10-year yields jumped 11 bps to 3.89% (down 68bps y-t-d). Italian yields gained four bps to 4.25% (down 45bps). Spain’s 10-year yields rose four bps to 3.64% (up 12bps). German bund yields gained six bps to 2.62% (up 18bps). French yields rose six bps to 3.15% (up 17bps). The French to German 10-year bond spread was little changed at 53 bps. U.K. 10-year gilt yields jumped 15 bps to 4.53% (up 86bps). U.K.’s FTSE equities index declined 0.5% (up 1.0% y-t-d).

Japan’s Nikkei Equities Index increased 0.9% (up 24.4% y-t-d). Japanese 10-year “JGB” yields dropped eight bps to 0.58% (up 16bps y-t-d). France’s CAC40 added 0.3% (up 13.4%). The German DAX equities index declined 0.8% (up 13.7%). Spain’s IBEX 35 equities index increased 0.7% (up 14.6%). Italy’s FTSE MIB index fell 1.1% (up 19.3%). EM equities were mixed. Brazil’s Bovespa index fell 1.2% (up 7.6%), and Mexico’s Bolsa index lost 1.4% (up 9.9%). South Korea’s Kospi index dipped 0.4% (up 15.9%). India’s Sensex equities index declined 0.6% (up 7.4%). China’s Shanghai Exchange Index sank 3.0% (up 3.2%). Turkey’s Borsa Istanbul National 100 index surged 4.2% (up 40.0%). Russia’s MICEX equities index gained 2.0% (up 46.5%).

Investment-grade bond funds posted inflows of $217 million, and junk bond funds reported outflows of $282 million (from Lipper).

Federal Reserve Credit declined $18.7bn last week to $8.171 TN. Fed Credit was down $729bn from the June 22nd, 2022, peak. Over the past 204 weeks, Fed Credit expanded $4.445 TN, or 119%. Fed Credit inflated $5.361 TN, or 191%, over the past 561 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $8.7bn last week to $3.454 TN. “Custody holdings” were up $76.2bn, or 2.3%, y-o-y.

Total money market fund assets gained $14.4bn to a record $5.530 TN, with a 22-week gain of $636bn (31% annualized). Total money funds were up $963bn, or 21.1%, y-o-y.

Total Commercial Paper increased $5.8bn to $1.172 TN. CP was down $5.2bn, or 0.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates added three bps to an eight-month high 6.95% (up 173bps y-o-y). Fifteen-year rates rose eight bps to 6.39% (up 180bps). Five-year hybrid ARM rates surged 27 bps to 6.78% (up 235bps) – to the high in data back to 2003. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 7.73% (up 190bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 0.8% to 102.84 (down 0.6% y-t-d). On the upside, the Mexican peso increased 0.4%. On the downside, the Norwegian krone declined 2.7%, the South African rand 2.6%, the Japanese yen 2.2%, the New Zealand dollar 1.8%, the Swedish krona 1.8%, the South Korean won 1.1%, the Australian dollar 1.1%, the Singapore dollar 0.9%, the Brazilian real 0.7%, the euro 0.5%, the Swiss franc 0.5%, the Canadian dollar 0.5%, and the British pound 0.4%. The Chinese (onshore) renminbi declined 0.92% versus the dollar (down 4.66%).

Commodities Watch:

August 7 – Bloomberg (Sybilla Gross): “China raised its gold reserves for a ninth straight month in July as central bank purchases continue to underpin prices of the precious metal. Bullion held by the People’s Bank of China rose by 740,000 troy ounces… That’s equivalent to about 23 tons. Total stockpiles now sit at 2,137 tons, with around 188 tons added in a run of purchases that began in November.”

August 11 – Bloomberg (Grant Smith): “Global oil demand has surged to a record amid robust consumption in China and elsewhere, threatening to push prices higher, the International Energy Agency said. World fuel use averaged 103 million barrels a day for the first time in June and may soar even higher in August… As Saudi Arabia and its partners constrict supplies, oil markets are tightening significantly. ‘Oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity,’ the… IEA said. ‘Crude and products inventories have drawn sharply’ and ‘balances are set to tighten further into the autumn.’”

August 7 – Bloomberg: “Chinese copper inventories are nearing critical levels, according to Goldman Sachs…, suggesting that supply constraints could become more influential in driving prices given that the bulk of global stockpiles are held in China. China’s stockpiles of refined metal are at a record low in terms of demand cover, accounting for just four days of usage versus an average of eight days last year, the bank said… Goldman called that position ‘extreme’ and said the sharply lower growth rate in the supply of mined copper could worsen the situation further.”

The Bloomberg Commodities Index slipped 0.3% (down 6.4% y-t-d). Spot Gold fell 1.5% to $1,914 (up 4.9%). Silver sank 4.0% to $22.69 (down 5.3%). WTI crude increased 37 cents, or 0.4%, to $83.19 (up 4%). Gasoline rallied 6.5% (up 21%), and Natural Gas surged 7.5% to $2.77 (down 38%). Copper dropped 3.8% (down 2.4%). Wheat declined 1.0% (down 21%), and Corn fell 2.0% (down 30%). Bitcoin gained $360, or 1.2%, to $29,390 (up 77%).

Global Bank Crisis Watch:

August 9 – Wall Street Journal (Telis Demos): “Regional bank stocks have been on a tear lately. But what is happening with their bonds should be a wake-up call. On Monday, ratings firm Moody’s… took action on 27 banks, including downgrading the credit ratings of 10 and putting others under review or giving their ratings a negative outlook. Credit ratings are very important for banks, which fund themselves partly with deposits, but also by selling bonds. Many of the reasons for the actions will be familiar: Rising deposit costs and risks to commercial property and construction loans posed by the shift to remote work. They might even feel a bit tired, after second-quarter earnings reports showed that many regional lenders had reversed or slowed deposit outflows…”

August 8 – Bloomberg (Hari Govind and Steve Dickson): “US bank stocks declined after Moody’s… lowered its ratings for 10 small and midsize lenders and said it may downgrade major firms including U.S. Bancorp, Bank of New York Mellon Corp., State Street Corp., and Truist Financial Corp. Higher funding costs, potential regulatory capital weaknesses and rising risks tied to commercial real estate are among strains prompting the review, Moody’s said… ‘Collectively, these three developments have lowered the credit profile of a number of US banks, though not all banks equally,’ the rating company said.”

