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Ten-year Treasury yields were 1.86% on election day 2016, having risen 14 bps over the previous month. Yields touched 2.60% by December 15th, before ending 2016 at 2.45%. While bonds were relatively tranquil heading into Trump v. Clinton, equities were apprehensive. Stocks slumped 3% in the nine sessions ended November 4th, declining to a four-month low and reducing the S&P500’s y-t-d return to 3.9%. Stocks enjoyed a 7.4% post-election rally into year end.

Today, the S&P500 sports a y-t-d return of 23.1%, as complacency reigns. Bonds, on the other hand, are notably uncomfortable. Ten-year Treasury yields rose another 16 bps this week to a three-month high 4.24% – with a notable one-month yield jump of 45 bps. This week’s 28 bps surge boosted the one-month spike in benchmark MBS yields to 75 bps.

Enthusiasm for President-elect Trump’s tax cuts spurred a big stock market rally – and were well-tolerated by the bond market. And while a giddy stock market today fancies Trump tax cuts 2.0 (or Harris 1.0), the bond market is much more wary than in 2016.

For me, things started veering off course when Donald Trump proposed tax-free tips while campaigning in Nevada. Vice President Harris followed. Trump campaigns to extend the 2017 tax cuts and further reduce the corporate tax rate. Other ideas floated include bringing back the state and local tax (SALT) deduction, exempting Social Security income and overtime pay, and allowing auto interest as an itemized deduction. Harris has campaigned on cutting income taxes for lower-income households, while expanding child tax credits, low-income housing credits, and small business tax deductions.

When the campaign give-away season really heated up, I couldn’t help but think of the Federal Reserve – the progenitor of “deficits don’t matter.” Of course, politicians will push the envelope. Just take what worked in previous elections and administrations and ratchet them up a few notches. Trump, Harris and voters don’t know the environment has changed. Bonds know.

Treasury Securities ended June at $26.9 TN (94% of GDP) – fully double Q2 2016’s $13.4 TN (72%). Over eight years, total Non-Financial Debt (NFD) inflated $28.38 TN, or 60%. Federal Reserve Assets jumped $2.55 TN, or 57%. System “repo” assets doubled to $6.98 TN. Money Market Fund Assets inflated $3.79 TN, or 140%, to $6.50 TN. Bond market levered speculation has ballooned.

Things turn crazy at the end of cycles. And it will be subtle and easily ignored, but crazy is destructive. This super-cycle is concluding with super crazy. It’s always been a case of when markets would finally begin to impose some discipline. It’s unfolding. When yields in the US, UK, France, Italy, and Greece lead on the upside, I take notice.

Up a notable 18 bps, UK gilt yields ended the week only 11 bps below the October 14th, 2022 spike high of 4.34%. French yields are now five bps above Spanish and 31 bps higher than Portuguese yields. On November 4th, 2016, France’s yields were 80 below Spain and 280 bps lower than Portugal. Five hundred and eighty bps below Greece in 2016, Italian yields are today 34 bps higher.

October 23 – Bloomberg (Michael Mackenzie and Greg Ritchie): “The US Treasury market, already mired in one of its worst losing stretches of the year, is flashing a fresh warning sign of mounting risks as yields surge. The so-called term premium on 10-year Treasury notes — an expression of the extra yield investors demand for owning the debt rather than rolling over shorter-term securities — has risen from near zero to just under a quarter point so far this month to the highest since last November… As academic as the indicator may sound, the measure is closely monitored by market watchers. It offers important information about investors’ perception of future risk — whether it be inflation, supply or anything else that extends beyond the expected path of short-term rates.”

“Legendary investor” is overused these days (it’s been a long bull market). However, it definitely applies to Paul Tudor Jones, a 44-year hedge fund veteran – a true master of the “Masters of the Universe.” I’ve deeply respected his market and macro insights for going on four decades. So, when Paul Tudor Jones delves into critically important and timely analysis, I’m compelled to share it.

CNBC’s Andrew Ross Sorkin interviewed Tudor Jones at this week’s Robin Hood Investors Conference. It’s straight talk from a brilliant macro thinker and statesman. It should today be a crowded field of economists, central bankers, investment professionals, and other statesmen trumpeting similar messages. Instead, it’s mainly voicelessness or hogwash. Below are excerpts from the interview:

Paul Tudor Jones: “For me in the hedge fund world, this is kind of the macro super bowl coming up on November 5th. Some elections are not that binary. This one is binary – not so much because of which candidate wins. But it’s binary in the sense of what is the markets’ response going to be – to either candidate if they win. We can either continue down the path we’ve been on… or we may have that point of recognition where all the sudden the markets have different ideas than what the candidates have been espousing…

I was watching this Vince McMahon documentary… in it there’s a term I’d never heard of called “kayfabe.” In wrestling parlance, that represents the unspoken, unwritten, tacit agreement between the wrestlers and the fans about the illusion that’s going on in the ring – the suspension of disbelief that what’s going on in the ring is actually – we know it’s scripted, we know it’s a performance, but they ask us to think it’s genuine and real.”

CNBC’s Andrew Ross Sorkin: “That’s what you think this is?”

Tudor Jones: “We’re in an economic kayfabe right now. And it’s not just the United States. In the UK, in France, Greece, Italy, Japan – Japan being the biggest of all. It’s this economic kayfabe. The question is, after this election, will we have a ‘Minsky moment’ here in the United States – in U.S. debt markets? Will we have a ‘Minsky Moment’ where all the sudden there’s a point of recognition that what’s going to happen – what they’re talking about – is actually fiscally impossible – financially impossible…”

Sorkin, shifting to Tudor Jones’ analysis of possible measures to rein in unsustainable fiscal spending: “Let’s talk about taxes, because that’s how the money is going to get raised – one way or the other.”

Paul Tudor Jones: “There are plenty of options.”

Sorkin: “But there are not many ways to get to where you need to go unless you start to do some of these things…”

Tudor Jones: “Correct. Can I just say this. You have to let the (Trump) tax cuts expire. You have to… that’s $390 billion. We’re going to be broke really quickly unless we get serious about dealing with our spending issues. I don’t know if we’ll be able to cut spending that much. Sixty percent of our spending are transfer payments.”

Sorkin: “If you think we’re going broke – and you think Trump is going to be the President – he’s not going to let those tax cuts expire if he can avoid it. He does not want the corporate tax rate to go to 25%, as you’re suggesting it will have to. He’s suggesting it should go to 15%.”

Tudor Jones: “Just to get us to the point where we stabilize debt to GDP at where it is right now, here’s what you need to do. You let the Trump tax cuts expire – that $390 billion. You need to raise the payroll tax on every single working person 1% – that’s another big slug.”

Sorkin: “What do you think that does to jobs?”

Tudor Jones: “We’re clearly going to have a period of contraction, which hopefully – it’s going to be really important for the Fed to be able to offset the fiscal contractionary that’s going to come.”

Sorkin: “Then you want to increase the individual tax rate all the way to a top rate close to 50%.”

Tudor Jones: “Hold it. I don’t want to do any of this stuff. What I’m telling you is, we’ve got to be serious about where we are fiscally. There’s a whole set of options, right. We could go in and cut 25% of the federal workforce. Some people may do that… I’m simply showing some of the things that you can do. You’d have to raise the tax rate on the top – I think probably everyone over $200 grand – probably have to raise that to 49.5%. If you do all these things – all these things. Raise social security from 65 to 70. If you do all these things – means test Medicare. If you do all these things, all you do is you get to a primary balance. What that means is you stabilize debt-to-GDP. You’re still actually increasing your debt… It excludes the interest cost. Which, oh, by the way, the interest bill this year is larger than every single line item except Social Security. It’s larger than defense spending. It’s larger than Medicare.”

Sorkin: “Given all the things you’re saying, are you off buying gold and bitcoin…”

Tudor Jones: “I think all roads lead to inflation… I’m long gold. I’m long bitcoin. I think commodities are so ridiculously under-owned, so I’m long commodities… The playbook to get out of this is that you inflate your way out.”

