Credit Bubble Bulletin: Just the Facts (December 27, 2019)

By Doug Noland

12/27/2019

 

For the Week:

The S&P500 added 0.6% (up 29.2% y-t-d), and the Dow increased 0.7% (up 22.8%). The Utilities slipped 0.3% (up 22.2%). The Banks added 0.3% (up 32.3%), while the Broker/Dealers declined 0.8% (up 22.6%). The Transports increased 0.3% (up 19.3%). The S&P 400 Midcaps were little changed (up 24.0%), while the small cap Russell 2000 declined 0.2% (up 23.8%). The Nasdaq100 advanced 1.1% (up 38.6%). The Semiconductors added 0.3% (up 60.9%). The Biotechs fell 1.2% (up 21.0%). With bullion jumping $29, the HUI gold index surged 8.2% (up 47.9%).

Three-month Treasury bill rates ended the week at 1.52%. Two-year government yields fell five bps to 1.58% (down 91bps y-t-d). Five-year T-note yields dropped five bps to 1.68% (down 83bps). Ten-year Treasury yields declined four bps to 1.88% (down 81bps). Long bond yields slipped three bps to 2.32% (down 70bps). Benchmark Fannie Mae MBS yields fell five bps to 2.70% (down 79bps).

Greek 10-year yields added a basis point to 1.42% (down 297bps y-t-d). Ten-year Portuguese yields declined three bps to 0.39% (down 134bps). Italian 10-year yields slipped three bps to 1.37% (down 137bps). Spain's 10-year yields fell three bps to 0.41% (down 101bps). German bund yields were little changed at negative 0.26% (down 50bps). French yields were about unchanged at 0.05% (down 66bps). The French to German 10-year bond spread was little changed at 31 bps. U.K. 10-year gilt yields dipped three bps to 0.76% (down 52bps). U.K.'s FTSE equities index gained 0.8% (up 13.6% y-t-d).

Japan's Nikkei Equities Index was little changed (up 19.1% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to 0.00% (unchanged y-t-d). France's CAC40 increased 0.3% (up 27.6%). The German DAX equities index was about unchanged (up 26.3%). Spain's IBEX 35 equities index added 0.3% (up 13.6%). Italy's FTSE MIB index fell 1.0% (up 29.7%). EM equities were mixed. Brazil's Bovespa index rose 1.2% (up 28.0%), while Mexico's Bolsa declined 0.5% (up 6.3%). South Korea's Kospi index was unchanged (up 8.0%). India's Sensex equities index dipped 0.3% (up 15.3%). China's Shanghai Exchange was little changed (up 20.5%). Turkey's Borsa Istanbul National 100 index jumped 2.3% (up 24.6%). Russia's MICEX equities index gained 1.1% (up 28.7%).

Investment-grade bond funds enjoyed inflows of $5.160 billion, while junk bond funds posted outflows of $190 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.74% (down 81bps y-o-y). Fifteen-year rates were unchanged at 3.19% (down 82bps). Five-year hybrid ARM rates jumped eight bps to 3.45% (down 55bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 4.00% (down 44bps).

Federal Reserve Credit last week surged $32.8bn to $4.120 TN, with a 15-week gain of $361 billion. Over the past year, Fed Credit expanded $76.4bn, or 1.9%. Fed Credit inflated $1.310 Trillion, or 47%, over the past 372 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $3.8 billion last week to $3.409 TN. "Custody holdings" gained $12.3 billion, or 0.4% y-o-y.

M2 (narrow) "money" supply jumped $74.4bn last week to a record $15.420 TN. "Narrow money" surged $1.085 TN, or 7.6%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits gained $24.5bn, and Savings Deposits surged $48.6bn. Small Time Deposits were little changed, and Retail Money Funds were unchanged.

Total money market fund assets added $4.8bn to $3.604 TN. Money Funds gained $565bn y-o-y, or 18.6%.