August 6 – Financial Times (Stephen Gandel and Joshua Franklin): “US banks are still relying on hundreds of billions of dollars in government financing that was crucial in shoring up the industry after the collapse of Silicon Valley Bank almost four months ago… One source of the funding comes from 11 government-sponsored wholesale regional lenders known collectively as the Federal Home Loan Banks, which would likely be bailed out by Washington if they were to fail. Data last week from the FHLB Office of Finance reported that US banks and credit unions had $880bn in outstanding loans at the end of June from the entities…”

August 7 – Bloomberg (Natalie Wong): “Banks seeking to sell commercial-property loans are encountering a dried-up market with few options for an easy exit. Lenders including Goldman Sachs… and JPMorgan… have been trying to sell debt backed by offices, hotels and even apartments in recent months, but many are finding that tidying up loan books is no easy feat when concerns about commercial real estate have surged.”

August 8 – Financial Times (Joshua Franklin and Stephen Gandel): “US banks suffered almost $19bn of losses on soured loans in the second quarter, the highest level in more than three years as lenders contend with rising defaults among credit card and commercial real estate borrowers. Lenders reported $18.9bn in so-called charge-offs — losses on loans marked as unrecoverable — during the quarter, an increase of almost 17% on the previous three months and 75% higher than the same period last year. In all, banks lost 61 cents for every $100 loaned, the most since the second quarter of 2020 when the Covid-19 pandemic was ravaging the economy.”

UK Crisis Watch:

August 11 – Reuters (Andy Bruce and David Milliken): “Britain’s economy eked out unexpected growth in the second quarter, laying the ground for more interest rate hikes from the Bank of England, but it remained the only big advanced economy yet to regain its pre-COVID, late-2019 level… The economy grew 0.2% in the second quarter, against the consensus for a flat reading… The figures sent the pound sharply higher against the U.S. dollar and euro.”

August 10 – Reuters (James Davey and Muvija M): “British homeware and household goods discount retailer Wilko said it had fallen into administration on Thursday, putting its 400 stores and 12,500 jobs in danger if a buyer can’t be found. The family-owned retailer sought protection from creditors after failing to secure emergency funding, having suffered a cash squeeze following a downturn in trading.”

Market Instability Watch:

August 8 – Bloomberg (Michael Mackenzie and Liz Capo McCormick): “Bulging sales of US Treasuries are about to deliver a major test of investor demand and determine whether a selloff has room to run, as the market braces for the biggest round of refunding auctions since last year… A rising US budget deficit and a poor fiscal outlook at a time of near full employment contributed to the move by Fitch Ratings to strip the US of its top rating last week. The bond market has to absorb a combined $103 billion of 3-, 10- and 30-year auctions before the week is out — up $7 billion from the May slate…”

August 8 – Bloomberg (Masaki Kondo and Yumi Teso): “The Bank of Japan’s looser grip on benchmark 10-year yields is starting to shake up the outlook for short-term borrowing costs, with swaps traders betting that the central bank will end the world’s last negative interest rate policy in as little as eight months. This signals a profound change for investors in Japanese markets, which have labored under the policy since early 2016, when former governor Haruhiko Kuroda doubled down on a zero rates regime that had been in place on-and-off since 1999.”

August 7 – Bloomberg (Erik Wasson and Edward Harrison): “A fresh fiscal showdown is brewing in Washington that threatens to complicate the Federal Reserve’s policy making and strengthen Fitch Ratings’ warning that self-inflicted wounds are tarnishing America’s standing in the global economy. Congress left for an extended August recess without resolving simmering conflicts over spending and hot-button social issues, raising the risk of a government shutdown when federal funding runs out after Sept. 30. It’s the latest case of brinkmanship over the national budget that fueled Fitch’s move to strip US debt of its prized AAA status last week — a landmark decision that’s caused hand-wringing across Wall Street and Washington.”

Bubble and Mania Watch:

August 8 – Wall Street Journal (Peter Grant): “Some of the biggest names in commercial real-estate lending have all but turned off the spigot. Blackstone Mortgage Trust and KKR Real Estate Finance Trust, two of the biggest mortgage real-estate investment trusts, have halted loans to any new borrowers. While these firms continued to provide financing related to existing loans, they didn’t originate any new loans during the first half of this year… Starwood Property Trust… has greatly decreased its appetite for new lending in recent quarters… Mortgage REITs… typically originate an average of about $10 billion in loans a quarter, according to Jade Rahmani, an analyst at Keefe, Bruyette & Woods. But lately ‘hardly anyone has made new loans,’ he said.”

August 9 – Reuters (Abhijith Ganapavaram and Shivansh Tiwary): “WeWork shares approached zero on Wednesday after the one-time startup darling warned it could go bankrupt in a stunning reversal of fortune for a company that was once privately valued at $47 billion. The SoftBank-backed company has been in turmoil ever since its plans to go public in 2019 imploded after investors recoiled at its hefty losses, corporate governance lapses and the management style of then founder-CEO Adam Neumann.”

August 5 – Wall Street Journal (Jack Kim): “Earnings for the nation’s biggest companies are poised to fall for the third straight quarter, hurt in part by the decline in energy prices. The members of the S&P 500 are on pace to collectively report a 5.2% decline in earnings, their worst performance since 2020. Revenue is on track to rise 0.6% from a year ago, according to FactSet. Energy companies are pulling down the index as their results have fallen from the record-breaking levels reported a year ago, but remain strong by historical standards. Through Friday, 84% of the S&P 500 have reported results for the second quarter of 2023…”

August 11 – Wall Street Journal (Berber Jin): “Startups are dying amid a historic drought in venture funding, showing how an indispensable engine of Silicon Valley is suffering even as technology stocks rebound and investors swoon over artificial intelligence. It has long been true that most startups don’t make it into adulthood, but for much of the past decade, amid a glut of capital and low interest rates, they often could count on several funding rounds to keep trying. Now, startups founded at or near the peak of the recent startup boom are learning it isn’t so easy to stay afloat as investors pull back on spending. ‘No one wants to fund something that’s chugging along, whereas those businesses were able to keep on going during the boom times,’ said Jenny Fielding, a managing partner at Everywhere Ventures. ‘In the next 12 months, we’re going to see a lot more companies go out of business.’”