October 25 – Bloomberg (Carter Johnson): “Mohamed El-Erian says that gold surging to a fresh record reflects how global financial institutions are deliberately diversifying away from the US dollar… ‘When we try to relate the moves in gold this year to traditional, financial and economic variables — interest rates, the dollar — the relationships have broken down,’ said El-Erian… The ‘secular’ move can be attributed to two fundamental drivers, he added. ‘One is the slow diversification away from the dollar in the reserves of central banks around the world… The other is a slow diversification away from the dollar payment system.’ While the move has been slow, ‘the bad news is the momentum is building up,’ said El-Erian…”

Mr. El-Erian penned his Sunday FT piece, “Why the West Should be Paying More Attention to the Gold Price Rise,” three weeks after his “The Federal Reserve’s Insurance Policy – Big Interest Rate Cut is Yet Another Evolution in Paradigm of Liquidity Dominance.” Gold has jumped 6.9% since the Fed fifty, with Silver surging 9.8% and Platinum rising 4.0%. Curiously, El-Erian doesn’t mention the Fed in his gold analysis.

“The playbook to get out of this is that you inflate your way out” (Tudor Jones). The Fed slashed rates despite loose conditions and speculative market Bubbles. When I contemplate financial and economic variables supporting the big moves in precious metals prices, I look to massive fiscal deficits, tottering debt loads and unrelenting Credit excess, and precariously speculative financial markets. Importantly, these are global phenomena. Mounting speculative leverage, severe economic maladjustment, and associated fragilities ensure ongoing Fed and global central bank “whatever it takes” monetization. Moreover, Beijing has commenced what will evolve into Herculean reflationary measures hastily discharged to hold financial and economic crises at bay.

The Dollar Index has gained 2.9% y-t-d. Gold and Silver’s rise has less to do with the dollar (slow de-dollarization) than it does deeply flawed monetary and central bank doctrines, unhinged inflations in debt and marketplace liquidity, and a monstrous global financial structure today acutely vulnerable to de-risking/deleveraging. Central banks are trapped in forever monetization.

It’s not coincidental that precious metals are in heightened demand as markets begin the process of reassessing prospects for some of the world’s largest government bond markets. Treasuries provide global debt markets with a frail foundation. And I’m with Paul Tudor Jones in fearing that the U.S. election is a possible catalyst for trouble. It’s been a much too long wait for markets to impose some desperately needed discipline.
 For the Week:

The S&P500 fell 1.0% (up 21.8% y-t-d), and the Dow dropped 2.7% (up 11.7%). The Utilities lost 2.0% (up 27.0%). The Banks declined 1.5% (up 25.7%), and the Broker/Dealers slipped 0.9% (up 33.1%). The Transports fell 1.7% (up 1.3%). The S&P 400 Midcaps dropped 2.8% (up 11.7%), and the small cap Russell 2000 fell 3.0% (up 8.9%). The Nasdaq100 (up 21.0%) and Semiconductors (up 24.8%) were little changed. The Biotechs dropped 3.2% (up 6.3%). While bullion rose $26, the HUI gold index sank 3.9% (up 36.1%).

Three-month Treasury bill rates ended the week at 4.5075%. Two-year government yields rose 16 bps to 4.10% (down 15bps y-t-d). Five-year T-note yields jumped 19 bps to 4.06% (up 22bps). Ten-year Treasury yields were 16 bps higher at 4.24% (up 36bps). Long bond yields gained 11 bps to 4.50% (up 47bps). Benchmark Fannie Mae MBS yields surged 28 bps to 5.69% (up 42bps).

Italian 10-year yields jumped 15 bps to 3.51% (up 12bps y-t-d). Greek 10-year yields rose 15 bps to 3.17% (up 12bps). Spain’s 10-year yields gained 12 bps to 3.00% (unchanged). German bund yields rose 11 bps to 2.29% (up 27bps). French yields jumped 15 bps to 3.05% (up 49bps). The French to German 10-year bond spread widened four to 76 bps. U.K. 10-year gilt yields surged 18 bps to 4.23% (up 70bps). U.K.’s FTSE equities index declined 1.3% (up 6.7% y-t-d).

Japan’s Nikkei Equities Index dropped 2.7% (up 13.3% y-t-d). Japanese 10-year “JGB” yields dipped two bps to 0.96% (up 34bps y-t-d). France’s CAC40 fell 1.5% (down 0.6%). The German DAX equities index declined 1.0% (up 16.2%). Spain’s IBEX 35 equities index slipped 0.9% (up 16.9%). Italy’s FTSE MIB index fell 1.2% (up 14.6%). EM equities were mixed. Brazil’s Bovespa index dipped 0.5% (down 3.2%), and Mexico’s Bolsa index dropped 2.3% (down 9.8%). South Korea’s Kospi slipped 0.4% (down 2.7%). India’s Sensex equities index fell 2.2% (up 9.9%). China’s Shanghai Exchange Index gained 1.2% (up 10.9%). Turkey’s Borsa Istanbul National 100 index rallied 1.3% (up 19.3%).

Federal Reserve Credit declined $10.3 billion last week to $6.993 TN. Fed Credit was down $1.897 TN from the June 22, 2022, peak. Over the past 267 weeks, Fed Credit expanded $3.266 TN, or 88%. Fed Credit inflated $4.182 TN, or 149%, over the past 624 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.3 billion last week to $3.322 TN. “Custody holdings” were down $104 billion y-o-y, or 3.0%.

Total money market fund assets jumped $40.4 billion to a record $6.508 TN. Money funds were up $374 billion over 12 weeks (26% annualized), $622 billion y-t-d (12.8% ann.), and $876 billion, or 15.5%, y-o-y.

Total Commercial Paper recovered $9.3 billion to $1.157 TN. CP was down $53 billion, or 4.4%, over the past year.

Freddie Mac 30-year fixed mortgage jumped another 10bps this week to a 12-week high 6.54% (down 125bps y-o-y). Fifteen-year rates rose eight bps to 5.71% (down 141bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates surging 25 bps to a three-month high 7.22% (down 81bps).

Currency Watch:

October 23 – Bloomberg (Mia Glass and Saburo Funabiki): “The yen dropped to its weakest level against the dollar in almost three months, reviving concern that Japanese officials may act to support the currency if it keeps on depreciating. Japan’s currency slid as much as 1.4% to 153.19 per dollar on Wednesday…, trading to finish at the lowest level since late July on a closing basis. The drop led the pair to breach the key technical level of about 151.38, its 200-day moving average, which analysts say opens the door for further declines.”

October 23 – Bloomberg (Toru Fujioka): “Japan’s Finance Minister Katsunobu Kato said he is raising the level of urgency for monitoring currency moves, after the yen hit an almost three-month low against the dollar. ‘We are seeing one-sided, rapid moves’ in the forex markets, Kato told reporters… ‘We will closely monitor the foreign exchange market with a stronger sense of urgency, including watching for speculative trading.’”

October 23 – Wall Street Journal (Jason Douglas and Rebecca Feng): “Chinese residents have been illicitly moving billions of dollars out of the country under authorities’ noses as a cratering property market and economic uncertainties push people to find safer places to park their wealth overseas. Moving fortunes out of China is hard: The country imposes strict capital controls that cap individual purchases of foreign exchange at $50,000 a year. Violators can receive big fines, or even prison sentences… Nevertheless, the stampede for the exit in the past few years appears to dwarf the outflows that occurred in 2015 and 2016, when an earlier property downturn propelled what at the time was the biggest episode of capital flight from China, in dollar terms… The Journal’s tally suggests as much as $254 billion might have left China illicitly in the four quarters through the end of June.”

For the week, the U.S. Dollar Index added 0.7% to 104.257 (up 2.9% y-t-d). For the week on the downside, the Japanese yen declined 1.8%, the New Zealand dollar 1.6%, the South Korean won 1.5%, the Australian dollar 1.5%, the Swedish krona 1.0%, the Singapore dollar 0.9%, the British pound 0.7%, the Canadian dollar 0.7%, the euro 0.7%, the Mexican peso 0.6%, the Norwegian krone 0.5%, the South African rand 0.3%, the Brazilian real 0.3%, and the Swiss franc 0.2%. The Chinese (onshore) renminbi declined 0.27% versus the dollar (down 0.30% y-t-d).