Total Commercial Paper increased $2.3bn to $1.131 TN. CP was up $76bn, or 7.2% year-over-year.

Currency Watch:

The U.S. dollar index declined 0.7% to 97.014 (up 0.9% y-t-d). For the week on the upside, the Norwegian krone increased 1.8%, the South African rand 1.6%, the New Zealand dollar 1.5%, the Brazilian real 1.3%, the Australian dollar 1.2%, the euro 0.9%, the Swiss franc 0.8%, the Swedish krona 0.7%, the Canadian dollar 0.6%, the British pound 0.6%, the Mexican peso 0.4% and the Singapore dollar 0.2%. On the downside, the South Korean won declined 0.1%. The Chinese renminbi increased 0.15% versus the dollar this week (down 1.68% y-t-d).

Commodities Watch:

December 25 – Reuters (Ranjeetha Pakiam and Yvonne Yue Li): “Gold firmed up a foothold above $1,500 an ounce as investors positioned for 2020, with post-Christmas gains coming even as global equities inched higher and U.S.-China trade concerns eased. Silver rose along with platinum in what’s been a banner year for precious metals. Spot bullion advanced for a fourth day, the best run since October, and headed for the highest close in more than seven weeks. The metal is on pace for biggest annual gain since 2010.”

The Bloomberg Commodities Index gained 1.2% this week (up 5.7% y-t-d). Spot Gold jumped 2.0% to $1,511 (up 18%). Silver surged 4.2% to $17.943 (up 15.5%). WTI crude jumped $1.28 to $61.72 (up 36%). Gasoline rose 2.4% (up 32%), while Natural Gas sank 4.2% (down 24%). Copper increased 0.8% (up 8%). Wheat jumped 2.6% (up 11%). Corn increased 0.6% (up 4%).

Market Instability Watch:

December 24 – CNBC (Jesse Pound): “Global stock markets have been on a torrid run in 2019, adding more than $17 trillion in total value, according to Deutsche Bank calculations. The value of global equities began the year just under $70 trillion but has now surpassed $85 trillion, according to… Deutsche Bank’s Torsten Slok… Central banks around the world have taken a more dovish approach, boosting markets. The Federal Reserve has cut its benchmark interest rate three times this year, and the European Central Bank cut its already negative rates even further.”

December 23 – Wall Street Journal (Gunjan Banerji): “Stocks and bonds are staging an extraordinary run, on track for their biggest simultaneous gains in more than two decades. Heading into the final two weeks of 2019, the S&P 500 has soared 28.6%, while a bond rally has pushed the yield on the benchmark 10-year Treasury note down three quarters of a percentage point. If the gains continue through the final days of December, it would mark the first time the broad stock index has jumped by at least 20%, while Treasury yields have slipped by at least that much since 1998, …when the Federal Reserve trimmed interest rates three times to avoid a recession.”

December 27 – Bloomberg (Brandon Kochkodin and Michael Gambale): “The cost to protect against default on North American high-grade debt fell to its lowest level in the post-credit crisis era on Friday in New York. The credit derivatives index, known as CDX, closed below 44 bps Thursday for the first time since at least 2011… On Friday, it dipped to 43.712 bps, the lowest on record.”

December 23 – Reuters (David Randall): “Exchange-traded funds that use leverage to offer double or triple the daily return of benchmark U.S. stock indexes rank among the 10 top-performing funds of the decade, with returns that in some cases neared 2,000%, despite warnings that they are not suitable for most investors. The huge gains for leveraged ETFs reflect the benefits of betting on growth during the longest bull market in history. But they also highlight the subtle ways in which record-low volatility bolstered investors.”

December 23 – Reuters (Hugh Bronstein and Walter Bianchi): “Argentina’s black market peso weakened 4.56% on Monday to an all-time low of 76.75 to the U.S. dollar, traders said, as the market digested new government data showing economic activity contracted 0.9% in October versus the same month last year.”