August 10 – Bloomberg (Silas Brown and Katharine Hidalgo): “Private credit funds are starting to confront the downside of the easy-money era of the past decade: They’re increasingly taking control of businesses that fall foul of loan agreements… Private credit grew into a $1.5 trillion behemoth over the past decade in a great environment for riskier borrowers to sell debt at historically low rates. As buyout firms snapped up assets, they needed plenty of financing that banks weren’t always willing or able to provide. Now, some borrowers are struggling to keep up with interest payments on their loans, which ratchet higher along with market rates.”

August 7 – Wall Street Journal (Konrad Putzier and Will Parker): “Apartment buildings, long considered a real-estate haven, are emerging as the next major trouble spot in the beleaguered commercial-property world. Investors bid up the prices of multifamily buildings for years, attracted by steadily rising rents and the prospect of outsize returns. Many took on too much debt… Apartment landlords face a ‘hydrogen-bomb scenario,’ said Peter Sotoloff, a veteran real-estate finance executive… Outstanding multifamily mortgages more than doubled over the past decade to about $2 trillion, according to the Mortgage Bankers Association. That is nearly twice the amount of office debt, according to Trepp. The data provider adds that $980.7 billion in multifamily debt is set to come due between 2023 and 2027.”

August 7 – Reuters (Safiyah Riddle): “The share of U.S. consumers who believe it is a bad time to buy a home reached the highest level in at least 13 years in July, according to a survey…, as the supply of available properties remains scarce and home prices appear to have stopped cooling. The portion of U.S. consumers saying now is a ‘bad time to buy’ a new home increased by 4 percentage points in July to 82%, according to… Fannie Mae, the highest level since the mortgage finance giant began conducting the survey in 2010.”

Ukraine War Watch:

August 7 – CNN (Kostan Nechyporenko, Denis Lapin and Tim Lister): “Explosions hit critical road bridges linking occupied Crimea with parts of Kherson region under Russian control, Russian authorities say, as Ukraine escalates its targeting of Russian infrastructure and territory. The blasts came on the same day the Moscow mayor said a drone had been shot down approaching the city and soon after Ukraine struck one of Russia’s biggest oil tankers with a sea drone as well as carrying out an attack on a major naval base.”

August 6 – Bloomberg: “The footprint of President Vladimir Putin’s war on Ukraine is growing fast after a weekend in which sea drones crippled a Russian naval vessel and an oil tanker. For the first time, the attacks put at risk Russia’s commodity exports via the Black Sea, a route that accounts for most of the grain and 15% to 20% of the oil that Russia sells daily on global markets. Significantly higher insurance and shipping costs are likely to follow for Moscow, but there are risks to European and global markets, too.”

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

August 8 – Wall Street Journal (Chun Han Wong): “China’s top diplomat assured Russia that Beijing hasn’t wavered in its stance on the Ukraine war, right after a Chinese envoy joined a multilateral forum—which excluded Moscow—to discuss ways to end the conflict… Chinese Foreign Minister Wang Yi and his Russian counterpart, Sergei Lavrov, affirmed the strong partnership between their governments and promised to keep working together to resist Western efforts to contain their countries’ development, according to readouts from both foreign ministries.”

August 6 – Wall Street Journal (Michael R. Gordon and Nancy A. Youssef): “A combined Russian and Chinese naval force patrolled near the coast of Alaska last week in what U.S. experts said appeared to be the largest such flotilla to approach American shores. Eleven Russian and Chinese ships steamed close to the Aleutian Islands… The ships, which never entered U.S. territorial waters and have since left, were shadowed by four U.S. destroyers and P-8 Poseidon aircraft. ‘It is a historical first,’ said Brent Sadler, a senior research fellow at the Heritage Foundation and a retired Navy captain. ‘Given the context of the war in Ukraine and tensions around Taiwan, this move is highly provocative.’”

De-globalization and Iron Curtain Watch:

August 9 – CNBC (Clement Tan): “China sharply rebuked President Joe Biden’s long-awaited executive order that limits U.S. investment in technology — but stopped short of issuing immediate counter measures. The Chinese Commerce and Foreign Affairs ministries issued strong responses… after Biden signed off on the measure targeting ‘countries of concern’ on the basis of national security. ‘China is strongly dissatisfied with and resolutely opposed to the U.S.’s insistence on introducing restrictions on investment in China,’ the Foreign Affairs Ministry said… ‘This is blatant economic coercion and technological bullying.’”

August 8 – Financial Times (Edward White): “Late last year in Beijing, officials from several of China’s technology, trade and defence agencies were called to a series of secret meetings with a single purpose: to respond to America’s sweeping restrictions on selling computer chips to Chinese companies. In July, Beijing announced its response: it imposed restrictions on the exports of gallium and germanium, metals used in the production of a number of strategically important products, including electric vehicles, microchips and some military weapons systems. ‘We had many options,’ says one official directly involved in the talks. ‘This was not our most extreme move . . . it was a deterrent.’”

Inflation Watch:

August 10 – Bloomberg (Reade Pickert): “A key measure of US consumer prices rose only modestly for a second month… The core consumer price index… rose 0.2% for a second month… The details showed more than 90% of the increase on the overall CPI was due to housing costs that have otherwise moderated since the start of the year. Used-car prices, meanwhile, fell for a second month, while airfares posted the biggest back-to-back declines since the start of the pandemic. Nonetheless, American households faced increased costs for necessities last month. Groceries rose by the most since early this year, utilities are higher and gasoline prices are rising. Auto insurance is up the most since 1976 on an annual basis.”