 Commodities Watch:

The Bloomberg Commodities Index rallied 2.0% (up 1.6% y-t-d). Spot Gold added 1.0% to a record $2,748 (up 33.2%). Silver was unchanged at $33.72 (up 41.7%). WTI crude recovered $2.56, or 3.7%, to $71.78 (unchanged). Gasoline rallied 3.8% (down 1%), and Natural Gas surged 13.4% to $2.56 (up 2%). Copper slipped 0.3% (up 12%). Wheat declined 0.7% (down 9%), while Corn rose 2.6% (down 12%). Bitcoin lost $1,200, or 1.7%, to $67,140 (up 58%).

Election Watch:

October 19 – Financial Times (Taylor Nicole Rogers): “Fears of violence have left some US election boards struggling to hire poll workers with less than three weeks to go before Americans vote in November’s presidential election. Election administrators in battleground states Nevada, Arizona and Wisconsin are still recruiting temporary staff to set up polling equipment, sign in voters and report results… Officials in Maryland, Ohio and Florida are also still hiring staff… ‘The challenge [comes from concerns about] the safety and security of poll workers,’ said Isaac Cramer, executive director of the election board in Charleston County, South Carolina. ‘I know that was a top concern of people who have left.’”

October 23 – New York Times (Steven Lee Myers): “The Democratic Party’s vice-presidential nominee has been falsely accused of sexually molesting students. The claims have been spread by a former deputy sheriff from Florida, now openly working in Moscow for Russia’s propaganda apparatus, on dozens of social media platforms and fake news outlets. A faked video purporting to show one victim — creating fake people is a recurring Russian tactic — received more than 5 million views on X, a platform owned by the world’s richest man, Elon Musk. Mr. Musk has not only leaned all in for the Republican nominee…, but he also used his platform to reanimate discredited claims about the validity of the election’s outcome… Two weeks before this year’s vote…, the torrent of half-truths, lies and fabrications, both foreign and homegrown, has exceeded anything that came before, according to officials and researchers who document disinformation.”

October 23 – Reuters (Carolina Mandl): “Hedge fund Bridgewater Associates said the Federal Reserve independence is probably a top issue in the U.S. presidential election, according to a commentary sent to clients… The comments by one of the world’s biggest hedge funds, which had around $100 billion in assets under management in August, adds to worries voiced by other investors about the Fed independence. Fed’s independence is crucial for investors as any political influence on monetary policy could disrupt key bets on the path of inflation and economic growth, in the U.S. and globally.”

Middle East War Watch:

October 25 – Associated Press (John Gambrell): “Israel pounded Iran with a series of airstrikes early Saturday, saying it was targeting military targets in retaliation for the barrage of ballistic missiles the Islamic Republic fired upon Israel earlier this month. Explosions could be heard in the Iranian capital, Tehran, though there was no immediate information on damage or casualties. The attack risks pushing the archenemies closer to all-out war at a time of spiraling violence across the Middle East, where militant groups backed by Iran – including Hamas in Gaza, and Hezbollah in Lebanon – are already at war with Israel. The Israeli military said Saturday it had launched ‘precise strikes on military targets’ and, according to two Israeli officials, it was not targeting nuclear or oil facilities.”

October 20 – Bloomberg (Ethan Bronner and Galit Altstein): “A day after a Hezbollah drone penetrated Israel’s air defenses and exploded next to the private home of Prime Minister Benjamin Netanyahu, he held a series of meetings with top security aides to discuss the next attack on Iran. The planning for such an assault has been underway for three weeks… Saturday’s precise drone attack on Netanyahu’s coastal home north of Tel Aviv stunned many Israelis. While neither Netanyahu nor his wife were home and no one was injured, he and his ministers said it was another reason retaliation is warranted. ‘There is no doubt that another red line has been crossed here,’ Foreign Minister Israel Katz told Israel’s Channel 14… ‘We must defeat Iran’s ability to pose a threat.’”

October 24 – Wall Street Journal (Jared Malsin): “After suffering a series of punishing blows by Israel, Hezbollah is fighting back, launching ambushes on Israeli troops in Lebanon and ratcheting up drone and missile strikes deeper into Israel. The attacks show that Hezbollah, though weakened by Israeli strikes that have killed a generation of its top leaders and destroyed some of its weapons, is still capable of turning Lebanon’s deadliest conflict in decades into a long grind for Israel. Hezbollah has been firing missiles at Israel for more than a year… While those missiles have resulted in only limited damage and few casualties, they have displaced tens of thousands of people from northern Israel and drained Israeli resources as Israel spends heavily to intercept them.”

October 22 – Reuters (Timour Azhari and Laila Bassam): “Lebanon’s Hezbollah movement said… there would be no negotiations while fighting continued with Israel and it claimed sole responsibility for a drone attack on Israeli Prime Minister Benjamin Netanyahu’s holiday home. The group ‘takes full and sole responsibility’ for targeting Netanyahu’s house, Mohammad Afif, head of the Iranian-backed militant group’s media office, told a press conference in the southern suburbs of Beirut. ‘If our hands didn’t reach you the previous time, then days, nights and the battlefield are still between us,’ he said.”

October 20 – New York Times (Maria Abi-Habib and Ismaeel Naar): “A year ago, Saudi Arabia was preparing to recognize Israel in a normalization deal that would have fundamentally reshaped the Middle East and further isolated Iran and its allies while barely lifting a finger to advance Palestinian statehood. Now, that deal is further away than ever… Instead, Saudi Arabia is warming relations with its traditional archenemy, Iran, while insisting that any diplomatic pact now hinges on Israel’s acceptance of a Palestinian state, a remarkable turnaround for the kingdom. A diplomatic détente is underway in the Mideast, but not the one envisioned by the Israeli prime minister, Benjamin Netanyahu, who continues to say that his administration can clinch a deal with Riyadh.”

Ukraine War Watch:

October 24 – Reuters (Yuliia Dysa): “Ukrainian President Volodymyr Zelenskiy said… that Russia plans to deploy North Korean troops to the battlefield starting Oct. 27-28… ‘According to intelligence, the first North Korean soldiers are expected to be deployed by Russia to combat zones as early as October 27-28. This is a clear escalation by Russia,’ Zelenskiy said…”

October 24 – Bloomberg (Donato Paolo Mancini and Andrea Palasciano): “A second batch of North Korean troops will head to Russia soon, according to South Korean intelligence documents shared with allies… A first group of 1,500 elite special forces troops is already undergoing training in Russia’s far east as part of a planned deployment of about 10,000 North Korean soldiers, according to the documents. They were transported to the port of Vladivostok between Oct. 8 and Oct. 13 after the first visit by Russian naval vessels to North Korean waters since 1990…”

October 23 – Reuters (Phil Stewart and Hyonhee Shin): “The United States said for the first time… that it had seen evidence that North Korea has sent 3,000 troops to Russia for possible deployment in Ukraine, a move that could mark a significant escalation in Russia’s war against its neighbor. U.S. Defense Secretary Lloyd Austin, speaking in Rome, said it would be ‘very, very serious’ if the North Koreans were preparing to fight alongside Russia in Ukraine, as Kyiv has alleged. But he said it remained to be seen what they would be doing there.”

October 21 – Reuters (Michelle Nichols): “It would be a ‘dangerous and highly concerning development’ if North Korea was sending troops, opens new tab to help Russia in Ukraine, the United States said… as South Korea and Britain warned of the high price Moscow would likely have to pay Pyongyang. ‘We are consulting with our allies and partners on the implications of such a dramatic move,’ deputy U.S. Ambassador to the U.N. Robert Wood told the 15-member United Nations Security Council. Russia invaded neighboring Ukraine in February 2022.”

October 21 – Financial Times (Christian Davies and Max Seddon): “South Korea has called on Russia to stop the deployment of North Korean troops to fight on Moscow’s side in Ukraine… South Korean vice-foreign minister Kim Hong-kyun ‘strongly urged Russia to immediately to pull out North Korean soldiers and to end their co-operation’, South Korea’s foreign ministry said… In a meeting with Russia’s ambassador to Seoul Georgy Zinoviev, ‘[Kim] pointed out that the fact that Russia-North Korea collaboration is moving beyond military equipment to the real dispatch of North Korean soldiers is a grave threat to international security and a violation of multiple UN Security Council resolutions and the UN charter.’”

Taiwan Watch:

October 23 – Reuters (Ben Blanchard and Roger Tung): “A real Chinese blockade of Taiwan would be an act of war and have far-reaching consequences for international trade, Defence Minister Wellington Koo said… after drills by China last week practiced such a scenario. China… has over the past five years staged almost daily military activities around the island, including war games that have practiced blockades and attacks on ports. Taiwan’s government rejects Beijing’s sovereignty claims.”