Trump Administration Watch:

December 22 – CNBC (Jacob Pramuk): “President Donald Trump signed bills Friday to prevent a government shutdown and make major changes to U.S. health policy. The president approved the $1.4 trillion appropriations package with only hours to spare before funding lapsed Saturday. The legislation, which boosts funding for both domestic programs and the military, keeps the government running through Sept. 30.”

December 24 – Reuters (Alexandra Alper and Ben Blanchard): “U.S. President Donald Trump said… he and Chinese President Xi Jinping will have a signing ceremony to sign the first phase of the U.S.-China trade deal agreed to this month. ‘We will be having a signing ceremony, yes,’ Trump told reporters. ‘We will ultimately, yes, when we get together. And we’ll be having a quicker signing because we want to get it done. The deal is done, it’s just being translated right now.’”

December 26 – Wall Street Journal (Daniel Kruger): “The Treasury Department auctioned seven-year notes Thursday, closing the door on a record year for sales of longer-term debt in 2019. The auction lifted the total of notes and bonds sold by the U.S. government with maturities ranging from two to 30 years to $2.55 trillion, a 26% increase from 2017, when Congress and President Trump agreed to massive corporate tax cuts.”

Federal Reserve Watch:

December 21 – Bloomberg (Alex Harris): “At the Federal Reserve, 2020 will be all about making the repo market boring again. Policy makers will find this easier said than done. The central bank’s liquidity injections -- including almost half a trillion dollars earmarked to ensure New Year’s Eve is a snooze -- and Treasury bill purchases have nudged the vital market for repurchase agreements back toward normalcy after a funding crunch sent rates soaring in September. This has anchored the Fed’s benchmark rate firmly within policy makers’ preferred range… But next year will test whether the Fed can end its interventions without chaos re-emerging. Chairman Jerome Powell recently said the Fed isn’t trying to eliminate all volatility from markets. However, if the repo market is erratic, it signals the Fed doesn’t have good control over the financial system’s plumbing. That’s something policy makers and the broader market can’t tolerate.”

U.S. Bubble Watch:

December 24 – Wall Street Journal (Michael Wursthorn): “Stock gains have lapped corporate profit growth during the roaring 2019 rally, but few portfolio managers are entering the new year concerned about investor exuberance. The S&P 500’s 29% rise for the year, on track for the best showing since 2013, stands out in part because corporate earnings have contributed a modest 0.4% to the climb. Rising earnings are typically the most dependable fuel for sustained stock-price gains, so the sight of major indexes climbing to records while profits shuffle behind often stokes concern about the risks of runaway sentiment, as seen in the 2000 dot-com bust.”

December 25 – Reuters (Nivedita Balu, Ismail Shakil and Andrea Shalal): “U.S. shoppers spent more online during this year’s holiday shopping season, a report by Mastercard Inc showed…, with e-commerce sales hitting a record high. E-commerce sales this year made up 14.6% of total retail and rose 18.8% from the 2018 period, according to Mastercard’s data tracking retail sales from Nov. 1 through Christmas Eve. Overall holiday retail sales, excluding autos, rose 3.4%.”

December 23 – Bloomberg (Eliza Ronalds-Hannon): “Retailers are strapping in for the final days of their traditional do-or-die holiday shopping period. For some, that could be meant literally, as creditors and vendors decide which ones are still worth supporting in a field plagued by fewer shoppers, more online competition and too much debt… In 2019 alone, Coresight Research estimates, retailers have shut more than 9,300 stores.”

December 27 – Wall Street Journal (Eric Morath and Jeffrey Sparshott): “Rank-and-file workers are getting bigger raises this year—at least in percentage terms—than bosses. Wages for the typical worker—nonsupervisory employees who account for 82% of the workforce—are rising at the fastest rate in more than a decade, a sign that the labor market has tightened sufficiently to convey bigger pay increases to lower-paid employees… A short supply of workers, increased poaching and minimum-wage increases have helped those nearer to the bottom of the pay scale. Pay for the bottom 25% of wage earners rose 4.5% in November from a year earlier… Wages for the top 25% of earners rose 2.9%."