August 10 – Bloomberg (Katia Dmitrieva): “A gauge of core US services inflation watched closely by Federal Reserve officials re-accelerated last month, highlighting the potentially bumpy path back to pre-pandemic levels. The measure rose 4.1% in the 12 months through July, in the first acceleration this year… That follows a 4% reading in June which at the time was the lowest in 18 months. On a monthly basis, the gauge rose 0.2%.”

August 9 – Bloomberg (Anuradha Raghu): “Rice prices soared to the highest in almost 15 years in Asia on mounting concerns over global supplies as dry weather threatens production in Thailand and after top shipper India banned some exports. Thai white rice 5% broken, an Asian benchmark, jumped to $648 a ton, the most expensive since October 2008… That brings the increase in prices to almost 50% in the past year.”

August 10 – New York Times (Eshe Nelson, Ana Swanson and Jeanna Smialek): “As the rate of food price inflation eases in the United States and Europe, analysts are warning of a new era of volatility in global food prices, ushered in by a series of threats coming together in unprecedented ways. A combination of calamities — extreme weather, Russia’s targeting of grain supplies in Ukraine and some countries’ growing willingness to erect protectionist barriers to food trade — has left food supplies more vulnerable and less prepared to absorb any one disruption, analysts say. ‘This is the new normal now, with more volatility and unpredictability, whether that’s in commodity prices or food prices,’ said Dennis Voznesenski, a commodities analyst at Rabobank…”

August 7 – Wall Street Journal (Jon Emont): “The workplace features floor-to-ceiling windows and a cafe serving matcha tea, as well as free yoga and dance classes. Every month, workers gather at team-building sessions to drink beer, drive go-karts and go bowling. This isn’t Google. It’s a garment factory in Vietnam. Asia… is running into a big problem: Its young people, by and large, don’t want to work in factories. That’s why the garment factory is trying to make its manufacturing floor more enticing, and why alarm bells are ringing at Western companies that rely on the region’s inexpensive labor to churn out affordable consumer goods. The twilight of ultracheap Asian factory labor is emerging as the latest test of the globalized manufacturing model…”

August 5 – Bloomberg (Naureen S. Malik): “Texas power prices for Sunday surged more than 800% as searing heat pushes demand toward record levels and strains supplies on the state grid. Electricity prices for the grid rose to more than $2,500 a megawatt-hour for Sunday evening, up from Saturday’s high of about $275, according to data from the Electric Reliability Council of Texas…”

Biden Administration Watch:

August 9 – Reuters (Karen Freifeld, Andrea Shalal and David Shepardson): “President Joe Biden… signed an executive order that will narrowly prohibit certain U.S. investments in sensitive technology in China and require government notification of funding in other tech sectors. The long-awaited order authorizes the U.S. Treasury secretary to prohibit or restrict certain U.S. investments in Chinese entities in three sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems. Biden said… he was declaring a national emergency to deal with the threat of advancement by countries like China ‘in sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities.’”

August 10 – Wall Street Journal (Charles Hutzler): “After years of blacklisting Chinese companies and scrutinizing their investments in the U.S., the Biden administration is sending an unmistakable signal to American business to steer investment away from China. An executive order President Biden…—while narrowly targeted at critical leading-edge technologies with military, surveillance and cyber capabilities—more broadly aims to reorder the flow of American capital and expertise away from its biggest global rival. The order prohibits U.S. investment in advanced semiconductors and quantum computing, and requires American investors to notify Washington about investments in other types of semiconductors and artificial intelligence. It also bars U.S. citizens and permanent residents from taking part in prohibited deals.”

August 11 – Bloomberg (Justin Sink): “President Joe Biden blasted China’s economic problems as a ‘ticking time bomb’ and referred to Communist Party leaders as ‘bad folks,’ his latest barb against President Xi Jinping’s government… Biden said at a political fundraiser Thursday that China was in ‘trouble’ because its growth has slowed and it had the ‘highest unemployment rate going.’ He also blasted Xi’s signature Belt and Road Initiative as the ‘debt and noose,’ because of the high levels of lending to developing economies associated with the global investment program… ‘So they got some problems,’ he added. ‘That’s not good because when bad folks have problems, they do bad things.’”

Federal Reserve Watch:

August 7 – New York Times (Jeanna Smialek): “John C. Williams, the president of the Federal Reserve Bank of New York, thinks that the central bank’s push to cool the economy is near its peak and that he expects that interest rates could begin to come down next year… Mr. Williams said that inflation was coming down as hoped, and that while he expected unemployment to rise slightly as the economy cooled, by how much was unclear. The upshot is that interest rates are unlikely to rise much further than the current range of 5.25 to 5.5%. Fed officials could also consider cutting them soon: Mr. Williams did not rule out the possibility of lowering rates in early 2024…”

August 5 – Reuters (Ann Saphir): “The U.S. Federal Reserve will likely need to raise interest rates further to bring down inflation, Governor Michelle Bowman said… Bowman said she supported the Fed’s quarter-point increase in interest rates last month, given still-high inflation, strong consumer spending, a rebound in the housing market and a labor market that is helping to feed higher prices. ‘I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2% target,’ she said…”

August 8 – CNBC (Jeff Cox): “Philadelphia Federal Reserve President Patrick Harker… indicated that the central bank could be at the end of its current rate-hiking cycle. A voter this year on the rate-setting Federal Open Market Committee, the central bank official noted progress in the fight against inflation and confidence in the economy. ‘Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,’ Harker said…”

U.S. Bubble Watch:

August 8 – Reuters (Safiyah Riddle): “U.S. small business confidence edged up to an eight-month high in July, as concerns about inflation fell to the lowest level in nearly two years… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose nine-tenths of a point to 91.1 last month, hitting the highest level since November 2022… Only 21% stated that inflation was their biggest concern – the lowest reading since November 2021 and down 13 points from a year earlier… More than a quarter of firms reported plans to invest in capital, and 17% reported plans to increase employment, both 2 percentage points higher than in the prior month. On top of that, small businesses recorded their least-pessimistic view of the near-term economic prospects since August 2021 as NFIB’s general business conditions outlook index climbed 10 points… Still, businesses notably didn’t report that credit is getting harder to acquire, with an unchanged 6% saying their most recent loan was harder to get than the one before.”