October 22 – Associated Press: “China is holding live-fire drills off the coast of its southern Fujian province facing Taiwan, just a week after a massive air-and-sea drill it described as punishment for Taiwan’s president rejecting Beijing’s claims of sovereignty… Taiwan’s Defense Ministry said China’s drills were part of an annual exercise and it was tracking them. ‘It cannot be ruled out that it is one of the ways to expand the deterrent effect in line with the dynamics in the Taiwan Strait,’ the statement added.”

October 21 – Bloomberg: “The Chinese military criticized the US and Canada for ‘undermining peace and stability’ by sending warships through the Taiwan Strait, just days after Beijing conducted major drills around the island. The People’s Liberation Army has dispatched air and naval forces to follow and monitor the transit of American destroyer USS Higgins and the Canadian frigate HMCS Vancouver on Sunday, the Eastern Theater Command said…”

October 23 – Bloomberg (Cindy Wang and Dan Murtaugh): “Taiwan’s imports of liquefied natural gas could be vulnerable if China someday imposed a blockade, the archipelago’s defense chief said — highlighting the concern Beijing’s military activity is raising in Taipei. ‘It’s undeniable that the imports of LNG are our weakest link,’ Defense Minister Wellington Koo told lawmakers…, a little more than a week after China’s military held drills around the main island. Some of that activity happened in areas in waters opposite key ports.”

Market Instability Watch:

October 24 – Reuters (Davide Barbuscia): “The cost of insuring exposure to U.S. government debt has climbed to its highest in nearly one year, suggesting investors are getting nervous about a U.S. presidential election outcome that could make the government less able to repay debt. Spreads on U.S. one-year credit default swaps (CDS) – market-based gauges of the risk of a default – widened to 49 bps on Thursday…, the highest since November 2023.”

October 22 – Bloomberg (Edward Bolingbroke): “The price of options that protect against an extended slump in Treasuries is soaring as traders brace for a bevy of decisive events in the weeks ahead that have the potential to deepen the market’s losses. Hedging is ramping before the release of a key batch of payrolls data next week, followed by the US election Nov. 5 and the Federal Reserve’s next policy announcement two days later. Benchmark 10-year rates touched the highest since July on Tuesday, but as traders see it now, the risk is for an even bigger jump in yields.”

October 25 – New York Times (Talmon Joseph Smith and Joe Rennison): “The $28 trillion Treasury market is arguably the most foundational financial market in the world. It’s where the U.S. government auctions its debt to investors who buy and trade that debt, influencing borrowing costs across the globe. It has also become one of the main places for investors to express their views on the race for the White House. Vice President Kamala Harris and former President Donald J. Trump have each pledged tax and spending policies that would most likely increase federal deficits, leading to more government borrowing. But it is Mr. Trump’s proposals — including steep tariffs and extra-large tax cuts — that investors have become focused on, especially as his odds of winning have risen in some betting markets.”

October 19 – Bloomberg (William Horobin): “France was downgraded by Scope Ratings in another warning on the state of the country’s finances and the political impediments to containing a ballooning budget deficit. The Europe-based credit rating firm cut France to AA- from AA, with a stable outlook, bringing it to the same notch as Belgium and the Czech Republic… ‘Sustained deterioration of public finances and challenging political outlook drive the downgrade,’ Scope said… The rebuke comes a week after Fitch slapped a negative outlook on its assessment of France’s creditworthiness. The country will face another test a week from now, when Moody’s has scheduled an update of its assessment. S&P… is due Nov. 29.”

October 23 – Bloomberg (Ruth Carson and Mia Glass): “Japan’s bonds are the latest to succumb to a global debt selloff as traders unwind bets for aggressive US interest-rate cuts. Yields on Japan’s 40-year government debt rose to a 16-year high on Wednesday, a day after their 10-year Treasury peers climbed past 4.2% for the first time since July. The losses have spread to German securities as well as Asian notes, while a gauge of total return in US sovereign bonds is getting closer to erasing its gains for the year.”

Global Credit Bubble Watch:

October 19 – Bloomberg (Craig Stirling): “Even before global finance chiefs fly into Washington over the next few days, they’ve been urged in advance by the International Monetary Fund to tighten their belts. The IMF’s Fiscal Monitor on Wednesday will feature a warning that public debt levels are set to reach $100 trillion this year, driven by China and the US. Managing Director Kristalina Georgieva… stressed how that mountain of borrowing is weighing on the world. ‘Our forecasts point to an unforgiving combination of low growth and high debt — a difficult future,’ she said. ‘Governments must work to reduce debt and rebuild buffers for the next shock — which will surely come, and maybe sooner than we expect.’”

October 22 – Financial Times (Martin Arnold and Colby Smith): “The IMF has registered its concern at the steps taken by banks to remove more than $1.1tn of risks from their balance sheets over the past decade, calling for supervisors to look into an increasingly-used technique to share exposure with investors. Growing numbers of lenders in Europe and the US have provided investors with funds to finance so-called round-trip deals, which involve instruments backed by loan repayments. While the loans remain on banks’ balance sheets, the deals transfer risk to investors by leaving them on the hook should borrowers default. The IMF said in its twice-yearly global financial stability report that supervisors should quantify how much financing banks have provided lenders for such deals to gauge any possible systemic effects… Private credit funds have bought about 60% of the transfers, while pension funds bought about 20%, attracted by the potential to earn annual returns as high as between 8 and 12% if the loans are repaid… The IMF said there was ‘anecdotal evidence that banks are providing leverage for credit funds to buy credit-linked notes issued by other banks’.”

October 22 – Bloomberg (Laura Noonan and Carmen Arroyo): “Concerns around the quality of assets being bundled into significant risk transfers are rising among market participants and the opaque transactions could increase risks to financial stability, according to the International Monetary Fund. SRTs, one of the hottest trades on Wall Street, could create ‘negative feedback loops’ during periods of stress because if leverage is used by buyers then ‘substantial risk’ remains within the banking system but capital coverage is lower, the IMF said in a report on financial stability. The transfers may also mask a traditional lenders’ resiliency, because they improve a bank’s buffers while leaving the overall capital level unchanged.”

October 23 – Wall Street Journal (Matt Wirz): “Wall Street is cranking up its complex bond machine again. Goldman Sachs this month sold $475 million of public asset-backed securitization, or ABS, bonds backed by loans the bank makes to fund managers that tide them over until cash from investors comes in. The first-of-its-kind deal is a lucrative byproduct of the New York bank’s push into loans to investment firms, such as these so-called capital-call lines. Goldman’s new deal reflects two trends transforming financial markets. Increasingly large managers of private-debt and private-equity funds are moving up in the Wall Street pecking order, but they often need money fast. Banks, once again, are reinventing themselves to adapt… Capital-call loans function like credit cards for private-fund managers. The funds borrow money to invest quickly in private debt, private equity, real estate and infrastructure. They then ‘call up’ cash commitments from clients in the funds, mostly institutions such as pensions and insurers, and repay the loans when the clients deliver.”

October 21 – Bloomberg (Dawn Lim and Laura Benitez): “Yesterday they dealt in distressed debt, today they’re battling to establish credibility as plain-vanilla lenders. Money managers once known for providing capital to businesses that couldn’t get bank financing are vying to lend to the world’s top-rated companies. Blackstone Inc. has more than $90 billion of investment-grade private credit assets, up roughly 40% from a year ago. The firm expects that to grow. Apollo Global Management Inc. manages roughly $275 billion of investment-grade credit. Its ‘high grade capital solutions’ business — a key plank in the firm’s growth strategy that focuses on multibillion-dollar corporate deals — has originated about $100 billion in the past four years.”