 

December 26 – CNBC (Amelia Lucas): “The move toward a $15 minimum wage is gaining steam, with 21 states raising minimum wages in 2019 and more increases on the way in 2020. Restaurant workers and Democratic presidential candidates are among those leading the charge for higher wages.”

December 24 – Wall Street Journal (Will Parker): “U.S. home builders benefited from low interest rates this year as housing starts climbed to levels not seen in a decade and new-home sales surged after a disappointing 2018. Builder confidence, as measured by the National Association of Home Builders, is now the highest since 1999. And publicly traded home-builder stocks beat the S&P 500 average this year, rising 40% as of Dec. 23, compared with the broad index’s 29% gain over the same period. Home builders cranked up volume partly by focusing on homes more buyers can afford.”

December 22 – Wall Street Journal (Christopher M. Matthews, Bradley Olson and Allison Prang): “Some of the banks that helped fuel the fracking boom are beginning to question the industry’s fundamentals, as many shale wells produce less than companies forecast. Banks have begun to tighten requirements on revolving lines of credit, an essential lifeline for smaller companies, as these institutions revise estimates on the value of some shale reserves held as collateral for loans to producers… Some large financial institutions… are likely to decrease the size of current and future loans to shale companies linked to reserves as a result of their semiannual reviews of the loans, the people say. The banks are concerned that if some companies go bankrupt, their assets won’t cover the loans, the people say.”

December 24 – CNBC (David Randall): “This year’s IPOs crop wasn’t as bad as it may have appeared. Despite the high-profile struggles of Uber and Lyft shares, an index that tracks initial public offerings has outperformed the S&P 500 in what could be a historic year for stocks. ‘The long-awaited debuts of mega unicorns Uber and Lyft were mega busts, capped off by WeWork’s kamikaze IPO attempt in September,’ said Kathleen Smith, principal at Renaissance Capital. ‘But beyond these headline-grabbing disappointments, the IPO market had a mostly good year.’ Renaissance Capital’s IPO Index, a basket of newly public companies, is up 33% this year versus a 29% rise in S&P 500. More than half of newly listed companies were trading above their issue price at the end of the year, compared with about 40% last year…”

December 22 – Bloomberg (Crystal Tse and Liana Baker): “Move over, IPOs. Special purpose acquisition companies, once a last resort for owners looking to exit an investment, have become a popular choice for private companies spooked by the swings in the regular IPO market. This helped lead SPAC volumes to their best year yet with a range of top dealmakers from private equity firm TPG to banker Michael Klein getting into the mix. Instead of a regular initial public offering that would raise funds through a share sale, a small but growing number of IPO candidates are choosing to sell themselves to SPACs instead.”

December 24 – Wall Street Journal (Katherine Clarke): “In 2019, a small group of enormous real estate deals… had an outsize impact on the national conversation about wealth inequality and the rapidly expanding billionaire class. A boom in ultrahigh priced deals in Palm Beach this year, including the $111 million sale of an oceanfront estate, raised questions about the number of wealthy New Yorkers fleeing to Florida in response to a 2017 change in federal tax law. A string of $100 million-plus deals completed in Los Angeles put the spotlight on high-end real estate on the West Coast. Hedge-fund manager Ken Griffin’s roughly $238 million purchase of a New York penthouse, which set a price record for the nation, bolstered the arguments of legislators who support additional property taxes for the super rich.”