August 10 – Associated Press (Matt Ott): “The number of Americans applying for jobless benefits jumped last week, but not enough to raise concern about the consistently strong U.S. labor market. U.S. applications for unemployment benefits rose by 21,000 to 248,000 for the week ending August 5, from 227,000 the week before… That’s the most in five weeks. The four-week moving average of claims, a less volatile reading, ticked up by 2,750 to 228,250.”

August 6 – Wall Street Journal (Esther Fung): “Surging demands on transportation workers are fueling labor standoffs at companies critical to U.S. supply chains. The Teamsters, which represents drivers at trucking company Yellow, threatened a strike shortly before the company shut down July 30. FedEx pilots recently rejected a new labor contract promising a roughly 30% raise. Port workers in Canada staged walkouts earlier this year and dockworkers at West Coast ports slowed work at container terminals. The renewed activism comes on the heels of the Covid-19 pandemic… Transportation workers said they are entitled to a larger share of the corporate profit generated during the pandemic and better pay and recognition for showing up through the health crisis when other staff was able to work remotely.”

August 7 – Bloomberg (Jeremy Hill, Natalie Choy and Steven Church): “Yellow Corp. filed for bankruptcy and will remain shuttered — throwing 30,000 people out of work — after the trucking firm’s long-running financial woes were compounded by a dispute with the Teamsters Union. The carrier will sell its warehouses and trucks in order to repay a pandemic-era, government loan of $737 million and another $485 million in debt it owes private lenders…”

August 6 – New York Times (Neal E. Boudette): “Detroit may be headed for a tumultuous labor showdown. The United Auto Workers union has made a bold opening bid in negotiations for new four-year collective bargaining agreements with General Motors, Ford Motor and Stellantis. Its new president, Shawn Fain, has declared that the 150,000 hourly workers employed by the companies are prepared to strike to achieve the union’s goals. The U.A.W. presented the automakers with a list of demands, including a 40% wage increase — premised on the compensation gains that the union says the companies’ chief executives have made over the four years since the last contract talks.”

August 9 – Bloomberg (Augusta Saraiva): “US mortgage rates jumped above 7% in a week that government bond yields spiked following a surprise decision by Fitch Ratings to lower the nation’s credit rating. The contract rate on a 30-year fixed mortgage rose by 16 basis points to 7.09% in the week ended Aug. 4… That’s the highest since November, and also dragged down the group’s measure of home-purchase applications to the lowest since February.”

August 9 – CNBC (Diana Olick): “Mortgage interest rates soared across the board last week, with the rate on the government’s low down payment option increasing to the highest level in 21 years. Applications for a mortgage to purchase a home dropped 3% for the week and were 27% lower than the same week one year ago.”

August 11 – CNBC (Emily Lorsch): “There are more than 275 million cars on the road in the U.S. But in recent years, car ownership has gotten more expensive than ever… More than 100 million Americans have a car loan, and auto loan debt in the U.S. currently stands at $1.5 trillion — a record high. In 2023, the average monthly loan payment for a new vehicle is $725, up from $650 in 2022, according to Experian. The average monthly payment for a used vehicle is $516 in 2023, up 2% from the year prior.”

Fixed-Income Watch:

August 5 – Financial Times (Harriet Clarfelt): “Investors are warming to the riskiest US corporate debt, as optimism about the state of the world’s biggest economy narrows the gulf between the top and bottom rungs of the $1.35tn junk bond market. The gap between the yield on double-B and triple-C bonds narrowed to its tightest level in 15 months at 6.53 percentage points in recent days, before widening slightly to 6.74 percentage points at Friday’s close — underscoring investors’ growing confidence that the US can avoid a recession… Such hopes of a ‘soft landing’ follow a flurry of positive data, with persistent evidence of easing inflation and better than expected second-quarter growth US growth figures.”

August 9 – Bloomberg (Maxwell Adler): “Municipal-bond auctions are dwindling as states and cities rely on Wall Street bankers to navigate rocky financial markets. Only $41 billion, or roughly one-fifth, of all long-term muni debt sales this year have been through competitive auctions among investment banks… That’s a 20% drop from last year and the smallest amount in at least a decade.”

China Watch:

August 7 – Reuters (Wei Zhou): “China’s promised ‘basket of measures’ to defuse local government debt risks is likely to include special bond issuance, debt swaps, loan rollovers, and something Beijing really loathes: dipping into the central budget. Local governments are fundamental to China’s economy, with Beijing tasking provincial and city officials with meeting ambitious growth targets. But after years of over-investment in infrastructure, plummeting returns from land sales and soaring COVID costs, economists say debt-laden municipalities now represent a major risk to China’s economy… Local government debt reached 92 trillion yuan ($12.8 trillion), or 76% of economic output in 2022, up from 62.2% in 2019. Part of it is debt issued by local government finance vehicles (LGFVs)… The International Monetary Fund expects LGFV debt to reach $9 trillion this year. The central government, which has repeatedly warned about ‘hidden debt risks,’ worries the numbers are even higher when accounting for any debt issued outside municipal balance sheets.”

August 5 – Financial Times (Sun Yu): “Chinese authorities are putting pressure on prominent local economists to avoid discussing negative trends such as deflation, as concerns mount about Beijing’s ability to boost a flagging recovery in the world’s second-biggest economy. Multiple local brokerage analysts and researchers at leading universities as well as state-run think-tanks said they had been instructed by regulators, their employers and even domestic media outlets to avoid speaking negatively about topics ranging from fears of capital flight to softening prices. Seven well-regarded economists told the Financial Times that their employers had told them some topics were off-limits for public discussion.”