October 22 – Bloomberg (James Crombie): “Leveraged loans have defied the drag of rising defaults and surging supply to hit a 29-month peak. Higher Treasury yields and dwindling expectations for Fed easing can extend the rally in floating-rate assets. The benchmark US leveraged loan index has been on a tear this month as US Treasury yields popped above 4%. It’s catching up with junk bonds for the year…”

October 24 – Bloomberg (Paula Seligson, Jeannine Amodeo and Michael Tobin): “Companies have issued a record $986 billion of debt in the US leveraged loan market this year, mostly to cut interest expense on existing debt. That figure surpassed 2017 as the busiest year for new issuance, according to… data going back to 2013. Most of this year’s volume has come from companies refinancing current obligations or locking in lower margins through repricing… In September, almost 20% of issuance volume came from acquisition-related transactions…”

AI Bubble Watch:

October 23 – Yahoo Finance (Daniel Howley): “Artificial Intelligence has driven shares of tech companies like Microsoft, Amazon, Nvidia, and Google to new highs this year. But the technology… is driving something else just as high as stock prices: energy consumption. AI data centers use huge amounts of power and could increase energy demand by as much as 20% over the next decade… Pair that with the continued growth of the broader cloud computing market, and you’ve got an energy squeeze. But Big Tech has also set ambitious sustainability goals focused on the use of low-carbon and zero-carbon sources to reduce its impact on climate change. While renewable energy like solar and wind are certainly part of that equation, tech companies need uninterruptible power sources. And for that, they’re leaning into nuclear power.”

Bubble and Mania Watch:

October 22 – Bloomberg (Finbarr Flynn and Ayai Tomisawa): “The private credit industry is still at the beginning of expansion with growth likely to be driven by investment-grade assets, according to Blackstone Inc., the world’s largest alternative asset manager. ‘We’re seeing this long-term structural shift toward private credit, and I think we’re in the very early days,’ said Gilles Dellaert, global head of credit and insurance at Blackstone… While private credit started off in more leveraged assets, the market for investment-grade lending is a ‘much larger addressable market’ of potentially $30 trillion or more, according to Dellaert. Blackstone’s credit arm grew to be its largest in the third quarter with $354.7 billion in assets…”

October 21 – Bloomberg (Ellen Schneider): “Many investors think they’re under-allocated to private credit and are looking for more ways to take a slice of the $1.7 trillion market, according to a private markets survey from Goldman Sachs. Investors surveyed included asset managers, private pension firms, insurers, endowments and public pensions, known in the industry as limited partners. And as private credit is raking in records amount of cash, most LPs are looking to invest even more… Nearly half of surveyed LPs are now allocating to secondaries and co-investment strategies, a ‘pretty meaningful increase’ compared to last year, Stephanie Rader, Goldman Sachs’ global co-head of alternatives capital formation, said… ‘It’s solidifying private credit as an asset class within an alternatives portfolio.’”

October 22 – Bloomberg (Christian Dass and Sagarika Jaisinghani): “Exposure to the S&P 500 has reached levels that were followed by a 10% slump in the past, according to Citigroup Inc. strategists. Long positions on futures linked to the benchmark index are at the highest since mid-2023 and are looking ‘particularly extended,’ the team led by Chris Montagu wrote… ‘We’re not suggesting investors should start to reduce exposure, but the positioning risks do rise when markets get extended like this,’ they said.”

October 21 – Axios (Neil Erwin): “For the last 15 years, all you’ve needed to do to achieve double-digit returns on your money was park it in an S&P 500 index fund, reinvest dividends, and forget about it. That happy ride may be over, according to a new note from Goldman Sachs that has Wall Street abuzz. The big picture: The S&P is on track to return only about 3% a year in the coming decade, Goldman’s portfolio strategy group estimates. Compare that to 13% average annual returns over the last ten years. Goldman’s forecast implies the S&P… is more likely than not to have lower returns than U.S. Treasury securities (72% odds) and could even deliver returns lower than inflation (33% odds) through 2034.”

October 23 – Bloomberg (James Crombie): “Investors chasing fat yields in US corporate debt aren’t being properly compensated for the risks, warns junk bond guru Marty Fridson. ‘Investors systematically overpay for industries that offer higher-than-median yields,’ Fridson, whose debt analysis has been studied by Wall Street for decades, wrote… Bond buyers, he added, are ‘earning inferior risk-adjusted returns.’ Fridson’s analysis points to a growing danger bubbling beneath the surface of the high-yield debt market, where a bullish consensus is underpinned by expectations for robust growth in the US economy.”

October 24 – Bloomberg (James Tarmy): “It was the banana seen round the world. When the artist Maurizio Cattelan duct taped a fresh banana to a wall at Art Basel Miami Beach in 2019 it caused an immediate uproar. Cattelan’s gallery was soon forced to take the piece down because crowds in the booth became unmanageable; within days it was the subject of memes and knockoffs. Celebrities posted about it; Serious Art Critics weighed in… And perhaps most important, collectors snapped it up. The work, which is titled Comedian, was produced in an edition of three, with reported prices of $120,000 to $150,000 apiece… Five years later, one of the works in private hands will be offered to the public with a notably higher price tag: Its presale estimate is $1 million to $1.5 million.”

De-globalization and Iron Curtain Watch:

October 23 – Bloomberg (Henry Meyer): “Russian President Vladimir Putin said the newly expanded BRICS group showed that a ‘multipolar world’ is being created, in a challenge to the US-dominated global order. BRICS ‘meets the aspirations of the main part of the international community, the so-called world majority,’ Putin said… at the formal opening of the leaders’ summit in Russia’s Kazan. It’s ‘especially in demand in the current conditions, when truly dramatic changes are taking place in the world, and the process of forming a multipolar world is underway…’ ‘It would be wrong to ignore the unprecedented interest of the countries of the Global South and East in strengthening contacts with BRICS,’ Putin told his fellow leaders. ‘At the same time, it is necessary to maintain a balance.’”

October 24 – Bloomberg (Sudhi Ranjan Sen): “India’s Prime Minister Narendra Modi said BRICS shouldn’t project itself as an alternative to global organizations, even as founding members like Russia and China try to expand the group to challenge the US-led global order. ‘We must be careful to ensure that this organization does not acquire the image of one that is trying to replace global institutions,’ Modi said… The group should work to reform institutions like the United Nations Security Council and multilateral lenders, he said.”

October 23 – Reuters (Lisandra Paraguassu): “Brazilian President Luiz Inacio Lula da Silva said… that it is time for the BRICS nations to create new payment methods between them, adding that the group’s New Development Bank was designed as an alternative to what he called failing Bretton Woods institutions. ‘It’s not about replacing our currencies, but we need to work so that the multipolar order we aim for is reflected in the international financial system,’ Lula told the BRICS summit…”

October 23 – Reuters (Vladimir Soldatkin and Gleb Bryanski): “Leaders of the nations in the BRICS grouping, which accounts for 37% of global economic output, predicted its influence would grow as they met in Russia…, outlining common projects ranging from a grain exchange to a cross-border payments system. Russia’s President Vladimir Putin, who has sought support from BRICS leaders amid his standoff with the West over the war in Ukraine, said that BRICS’ average economic growth in 2024/25 would be 3.8%, compared to global growth of 3.2-3.3%.”

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

October 22 – Reuters (Vladimir Soldatkin, Dmitry Antonov, and Laurie Chen): “Chinese President Xi Jinping told Russia’s Vladimir Putin that the international situation was gripped by chaos but that Beijing’s strategic partnership with Moscow was a force for stability amid the most significant changes seen in a century. Xi and Putin in May pledged a ‘new era’ of partnership between the two most powerful rivals of the United States, which they cast as an aggressive Cold War hegemon sowing chaos across the world. ‘At present, the world is going through changes unseen in a hundred years, the international situation is intertwined with chaos,’ Xi told Putin… at the opening of the BRICS summit. ‘But I firmly believe that the friendship between China and Russia will continue for generations, and great countries’ responsibility to their people will not change.’”

October 24 – Wall Street Journal (Benoit Faucon and Thomas Grove): “Russia provided targeting data for Yemen’s Houthi rebels as they attacked Western ships in the Red Sea with missiles and drones earlier this year, helping the Iranian-backed group assault a major artery for global trade and further destabilizing the region. The Houthis… eventually began using Russian satellite data as they expanded their strikes, said a person familiar… and two European defense officials. The data was passed through members of Iran’s Islamic Revolutionary Guard Corps, who were embedded with the Houthis in Yemen… The assistance… shows how far Russian President Vladimir Putin is willing to go to undermine the U.S.-led Western economic and political order.”