Fixed-Income Bubble Watch:

December 23 – Reuters (Michelle Sierra): “What a difference 10 years make. It was December 2010, in the aftermath of the financial crisis when the US government was forced to approve a US$700bn rescue package slated to avert the collapse of the country’s financial system. The 2008 crisis was perhaps the first time many American households learned about leveraged loans for companies that take on significant amounts of debt… The loan market, which provides funding for US corporates… was just US$497.5bn in size in December 2010. Average loan bids bounced back from a low of 62.8 during the financial crisis… Fast forward to December 2019 and the size of the leveraged loan market has more than doubled to US$1.2trn. Loans have rallied, pushing prices to an average 98.95 cents on the dollar…”

December 23 – Bloomberg (Davide Scigliuzzo): “Bankers in the $2.5 trillion leveraged credit market are ready to get back to risk taking. After a volatile year that saw over $2 billion of loans pile onto their balance sheets as investors sought safer assets, underwriters are getting ready for another wave of risky sales in 2020. This time, they’re betting investors will be more receptive. Banks have high hopes that they’ll be able to place debt sales backing several leveraged buyouts and continue to chip away at a backlog of unsold loans come January. Investors favored safer junk bonds rated in the BB range for much of 2019, but their turn in sentiment has helped notes with ratings in the near-bottom CCC range outperform in December. ‘There has been a view that rates are going to stay low for long so you can hide out in BBs,’ said Marc Warm, co-head of U.S. leveraged finance capital markets at Credit Suisse Group…”

December 24 – Wall Street Journal (Matt Wirz): “Bonds with the lowest junk credit ratings have rallied in December, rebounding from a beating taken this fall… The junk-bond bounce comes as optimism about global growth and easing trade tensions stokes investor appetite for other risky assets such as copper. ‘People are looking at their funds and thinking ‘what can generate performance next year?’’ said Eric Hess, credit analyst at… Newfleet Asset Management. With higher quality bonds trading near record highs, investors are dipping back into the riskiest patch of high yield… Bonds rated triple-C—one of the lowest ratings rungs in the below-investment-grade category—returned 4.7% this month through Dec. 23 counting price changes and interest payments…”

December 22 – Reuters (Yoruk Bahceli): “From Harley Davidson to Colgate-Palmolive, U.S. companies are flocking to borrow in euros and their record issuance is breathing life into a market where yields have been hammered by the European Central Bank’s renewed stimulus push. Offshore fundraising by U.S. firms… has been a regular feature of the euro debt market. But issuance by non-financial, investment-grade U.S. firms has quadrupled this year from 2018 levels, to around 93 billion euros ($103bn), Dealogic data shows. That accounted for 27% of a total 346 billion euros ($383bn) of euro-denominated investment-grade corporate bond issuance…”

December 23 – Bloomberg (Gerson Freitas Jr): “U.S. utilities are on a record borrowing spree this year, selling more than $90 billion in bonds for the first time ever. The surge in debt from NextEra Energy Inc., Duke Energy Inc. and other power giants comes as interest rates are at historic lows, leaving investors hungry for the safe and relatively strong returns offered by utility bonds… ‘Financing costs are lower than we ever thought they would be,’ Morgan Stanley analyst Stephen Byrd said… ‘The low-interest rate environment helps the deployment of renewables.’”

China Watch:

December 23 – Wall Street Journal (Grace Zhu and Chao Deng): “China will cut import tariffs for frozen pork, pharmaceuticals and some high-tech components starting from Jan. 1, a move that comes as Beijing and Washington are trying to complete a phase-one trade deal. The plan, approved by China’s cabinet, will lower tariffs for all trading partners on 859 types of products to below the rates that most-favored nations enjoy…”

December 23 – Bloomberg (Jeff Black and Yinan Zhao): “The Chinese government is trying to set the economy up for a stronger start to 2020, with a multi-pronged policy push ranging from easier monetary settings to freer trade. The latest pledge came late Monday, when Premier Li Keqiang signaled that further cuts in the amount of cash that banks have to park as reserves will be forthcoming. In theory, that will free up funds to lend to private-sector companies that have struggled to access loans this year. The funding promise follows a wide-ranging set of initiatives to boost the non-state sector announced at the weekend, and a fresh round of tariff cuts designed to spur domestic demand released on Monday.”