August 8 – Reuters (Joe Cash): “China’s imports and exports fell much faster than expected in July as weaker demand threatens recovery prospects in the world’s second-largest economy… Imports dropped 12.4% in July year-on-year…, missing a forecast fall of 5%… and off a 6.8% decline in June. Meanwhile, exports contracted 14.5%, steeper than an expected 12.5% decline and the previous month’s 12.4% fall. The pace of export decline was the fastest since the onset of the pandemic in early 2020 and the tumble in imports was the biggest since January…”

August 8 – Reuters (Qiaoyi Li and Miyoung Kim): “China’s passenger vehicle sales fell for a second month in July, as discounts and government support measures failed to persuade consumers wary of buying cars amid a sputtering economy and a prolonged slump in the housing market… Car sales totalled 1.79 million units in July, down 2.6% from last year, data from the China Passenger Car Association (CPCA) showed, the second contraction in a row after a 2.9% slide in June.”

August 8 – Financial Times (Thomas Hale, Hudson Lockett, Cheng Leng and Kaye Wiggins): “Country Garden, China’s biggest private developer by sales, has missed interest payments on two international bonds as it battles to stave off a liquidity crisis that has derailed the country’s real estate sector and dragged on economic growth. The $500mn bonds, which are due in February 2026 and August 2030, and were already trading at distressed levels, fell to 13 and 11 cents on the dollar respectively on reports of $22.5mn in missed coupon payments. Country Garden, which had almost $200bn in liabilities as of the end of 2022, was one of a handful of private companies to survive a liquidity crunch that has ravaged the country’s real estate sector since the default of Evergrande almost two years ago.”

August 8 – Bloomberg (Ye Xie): “Country Garden, once China’s largest developer, made headlines again after missing a coupon payment on its dollar bonds as the years-long housing crisis shows no signs of ending. With a shrinking population, it will take years to restore the supply-demand balance to the market. And according to Goldman Sachs, it will also take a massive restructuring of developers’ debt, imposing 1.9 trillion yuan ($263bn) in losses on creditors such as banks along the way.”

August 10 – Bloomberg (Richard Macauley): “Country Garden Holdings Co. was downgraded three notches by Moody’s… to Caa1 from B1 in the wake of this week’s missed dollar-bond coupon payments. ‘The downgrade reflects Country Garden’s heightened liquidity and refinancing risks in view of its deteriorated liquidity and financial flexibility, sizable refinancing needs and still-constrained access to funding,’ senior vice president Kaven Tsang said… The builder has left investors in the dark after dollar bondholders said they’ve yet to receive coupon payments that were effectively due Monday. That puts the firm — which had 1.4 trillion yuan ($199bn) of total liabilities at the end of last year — on course for its first public default if it doesn’t make the payments within a 30-day grace period.”

August 9 – Bloomberg (Dorothy Ma and Wei Zhou): “A debt crisis that rivals China Evergrande Group’s default may be brewing in the world’s second-largest economy. Country Garden Holdings Co., helmed by one of China’s richest women, Yang Huiyan, has left investors in the dark after dollar bondholders said they’ve yet to receive coupon payments effectively due Monday. That puts the firm—which had 1.4 trillion yuan ($199bn) of total liabilities at the end of last year—on course for its first public default if it doesn’t make the payments within a 30-day grace period. Formerly the nation’s largest private-sector developer by sales, the builder of more than 3,000 housing projects in smaller cities is a household name and employed about 70,000 people at the end of last year.”

August 10 – Bloomberg (Dorothy Ma): “Chinese junk dollar bonds extended their slump as missed dollar bond interest payments that may lead to a default by major developer Country Garden Holdings Co. darkened the outlook for the debt-stricken sector. Average prices of the nation’s high-yield US currency notes fell to 66.8 cents on Wednesday, the lowest since early December… Country Garden’s next maturing dollar bond dropped 1 cent to 11.3 cents on Thursday…”

August 10 – Bloomberg (Ailing Tan): “Bonds from at least 84 Chinese companies totaling $81.2 billion face repayment pressure… That involves 355.7 billion yuan worth of notes and $31.85 billion of offshore bonds. At least 23 companies are local government funding vehicles, entailing 187.6 billion yuan worth of local notes and $1.37 billion of offshore bonds…”

August 7 – Bloomberg (Wei Zhou): “China’s local government financing vehicles are showing more signs of stress, with a record number missing payments on a popular type of short-term debt last month. A total of 48 LGFVs were overdue on commercial paper, which typically carries a maturity of less than a year…, according to a Huaan Securities Co. report… Their missed payments amounted to 1.86 billion yuan ($259 million), versus 780 million yuan in June. The revelation is set to aggravate concerns about the financial health of LGFVs, which are mostly tasked with building infrastructure projects that may take years to generate investment returns.”

August 8 – Bloomberg: “One measure of new foreign investment in China fell to the lowest level in 25 years in the second quarter, fueling concerns about how much geopolitical tensions and the economy’s slowing recovery can hurt business confidence. Direct investment liabilities — a gauge of foreign direct investment in China — slumped to just $4.9 billion in the April-June period… That was down 87% from the same period last year and was the smallest amount in any quarter in data back to 1998.”

August 8 – New York Times (Claire Fu and Daisuke Wakabayashi): “At this year’s commencement ceremony for the Chongqing Metropolitan College of Science and Technology in southwestern China, the members of the graduating class did not receive the usual lofty message to pursue their dreams. Instead, they were dealt a harsh dose of reality. ‘You must not aim too high or be picky about work,’ said Huang Zongming, the college’s president, to more than 9,000 graduates in June. ‘The opportunities are fleeting.’ A record number of Chinese college graduates are entering the job market, exacerbating an already bleak employment outlook… China’s unemployment rate for 16- to 24-year-olds in urban areas hit a record 21.3% in June.”

August 5 – Reuters (David Kirton and Ryan Woo): “Nearly 1 million people in China’s northern Hebei province were relocated after record rains forced authorities to channel water from swollen rivers to some populated areas for storage, sparking anger online over the homes sacrificed to save Beijing. The vast Hai River basin covers an area the size of Poland that includes Hebei, Beijing, Tianjin. Over a span of one week from late July, the region with a population totalling 110 million experienced its most serious flooding in six decades, with Hebei… the worst hit.”