October 23 – Bloomberg (Anthony Capaccio): “China is pressing ahead with plans to rapidly upgrade and expand its nuclear weapons arsenal across land, sea and air, according to a new US assessment that offers the most detailed accounting yet of the country’s bid to catch up to the US in an area where it lagged. The Defense Intelligence Agency’s report details how China is building up a land-based arsenal involving about 300 missile silos, while also expanding its fleet of road-mobile intercontinental ballistic missiles and further developing a fleet of bombers… ‘China is undergoing the most rapid expansion and ambitious modernization of its nuclear forces in history — almost certainly driven by an aim for enduring strategic competition with the US,’ the Pentagon’s intelligence arm said in its 2024 Nuclear Challenges report.”

Inflation Watch:

October 21 – Reuters (Nupur Anand): “Higher prices are here to stay, which adds to economic pain also stemming from slow growth and high debt, the International Monetary Fund’s managing director, Kristalina Georgieva, said… ‘The pain we all feel because prices have gone up is here to stay, and a higher level of prices makes many people around the world quite angry too,’ she said… at the Bretton Woods Conference. ‘We are faced with this unforgiving combination of slow growth and high debt.’”

October 22 – Bloomberg (Alexandre Tanzi): “Price pressures have eased substantially over the past two years, but a disconnect remains between what US inflation data show and what millions of Americans experience with their finances. That’s in part because price levels are still higher than they were before the pandemic. Another explanation: the government’s key inflation measure excludes a number of major everyday costs that have surged in recent years. Property taxes, tips and interest charges from credit cards to auto loans aren’t factored into the… consumer price index. The CPI also leaves out a key aspect of home insurance, as well as brokerage fees and under-the-table payments to babysitters and dog walkers — costs that can add up.”

October 21 – Washington Post (Abha Bhattarai and Federica Cocco): “A multiyear surge in home prices has hit hardest in the swing states that are likely to determine the outcome of the 2024 presidential campaign… Americans in swing states are far more likely to live in areas where housing has become disproportionately more costly since 2019… Nationally, home prices have grown 48% since 2019. But in some counties across the seven most tightly contested swing states — including Arizona, Georgia, North Carolina and Pennsylvania — prices have more than doubled, an analysis of Zillow data shows.”

October 21 – New York Times (Ron Lieber): “If you’re 16 years old, live in California and just passed your driver’s license test, the first thing you should do is drive your family to In-N-Out Burger for a milkshake and some animal-style fries. The first thing a parent should do is call the insurance company to update the policy. That part, however, will probably give you indigestion. Last month, when Debbie Mukamal called her insurer… the representative casually informed her that her annual premium would triple, from about $1,700 to over $5,000. She has it pretty good, it turns out. There are plenty of families with three or four children whose annual premiums will top $20,000 this year.”

Federal Reserve Watch:

October 21 – Reuters (Michael S. Derby): “Federal Reserve Bank of Dallas President Lorie Logan said… she sees more rate cuts ahead for the central bank and suggested she sees no reasons why the Fed can’t also press forward with shrinking its balance sheet. ‘If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals,’ Logan said… ‘The economy is strong and stable,’ Logan said, but, ‘meaningful uncertainties remain in the outlook’ around rising risks for the labor market and ongoing risks to the Fed’s inflation objectives. The Fed ‘will need to remain nimble and willing to adjust if appropriate,’ she said.”

October 21 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Kansas City President Jeffrey Schmid said he favors a slower pace of interest-rate reductions given uncertainty about how low the US central bank should ultimately cut rates. Schmid… said he hoped for a ‘more normalized’ policy cycle where the Fed makes ‘modest’ adjustments to sustain economic growth, stable prices and full employment. He said a slower pace of rate reductions will also allow the Fed to find a so-called neutral level — where policy neither weighs on nor stimulates the economy. ‘Absent any major shocks, I am optimistic that we can achieve such a cycle, but I believe it will take a cautious and gradual approach to policy,’ Schmid said…”

October 21 – Bloomberg (Laura Curtis): “Federal Reserve Bank of San Francisco President Mary Daly said she expected the US central bank would continue cutting interest rates to guard against further weakening in the labor market. ‘So far, I haven’t seen any information that would suggest we wouldn’t continue to reduce the interest rate.’ Daly said… ‘This is a very tight interest rate for an economy that already is on a path to 2% inflation, and I don’t want to see the labor market go further’.”

U.S. Economic Bubble Watch:

October 24 – Reuters (Lucia Mutikani): “New applications for U.S. unemployment aid unexpectedly fell last week, but the number of people collecting benefits in mid-October was the highest in nearly three years… Initial claims for state unemployment benefits dropped 15,000 to a seasonally adjusted 227,000 for the week ended Oct. 19… The Fed’s ‘Beige Book’ report… described employment as having ‘increased slightly’ in early October, ‘with more than half of the districts reporting slight or modest growth and the remaining districts reporting little or no change.’”

October 24 – Associated Press (Alex Veiga): “The average rate on a 30-year mortgage in the U.S. rose again this week, reaching its highest level in nearly three months. The rate rose to 6.54% from 6.44% last week… Despite the recent uptick, the average rate is down from a year ago, when it climbed to a 23-year high of 7.79%.”

October 23 – CNBC (Diana Olick): “Sales of previously owned homes fell 1% in September compared with August, to a seasonally adjusted, annualized rate of 3.84 million units, the slowest pace since October 2010… Inventory rose 1.5% month to month to 1.39 million homes for sale at the end of September. That represents a 4.3-month supply at the current sales pace. Inventory was 23% higher from September 2023… The pressure of still low inventory continues to push prices higher. The median price of an existing home sold in September was $404,500, an increase of 3% year over year and the 15th consecutive month of annual price gains. Cash continues to be king in this market, making up 30% of September sales… Investors actually pulled back slightly in September to just 16% of sales, down from 19% in August.”

October 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes increased to the highest level in nearly 1-1/2 years in September as buyers rushed in to take advantage of a decline in mortgage rates. New home sales jumped 4.1% to a seasonally adjusted annual rate of 738,000 units last month, the highest level since May 2023… The median new house price was unchanged at $426,300 in September from a year earlier. The inventory of new homes increased in September to 470,000, near levels last seen in early 2008, from 468,000 units in August. At September’s sales pace it would take 7.6 months to clear the supply of houses on the market, down from 7.9 months in August.”

October 23 – Bloomberg (Amara Omeokwe): “Economic activity was flat in most parts of the US since early September, the Federal Reserve said in its Beige Book survey of regional business contacts. More than half of the US central bank’s 12 districts reported ‘slight or modest’ growth in employment, while most districts said prices rose at a slight or modest pace’… Multiple districts also noted slowing wage growth. ‘On balance, economic activity was little changed in nearly all districts since early September, though two districts reported modest growth,’ the report said. ‘Reports on consumer spending were mixed, with some districts noting shifts in the composition of purchases, mostly toward less expensive alternatives.’”

October 23 – Associated Press (David Koenig and Manuel Valdes): “Boeing reported a loss of more than $6 billion in the third quarter and immediately turned its attention to union workers who will vote Wednesday whether to accept a company contract offer or continue their crippling strike, which has dragged on for nearly six weeks. New CEO Kelly Ortberg laid out his plan to turn Boeing around after years of heavy losses and damage to its reputation.”

Fixed Income Watch:

October 25 – Bloomberg (Gowri Gurumurthy): “US junk bonds are headed for their biggest weekly loss in six months as yields surge alongside rise in Treasury yields and 0.9% loss in equities so far this week. Yields advanced in three of the last four weeks to close at 7.31%, up 15 bps in four sessions… CCCs are set to post their first weekly loss in more than three months and the biggest since the week ended June 28.”