December 25 – Bloomberg: “China’s policy makers will unveil a three-year action plan in early 2020 on the reform of state enterprises, with an aim to improve the performance of the sector and create world-class champions… The plan will tighten how the performances of state firms, often referred to as SOEs, are evaluated, and also seek ‘new breakthroughs’ in introducing more strategic private-sector investors, Hao Peng, head of the country’s state assets manager, was cited in the China Securities Journal as saying.”

December 25 – Wall Street Journal (Chuin-Wei Yap): “Tens of billions of dollars in financial assistance from the Chinese government helped fuel Huawei Technologies Co.’s rise to the top of global telecommunications, a scale of support that in key measures dwarfed what its closest tech rivals got from their governments. A Wall Street Journal review of Huawei’s grants, credit facilities, tax breaks and other forms of financial assistance details for the first time how Huawei had access to as much as $75 billion in state support as it grew from a little-known vendor of phone switches to the world’s largest telecom-equipment company—helping Huawei offer generous financing terms and undercut rivals’ prices by some 30%, analysts and customers say.”

December 23 – Bloomberg: “China has a mounting debt problem. Not just over-leveraged companies, but a rapid build-up on household balance sheets that is hitting records. You can blame youth for a borrowing binge that, if left unchecked, could be China’s next credit bubble. Household debt hit levels of 57% of gross domestic product in the third quarter…, more than double just 27% in 2010. Fitch Ratings said in July that it was surging at a pace roughly double nominal GDP growth. Behind it lies increasing use of mortgages, credit cards and smartphone lending apps. As a percentage of disposable income, household debt jumped to 99.9% in 2018 from 93.4% a year earlier…”

December 25 – Financial Times (Don Weinland): “Corporate defaults in China surged to a record high in 2019, raising new questions over how policymakers in Beijing will manage mounting financial distress among large private and state-owned companies. Onshore corporate defaults hit Rmb130bn ($18.6bn) in the final weeks of the year, breaking the record of Rmb122bn last year… Private companies that expanded rapidly in recent years, accruing large piles of debt, have been at the heart of the explosion in corporate distress. Some of the country’s leaders in sectors such as chemicals and textiles have faced financial pressures in recent weeks.”

December 23 – Bloomberg: “Troubled Chinese conglomerate HNA Group Co. repaid a 1.3 billion yuan ($185 million) bond due Tuesday…, avoiding what could have been its first default on a publicly issued note. HNA’s move is the latest of a series of developments that have helped calm frayed nerves in China’s debt markets in recent days. Peking University Founder Group secured an extension on a local bond repayment deadline and luxury clothing giant Shandong Ruyi Technology Group Co. also repaid a dollar note.”

December 24 – Bloomberg: “China’s financial regulators are calling for more transparent and fair handling of defaults to restore investor confidence in the world’s second-largest bond market, after repayment failures hit a record high this year. Senior officials from the central bank, the securities regulatory body, the supreme court and other departments discussed court-mediated dispute resolution concerning bond defaults at a symposium in Beijing…”

December 24 – Reuters: “China will curb financial risks in the rental housing market by tightening lending to rental housing companies and capping the ratio of their rental income from loans taken by tenants at 30%, the housing ministry said… The Chinese government has vigorously promoted the rental housing market since 2017 to address housing affordability as home prices skyrocketed across the country. But rapid growth in the sector with little regulatory control has created unexpected financial risks. The ministry described the sector’s development as ‘chaotic’, saying it had been filled with false listing information and malicious practices such as misuse of loans, illegal withholding of security deposits and forced evictions.”