August 7 – Bloomberg (Hallie Gu): “Heavy rains lashing China’s northeast are ravaging crops in some areas of the country’s grain basket, threatening to increase imports at a time of rising food insecurity across the globe. Recent flooding has destroyed rice planted in parts of Jilin and Heilongjiang provinces, local media reported.”

Central Banker Watch:

August 10 – Reuters (Francesco Canepa): “The European Central Bank is on the back foot again and this time the bad news doesn’t come from Greece, Italy or any of the usual suspects in the bloc’s poorer south. The club’s biggest member and supposed powerhouse, Germany, has been hit by a toxic mix of weak trading with key partner China, a slump in its large manufacturing and construction sectors and even some existential questions about a business model predicated on cheap fuel from Russia… This is forcing a change of tune at the ECB — from ruling out a pause in its steepest and longest streak of interest rate hikes to openly talking about one as soon as next month.”

Global Bubble Watch:

August 11 – Bloomberg (Laura Curtis): “As economists gauge the likelihood of recessions in major economies around the world, a slew of recent data show that a downturn is already evident when it comes to global commerce. China, the world’s biggest exporter, this week reported the biggest contraction in overseas shipments since Covid-19 walloped the nation in February 2020. Germany, the global No. 3, saw its exports sink in the latest monthly data by the most on a year-on-year basis since early 2021. Exports from the US, which pips Germany for the global No. 2 slot, also contracted over the year to June.”

Europe Watch:

August 8 – Financial Times (Mary McDougall and Martin Arnold): “A closely watched gauge of long-term inflation expectations in the eurozone has reached its highest level since 2010, in a sign that some investors think the European Central Bank will struggle to bring inflation back to its 2% target. The so-called five-year, five-year forward inflation swap — a measure of markets’ assessment of price growth over the second half of the next decade — hit 2.66% this week, despite signs that the current burst of inflation has peaked as tighter monetary policy takes effect. Inflation expectations have edged higher in most big economies in recent weeks, driven partly by climbing oil prices.”

August 8 – Reuters (Angelo Amante, Valentina Za and Giuseppe Fonte): “Italy dealt a surprise blow to its banks and sent shockwaves across the sector in Europe by setting a one-off 40% tax on profits reaped from higher interest rates, after reprimanding lenders for failing to reward deposits. Sharply higher official interest rates have yielded record profits for banks, as the cost of loans soared while lenders held off paying more on deposits. Countries such as Spain and Hungary have already imposed windfall taxes on the sector and others may now follow suit.”

Japan Watch:

August 6 – Reuters (Leika Kihara): “The Bank of Japan debated growing prospects of sustained inflation at their July meeting with one board member saying wages and prices could keep rising at a pace ‘not seen in the past,’ according to a summary of opinions… While the members stressed the need to keep ultra-easy monetary policy, the upbeat view on the inflation outlook suggests they are now more convinced that conditions for phasing out stimulus could fall in place.”

August 7 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Growth in Japanese workers’ wages unexpectedly slowed in June, indicating the labor market may be losing some steam and clouding prospects for the Bank of Japan’s sustainable inflation goal. Nominal cash earnings for workers rose 2.3% from the previous year, decelerating from a revised 2.9% clip in the previous month…”

EM Bubble Watch:

August 7 – Financial Times (Chloe Cornish): “Investors are piling into India’s so-called shadow banking sector, which has been buoyed by consumer demand for credit in one of the world’s fastest-growing economies even as concerns remain about risky loans. US investor Bain Capital in July bought a majority stake in tycoon Gautam Adani’s shadow banking business comprising Adani Capital and Adani Housing Finance… Reliance Industries, India’s biggest company by market value, plans to soon list its own shadow bank, Jio Financial Services.”

August 9 – Bloomberg (Anuradha Raghu): “A surge in rice prices to the highest level in almost 15 years is renewing fears that food costs are going to get a lot more expensive for the world’s poorest people. The grain is vital to the diets of billions in Asia and Africa. Rice contributes as much as 60% of total calorie intake for people in parts of Southeast Asia and Africa, and that rises to 70% in countries like Bangladesh. The latest price jump increases stress on global food markets already roiled by extreme weather and the escalating conflict in Ukraine.”

Leveraged Speculation Watch:

August 6 – Bloomberg (Bailey Lipschultz): “Dan Loeb is hardly the first Wall Street titan to lament how meme stock traders have made short selling a perilous endeavor. But that Loeb, who runs the hedge fund Third Point LLC, did so now is what’s interesting. The meme crowd, it turns out, is back at it again, driving up stocks and burning short sellers just like they did back in the wild early days of the pandemic. Tupperware Brands Corp., Nikola Corp. and Yellow Corp. have spiraled higher, sticking short sellers in the process with some $435 million in losses over the past two months. Loeb… made it clear in a letter this week to his clients that his days as a big gambler against individual stocks are over. ‘Fundamental analysis is increasingly taking a back seat to monitoring daily option expiries and Reddit message boards, as evidenced by the numerous short squeezes and manipulations of heavily shorted stocks such as AMC and Gamestop in 2021 and others this year… While we have not abandoned short selling, we continue to reduce our single name short exposure in favor of market hedges and short baskets.’”

August 8 – Wall Street Journal (Jack Pitcher): “Betting against U.S. stocks has gone poorly for Wall Street speculators. July’s gains left hedge funds closing out so-called short positions and cutting risk at the fastest pace in years, according to… Goldman Sachs… The cumulative dollar amount of short covering by hedge funds in June and July combined was the largest over a two-month period since 2016… U.S. and Canadian equity short sellers racked up $53.5 billion in mark-to-market losses on short sales in July, and have lost $175.2 billion betting against the market this year, according to data from S3 Partners. Every sector was unprofitable for short sellers in July.”

August 10 – Bloomberg: “China’s 6 trillion yuan ($832bn) hedge fund industry is bracing for a historic shakeup that will likely cause thousands of smaller managers to shut and impose stricter regulations on larger peers that have become a growing force in local markets. Draft rules set to take effect as soon as September will impose a 10 million yuan asset minimum on Chinese hedge funds, a threshold that is expected to force the liquidation of more than a third of the existing products… The rules will also cap leverage levels and the size of investments hedge funds can make in single securities.”