October 21 – Wall Street Journal (Sam Goldfarb and Vicky Ge Huang): “Weaker businesses are rushing to take advantage of a red-hot credit market, issuing a deluge of bonds and loans to refinance older debt, strengthen their balance sheets and fund dividend payments to their owners. In September alone, companies… borrowed a combined $109.7 billion in junk-rated bonds and loans, according to PitchBook… That is the third-largest monthly total in records going back to 2005. The extra yield that investors demand to hold speculative-grade corporate bonds over U.S. Treasurys fell to 2.85 percentage points last week, just a touch higher than the 14-year lows reached in 2021… The latest surge in issuance has gone beyond just refinancings. Some $22.1 billion of junk-rated loans issued in September were used by businesses to pay dividends to their owners, the largest monthly total in records going back to 2000 by a comfortable margin…”

October 21 – Bloomberg (Lily Meier): “A new bridge in Lake Charles, Louisiana, a 26-story patient tower for the Children’s Hospital of Philadelphia and two high schools in the heart of Texas’ oil country are just a handful of projects financed by what’s poised to be a record year of municipal bond sales. Since January, state and local government borrowers have tapped investors for nearly $250 billion of debt sold exclusively for new infrastructure developments, the most since at least 2013… The sum is up 30% over the same period last year…”

China Watch:

October 20 – Bloomberg: “Chinese banks cut their benchmark lending rates after easing by the central bank at the end of September, part of a series of measures aimed at reviving economic growth and halting a housing market slump. The one-year loan prime rate was lowered to 3.10% from 3.35%, while the five-year LPR was reduced to 3.60% from 3.85%. The size of the cut is at the upper bound of the 20-25 bps range forecast by People’s Bank of China Governor Pan Gongsheng… since late September…”

October 22 – Bloomberg (Foster Wong and Jacob Gu): “China should issue 2 trillion yuan ($281bn) of special government bonds to help create a market stabilization fund, according to a top government-linked think tank. The fund would promote market stability through the buying and selling of blue-chip stocks and exchange-traded funds, Chinese media outlet the Paper reported, citing a release from the Institute of Finance & Banking at the Chinese Academy of Social Sciences. That think tank is affiliated with the State Council, China’s cabinet. Chinese authorities have been considering such a fund…”

October 24 – Bloomberg: “Chinese banks are under increased funding pressure, an unintended consequence of increased monetary easing efforts that fueled a stock rally and cut demand for debt products. The yield on one-year negotiable certificates of deposit sold by AAA rated banks, a popular bond-like fundraising tool for lenders, rose to the highest since June earlier this month… Its premium over the seven-day repurchase agreement rate… is hovering near its widest since February… The latest funding struggle is also a reminder of the importance for Beijing to deliver on its pledge to re-capitalize big state-owned banks, a move aimed at helping them cope with record low margins, sinking profits and rising bad debt.”

October 24 – Bloomberg: “Defaults in an opaque corner of China’s local debt market have surged to a record high, ensnaring investors who’d assumed the securities had an implicit guarantee from the state. It wasn’t supposed to be this way. Last year, confronted with a wave of bad debt issued by municipalities’ financing arms, the country’s central government took action. It gave local governments permission to raise around 2.2 trillion yuan ($309bn) in new bonds to help repay creditors and ordered state banks to provide additional refinancing support… While there is no official tally of the size of the sector, analysts estimate it to be around $800 billion. In the first nine months of this year, 60 non-standard products tied to LGFVs have defaulted or warned of repayment risks, up 20% from the same period last year…”

October 21 – Financial Times (Thomas Hale and Wang Xueqiao): “Share buybacks on mainland China’s biggest exchanges have soared to a record high this year as Beijing pushes for companies to return cash to shareholders as part of its efforts to revive a flagging stock market. There have been Rmb235bn ($33bn) in buybacks across mainland-listed shares so far in 2024, more than double last year’s total and far surpassing the previous record of Rmb133bn in 2022… The rush of share repurchases comes as China’s government unleashes its biggest round of economic stimulus since the Covid-19 pandemic.”

October 21 – Reuters (Will Freeman): “More than 20 Chinese listed companies have announced plans to tap special central bank lending for share purchases, according to exchange filings, days after the People’s Bank of China (PBOC) kicked off the $42 billion funding scheme. The PBOC launched the relending programme on Friday, allowing listed companies or their major shareholders to borrow cheaply to fund share buybacks or holding increases.”

October 21 – New York Times (Li Yuan): “They call China’s stock market a ‘casino,’ yet they are rushing in. They are betting money that the government really does want to finally crawl out of the hole it has dug. They are speculating, looking for short-term gains, with a great degree of uneasiness. A flurry of policies by Beijing in recent weeks meant to stimulate the domestic economy has spurred China’s middle class to invest more in stocks, prompting the country’s biggest rally since 2008. In recent interviews, investors said that doing something, even putting their savings into a market full of risks, gives them a sense of control when their country seems to be going astray. They worry that the government is doing more to prime the market than to help the economy, but for now they are clinging to a familiar, bubbly feeling in an era of deflation.”

October 22 – Bloomberg: “Central Huijin Investment Ltd., a unit of China’s sovereign wealth fund that has at times bought equity to stabilize the stock market, issued bonds that pushed its total local debt sales this year to a record. The firm has now sold 207 billion yuan ($29bn) of notes this year, the most since it first tapped the onshore credit market in 2010.”

October 22 – Financial Times (Joe Leahy, Sun Yu and Kana Inagaki): “A Chinese scholar who was one of the most prominent critics of Russia’s full-scale invasion of Ukraine has been forced into early retirement, becoming the latest victim of a crackdown by Beijing on academics. Hu Wei, a top government adviser, sparked fierce online debate in China at the outbreak of the war in 2022 by calling for Beijing to ‘cut off as soon as possible’ its ties with Vladimir Putin… Two people familiar… said this month that Hu, whose commentary has been featured extensively in international media, was forced to retire from the Shanghai Party Institute of the Communist party — a school for officials — last year at the age of 59… Hu is one of a growing number of scholars targeted in recent years as the Communist party under Xi tightens its grip on academia. The crackdown has targeted Chinese intellectuals overseas as well as those working within the country, muzzling public discussion of not only traditionally sensitive topics such as politics and international relations but also China’s struggling economy.”

Central Banker Watch:

October 23 – Bloomberg (Randy Thanthong-Knight and Erik Hertzberg): “The Bank of Canada stepped up the pace of interest-rate cuts and signaled that the post-pandemic era of high inflation is over. Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 3.75%…, the biggest reduction in borrowing costs since March 2020 during the early days of the pandemic.”

October 24 – Bloomberg (Tom Rees and Irina Anghel): “Bank of England rate-setter Catherine Mann warned that the UK may have prematurely cut interest rates if there have been lasting shifts in wage and price setting. The cooling in services inflation still has ‘a long way to go’ despite slipping to the lowest level in over two years last month, Mann said… ‘If you have structural persistence in the relationship between wages and price formation that lasts, that is persistent and embedded, then it’s premature to start cutting until you purge those behaviors,’ she said.”

Global Bubble Watch:

October 22 – New York Times (Alexandra Stevenson): “It was an audacious real estate project undertaken a decade ago by a Chinese developer: a $100 billion city in Malaysia built on sand and shrubby mangroves and sold as a luxury ‘dream paradise’ for China’s middle class. Many of Forest City’s residents today are transient — the caretakers of the grounds who sweep the empty roads and pick up the garbage, trim the hedges and water the plants. ‘I see so many new faces,’ said Thana Selvi, who works at KK Supermart, a brightly lit convenience store that stands out among the mostly boarded-up, empty spaces on the street level… At a distance, Forest City’s rows of high-rises tower over the Johor Strait between Singapore and Malaysia like a monument to China’s economic triumphs. Up close, the streets are quiet, most apartments are dark and large stone slabs demarcate the lush forest from the ‘land to be developed.’”

Europe Watch:

October 22 – Financial Times (Leila Abboud, Delphine Strauss and Alex Irwin-Hunt): “After 50 years of failing to balance its budget, France wants to narrow its deficit next year with €60bn worth of tax rises and spending cuts. But the belt-tightening poses a risk to growth… That, in turn, creates a headache for the Eurozone, where France’s relative health has acted as a bulwark against a sharp slowdown in Germany. New conservative premier Michel Barnier this month unveiled a fiscal package that aims to narrow its deficit from 6.1% this year to 5% by the end of 2025.”

October 24 – Financial Times (Editorial Board): “Michel Barnier and his new minority centrist-conservative coalition were always going to face a formidable challenge governing France at a time of populism and polarisation. But their task has been made all the more difficult by the fiscal mess bequeathed by Emmanuel Macron and his ministers after seven years in power… The public deficit is due to hit 6.1% GDP this year, a massive slippage from the 4.4% envisaged when the draft 2024 budget was first outlined 18 months ago. It is a significant miss that tarnishes Macron’s record. It has also unnerved financial markets with France’s 10-year bond yields converging with Spain’s. After five decades without a balanced budget, France’s public debt now stands at 110.6% of GDP.”