December 25 – Reuters (Lusha Zhang and Ryan Woo): “The eastern Chinese city of Nantong, with a population of more than 7 million, has introduced a new rule to ban near-term resale of certain cheap homes in the latest step by authorities in the country to curb property market speculation.”

Central Banking Watch:

December 22 – Reuters (Bart Meijer): “Interest rates in the euro zone could remain historically low for years, but the European Central Bank’s (ECB) ultra-loose monetary policy risks becoming counterproductive, ECB governing council member Klaas Knot said… ‘I do not have a crystal ball, but I cannot rule out that the current low interest rate environment could last another five years’, Knot told… De Volkskrant. ‘This worries me, because temporarily low interest rates are something quite different from persistently low interest rates.’”

December 26 – Reuters (Leika Kihara and Yoshifumi Takemoto): “The Bank of Japan has nearly exhausted its policy ammunition to boost the economy as deepening negative interest rates, seen as the most likely step if it were to expand stimulus, will do more harm than good, former BOJ Deputy Governor Toshiro Mutoh said. …He questioned BOJ Governor Haruhiko Kuroda’s argument that the central bank could take short-term rates deeper into negative territory if the economy needed more stimulus. ‘There are too many demerits to deepening negative rates,’ Mutoh told Reuters…”

Brexit Watch:

December 26 – PTI: “The European Union and Britain will struggle to seal an agreement on trade and other aspects of their future ties after Brexit next year and should consider extending the negotiations beyond 2020, a top EU official said… The UK is scheduled to leave the EU on January 31. If it does, it will be the first time a country leaves the world’s biggest trading bloc. Negotiations between the remaining members and the British government on future trade, fisheries, education and transport relations can only begin after that date and must conclude by the end of 2020. ‘I am very concerned about how little time we have,’ European Commission President Ursula von der Leyen told… Les Echos. ‘It seems to me that, on both sides, we should seriously consider whether the negotiations are feasible in such a short time.’”

EM Watch:

December 19 – Financial Times (Tommy Stubbington): “Developing countries racked up a ‘towering’ $55tn of debt by the end of last year, in a borrowing surge since the financial crisis that has been the fastest and widest in modern history, according to World Bank research. Fuelled by the era of very low interest rates, total debt has rocketed to 170% of emerging markets’ gross domestic product, a 54 percentage point increase since 2010… ‘The size, speed and breadth of the latest debt wave should concern us all,’ said David Malpass, World Bank group president. The bank warned that, on many measures, emerging economies were more vulnerable today than before the global financial crisis. Three-quarters have budget deficits, while corporate debt denominated in foreign currencies is much higher and current account deficits are four times larger than in 2007.”

December 20 – Reuters (Nigam Prusty and Shilpa Jamkhandikar): “More than 1,500 protesters have been arrested across India in the past 10 days, officials said, as police try to quell sometimes violent demonstrations against a citizenship law that critics say undermines the country’s secular constitution.”

Europe Watch:

December 26 – Financial Times (Tony Barber): “A few weeks ago, Germany’s ruling Christian Democratic party put out a tweet that, depending on your viewpoint, was either naively sincere or shamelessly provocative. …The CDU said: ‘We have a small fetish: solid finances without new debts.’ Fiscal rectitude, the tweet went on to say, represents justice between older and younger generations and is a precondition of investments in society’s future. Here, in a nutshell, is everything that France, Italy and other eurozone governments find frustrating about Germany’s economic policies and its approach to reforming the 19-nation currency union… The stalemate is symptomatic of a deeper malaise in European integration. Whether it be migration policies, attitudes to Russia or the size and focus of the EU’s 2021-27 budget, the Europeans are divided. In some cases, it is west versus east; in others, north versus south; in still others, left versus right. The divisions cut through every national political system and society as well as between governments, making it a truly Herculean task to find solutions.”