Social, Political, Environmental, Cybersecurity Instability Watch:

August 10 – Reuters (Marco Garcia): “At least 36 people have died after wildfires, fanned by winds from a faraway hurricane, devastated much of the resort city Lahaina on Hawaii’s Maui island, the Maui County said… Multiple neighborhoods were burnt to the ground as the western side of the island was nearly cut off, with only one highway open and thousands to evacuate as officials told of widespread devastation to Lahaina, its harbor and surrounding areas. Some people fled into the ocean to escape the smoke and flames. ‘We just had the worst disaster I’ve ever seen. All of Lahaina is burnt to a crisp. It’s like an apocalypse,’ said Lahaina resident Mason Jarvi, who escaped from the city.”

August 9 – Bloomberg (Lara Sanli): “July was officially Earth’s hottest month on record, causing the Antarctic to shrink at a record pace and the European Union’s earth observation agency to warn of ‘dire consequences’ as extreme weather events grow more frequent and more intense. Global average temperatures rose above the previous record set in July 2019 by ‘the unusually large margin’ of 0.33C, according to the EU’s Copernicus Climate Change Service. Going back further, this July was 0.72C warmer than the 1991 to 2020 July average and about 1.5C warmer than the average for 1850 to 1900.”

August 6 – Financial Times (Clive Cookson): “Over the past few weeks, a large-scale rescue operation has been under way off the coast and keys of Florida. It began as water temperatures were rising towards a peak of 38.4C — similar to someone with a high fever — which was recorded on July 24 by a buoy off Manatee Bay. Knowing that the heat was well above the level corals can tolerate, biologists at the Coral Restoration Foundation in Key West felt they had little choice but to evacuate specimens to onshore tanks.”

August 10 – Bloomberg (Dan Murtaugh): “China’s carbon dioxide emissions rose to a new record even as surging clean power additions put the nation on a path to hit peak pollution years earlier than expected. Carbon emissions in the second quarter jumped 10% on last year’s coronavirus-induced lull and were above the total in the same period of 2021, according to… the Centre for Research on Energy and Clean Air. Much of that increase was due to a surge in coal power generation needed to offset weak hydropower output after a historic drought last summer.”

August 6 – Reuters (Kiyoshi Takenaka and Satoshi Sugiyama): “Japan plans to start releasing treated radioactive water from the tsunami-wrecked Fukushima nuclear power plant into the ocean as early as late August, Japan’s Asahi Shimbun daily reported… The release will most likely come shortly after Prime Minister Fumio Kishida meets with U.S. President Joe Biden and South Korean President Yoon Suk Yeol in the United States next week and explains to them how the water release will be safe, it said.”

August 9 – Reuters (Gabrielle Tétrault-Farber and Leroy Leo): “The World Health Organization… classified the EG.5 coronavirus strain circulating in the United States and China as a ‘variant of interest’ but said it did not seem to pose more of a threat to public health than other variants. The fast-spreading variant, the most prevalent in the United States with an estimated more than 17% of cases, has been behind upticks in the virus across the country and also has been detected in China, South Korea, Japan and Canada, among other countries.”

Geopolitical Watch:

August 9 – Reuters (Hyunsu Yim): “North Korean leader Kim Jong Un replaced the military’s top general and called for more preparations for the possibility of war, a boost in weapons production, and expansion of military drills, state media KCNA reported… Kim made the comments at a meeting of the Central Military Commission which discussed plans for countermeasures to deter North Korea’s enemies, which it did not name, the report said.”

August 5 – Reuters (Jack Kim): “North Korean leader Kim Jong Un has instructed factories making missile engines, artillery and other weapons to boost capacity as an important part of bolstering the country’s defence capabilities… Kim’s inspections from Thursday to Saturday included the production of engines for strategic cruise missiles and unmanned aerial vehicles, as well as shells for super large-calibre multiple-rocket launchers and transporter-erector-launchers…”

August 10 – Reuters (Kantaro Komiya): “Former Japanese Prime Minister Taro Aso’s remark… that his country must show ‘the resolve to fight’ to defend Taiwan from attack was in line with Tokyo’s official stance, a lawmaker close to Aso told a TV show… Aso, vice president of the ruling Liberal Democratic Party (LDP), said in Taipei that Japan, the United States and others must show strong resolve to come to Taiwan’s defence if it were attacked, signalling deterrence against China… Keisuke Suzuki, an LDP lawmaker who accompanied Aso’s Taiwan visit this week, told the BS Fuji talk show… that Aso had discussed the issue with Japanese government officials, indicating that Aso’s view did not deviate from the official position.”

August 9 – Bloomberg (Jacob Gu): “China warned Japan against ‘being led astray again,’ after its former Prime Minister Taro Aso said his country, the US and Taiwan must show Beijing their ‘resolve to fight’ to deter any possible invasion. Aso’s ‘balderdash severely interfered in China’s internal affairs and undermined stability in the Taiwan Strait,’ the Chinese embassy in Tokyo said… The Foreign Ministry… later issued another statement, slamming Aso for what it called ‘irresponsible remarks that sought to hype up cross-Strait tensions, stoke antagonism and confrontation, and blatantly interfere in China’s internal affairs.’”

August 8 – Reuters (Ella Cao, Liz Lee and Karen Lema): “China again asked the Philippines to tow away a grounded warship – a World War Two-era vessel now used as a military outpost – from a disputed shoal…, after Manila rejected Beijing’s earlier demand. Tensions have soared between the two neighbours over the South China Sea under Philippine President Ferdinand Marcos Jr, with Manila pivoting back to the United States… China’s embassy in Manila criticised Washington for ‘gathering’ its allies to continue ‘hyping up’ the South China Sea issue and the boat incident. ‘South China Sea is not a ‘safari park’ for countries outside the region to make mischief and sow discord,’ the embassy said…”

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