Japan Watch:

October 24 – Bloomberg (Toru Fujioka): “Governor Kazuo Ueda said the Bank of Japan has time to consider its next policy steps, signaling the central bank won’t hike interest rates next week even after the yen fell to an almost three-month low. ‘I believe we have enough time’ for making a policy decision, Ueda told reporters… ‘We need to look at the whole picture, and need to diligently examine impacts on Japan’s inflation from not only a weak yen but a view on the US economy behind it — which may be related to the US presidential election,’ Ueda said.”

October 23 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda hinted that more interest-rate hikes are coming, saying that figuring out the right size and timing for further normalization of Japan’s easy monetary policy is his over-arching preoccupation. ‘I think about what would be the right size of normalization in total going forward, and how best to allocate that total rate hikes across time,’ Ueda said… ‘That keeps me awake 24/7.’”

October 24 – Bloomberg (Erica Yokoyama): “Inflation in Tokyo slowed below 2% for the first time in five months largely due to energy prices, as the country heads into a general election and the Bank of Japan mulls data for its policy decision next week. Consumer prices excluding fresh food rose 1.8% in the capital in October, marking the second month of deceleration…”

October 23 – Bloomberg (Toru Fujioka and Cynthia Li): “The Bank of Japan is expected to keep its benchmark interest rate unchanged next week before raising it in December or January, according to most economists… Almost all of 53 BOJ watchers predict a stand pat decision at the end of a two-day meeting on Oct. 31… Some 53% see a rate hike in December, keeping it the most popular timing. Those expecting the move in January has jumped to 32% from 19%, while there’s been a drop in expectations for this month.”

October 21 – Bloomberg (Nicholas Takahashi): “After three decades of ultra-loose monetary policy, even small hikes in interest rates by the Bank of Japan are poised to fuel an increase in the number of zombie companies that could be tipped into insolvency. Bankruptcies topped 5,000 cases for the first time in a decade between April and September… Those 5,095 firms collectively account for almost ¥1.38 trillion ($9.2bn) yen in debt, with the largest slice coming from the service industry. Defined as businesses that struggle to pay the interest on debt from operating profit alone, zombie companies have survived for years in Japan thanks to low rates and government support.”

Emerging Markets Watch:

October 21 – Financial Times (Will Freeman): “Latin America is learning the hard way. Organised crime in the region has been bad since the 1980s; but ‘reorganised crime’ is proving far worse. Ecuador’s gang war meltdown; Mexican mafias’ colonisation of avocado farms; hitmen prowling the once peaceful streets of Chile. These are a few recent developments that have made organised crime the unavoidable question of the moment in Latin America. But these are just the symptoms. The underlying disease: a reorganisation of the region’s criminal economies, now over a decade in the making. One that is testing democracy’s capacity to respond — and survive.”

October 21 – Reuters (Dave Sherwood): “Cuba’s electrical grid collapsed again on Sunday, the fourth such failure in 48 hours, raising fresh doubts about a quick fix on an island already suffering from severe shortages of food, fuel and medicine… Cuba’s national electrical grid first crashed around midday on Friday after the island’s largest power plant shut down, sowing chaos and leaving around 10 million people in the dark. The grid has collapsed three times since, underscoring the precarious state of the country’s infrastructure.”

Leveraged Speculation Watch:

October 21 – Financial Times (Nicholas Megaw): “Jeff Yass used to see options trading as a ‘game’. Now he sees it as a ‘mission from God’. The billionaire co-founder of Susquehanna International Group has claimed he was a socialist during his student days at the State University of New York, but now he talks about capitalism with the zeal of a convert. ‘Throughout history, the money lenders have always been viewed with suspicion,’ he told a student group dedicated to the promotion of free markets in 2021. ‘When you’re against finance, you’re fundamentally against all human progress.’”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 24 – Wall Street Journal (Eric Niiler): “The environmental costs of hurricanes Helene and Milton are now becoming clear. The storms damaged or destroyed 200,000 commercial beehives—a vital resource for pollinating U.S. crops—in Florida, Georgia and North Carolina. Hundreds of landslides devastated communities throughout Appalachia. And a 40-mile-long toxic red tide hovers just off Florida’s Gulf Coast, threatening fish and humans. The hurricanes also killed more than 250 people in six states, and, according to Moody’s…, caused total insured losses between $35 billion and $55 billion. The cost of the environmental damage is harder to tally. Researchers have identified more than 1,700 landslides across Georgia, North Carolina, South Carolina, Tennessee and Virginia, more than 950 of which damaged roads, bridges and buildings…”

October 23 – Associated Press (Gary D. Robertson): “The catastrophic flooding and destruction caused by Hurricane Helene in western North Carolina likely caused at least a record $53 billion in damages and recovery needs, Gov. Roy Cooper’s administration said… The state budget office generated the preliminary figure for direct or indirect damages and potential investments to prevent similar destruction in future storms. Cooper told reporters the state’s previous record for storm damage was $17 billion from Hurricane Florence, which struck… in 2018.”

October 24 – Financial Times (Attracta Mooney): “The world is on course for a ‘catastrophic’ temperature rise of more than 3C above pre-industrial levels, or twice a goal set by the Paris agreement, according to a UN report that stepped up warnings that time was running out to address climate change. The latest research by the UN Environmental Programme found the world’s ability to remain within the target of 1.5C of global warming ‘will be gone within a few years’ without rapid action… Already the long-term average temperature rise was put at 1.1C in a 2021 landmark report signed off by almost 200 countries.”

October 25 – Bloomberg (Michael Hirtzer and Brian K. Sullivan): “The Mississippi River is suffering from low waters for the third straight autumn, a crucial time of year when American farmers rely on the route to deliver their crops to the world. Months of limited rainfall — with few chances for more during the rest of the season — have left the vital waterway so shallow that barges are starting to run aground, even after shippers started running lighter loads to prevent boats from hitting the river bottom. While the situation isn’t as chaotic as in years past, the lack of water is again creating headaches for shippers and farmers.”

October 24 – Bloomberg (Dan Murtaugh, John Ainger and Alfred Cang): “If China can go to the moon, asked the European Union’s climate commissioner in September, why isn’t it paying more toward climate action? Wopke Hoekstra’s quip laid bare a point of contention that will loom over November’s United Nations climate summit in Baku, Azerbaijan: How can the world’s second-largest economy be simultaneously ‘developed’—at the cutting edge of science and technology—yet still be officially classed as ‘developing’—allowed concessions on emissions and access to global funds?”

Geopolitical Watch:

October 24 – Financial Times (Kathrin Hille): “China’s coastguard has entered a stand-off with its Indonesian counterpart in the southernmost reaches of the South China Sea as it attempts to enforce Beijing’s expansive territorial claims. Indonesia’s Maritime Safety Agency, or Bakamla, on Thursday said it had for the second time this week driven Chinese coastguard ships out of waters under Indonesian jurisdiction, where the vessels had been disrupting resource survey work.”

October 23 – Reuters (Vladimir Soldatkin and Guy Faulconbridge): “Chinese President Xi Jinping and Indian Prime Minister Narendra Modi used a BRICS summit in Russia… to showcase ambitions for a more harmonious relationship between the world’s two most populous countries after years of animosity. The meeting between Xi and Modi, who have not held formal talks for five years, was one highlight of a summit which President Vladimir Putin sought to use to show that the West had failed to isolate Russia over the Ukraine war.”

October 23 – Reuters (Anne Kauranen): “Finland is experiencing suspicious acts of sabotage and disruption and believes Russia is engaged in broad-ranging influence operations against it and other European countries, Finland’s Minister of Interior Lulu Ranne said. NATO and Western intelligence services, including Finland’s, have warned that Russia is behind a growing number of hostile activities across the Euro-Atlantic area, ranging from repeated cyber attacks to Moscow-linked arson… ‘We are experiencing disruptions, acts of sabotage, various types of damage, and instrumentalised migration, among other things. This creates a general sense of uncertainty and vagueness about what is true and what is not,’ Ranne told reporters.”More By This Author:Weekly Commentary: Accelerating Wall Street and Subprime BoomsMarket Commentary: 45 and CountingWeekly Commentary: Reality Check for Bonds