Global Bubble Watch:

December 26 – Barron’s (Luisa Beltran): “More than 10 years after the Financial Crisis, the M&A market is on an upswing—and showing few signs of stopping. Expect another good year in 2020… The number of global announced transactions in 2019 fell 3.7% to 34,482 as of Dec. 19, according to… Dealogic, down from 35,976 in 2018. Those deals were valued at roughly $4 trillion, a 2.4% dip from last year’s $4.1 trillion… The slight drop comes at the tail end of a five-year bull run for mergers. Global M&A volume has surpassed $3 trillion in volume each year since 2014, Dealogic said. ‘The last four years have been terrific,’ said Brendan Ryan, a managing director and co-head of Raymond James’s technology and services group.”

December 22 – Financial Times (James Politi and Demetri Sevastopulo): “A top US development finance official has warned that China's $1.3tn global spending spree on infrastructure is destined to collapse, shattering some emerging market economies. Adam Boehler, the chief executive of the US International Development Finance Corporation, told the Financial Times that China’s international investments were ‘100%’ like a house of cards because of ‘debt overload, poor infrastructure, bribes [and] lack of transparency’. ‘Everything comes around, it’s only a matter of time. It was only a matter of time before WeWork came around, right?,’ Mr Boehler said… ‘We have to be there as an alternative because I could see China take down a whole bunch of emerging countries . . . there will be more and more cracks and then the glass will break,’ he added.”

December 26 – Bloomberg (Fabiola Moura, Vinícius Andrade and Patricia Lara): “Sao Paulo real estate has never been so hot. Walking around Brazil’s wealthiest city, it’s impossible to avoid the construction sites suddenly breathing life into formerly empty lots. One street alone in Itaim Bibi, the city’s financial district, has five skyscrapers going up. Newspapers are packed with ads for new high rises targeting just about anyone with a steady paycheck. And then there are the real estate brokers. In some neighborhoods, they seem to be everywhere, waiting to pounce on any passer-by who might seem like a potential buyer. They lurk outside of bakeries and wait at traffic lights, proffering leaflets showing grand renderings of buildings covered in lush green plants or packed with all the services of a five-star hotel.”

December 23 – Bloomberg (Takashi Nakamichi and Takako Taniguchi): “Japan needs to remain vigilant about its banks’ overseas investments in bundled credit products because the underlying loans may be less spread out across industries or individual companies than they appear, a senior regulatory official said. ‘Even if banks individually think they are well-diversified, it is possible that overall risks in the market are concentrated in the same sector or the same debtors,’ said Tokio Morita, director-general of the Financial Services Agency’s Strategy Development and Management Bureau. ‘It is important for us to continue to analyze the situation closely’ to prevent trouble for the financial system, he said.”

Japan Watch:

December 22 – Reuters (Daniel Leussink and Tetsushi Kajimoto): “Japan’s ‘Abenomics’ stimulus program appears to be reaching a turning point as growth is sputtering and the hit to exports from slowing global demand is spreading to various sectors of the economy. The slowdown makes it more likely that the government and central bank will need to devise novel ways to stimulate growth in the world’s third-largest economy in 2020, although they are hampered by a near-empty policy arsenal.”

Leveraged Speculation Watch:

December 27 – Financial Times (Lindsay Fortado and Laurence Fletcher): “Hedge funds are on track for their best year since 2013 but continue to lag the broader market, adding to pressure on an industry that charges some of the highest fees in the investment world. After failing to capture much of 2019’s strong rally in stocks and bonds, the hedge fund industry has delivered an overall return of 8.5% this year, according to… HFR. Although it is the best performance in six years, it is still well behind the S&P 500’s 29.1% gain this year. The US bond market, measured by a Bloomberg Barclays index, returned 14.5%.”

December 23 – Wall Street Journal (Juliet Chung): “Hedge-fund firms York Capital Management and Southpaw Asset Management are barring clients from getting back all of the money they have requested for year-end, a sign of the pressure that investors in distressed assets are facing. Funds at both firms faced significant client redemptions, according to people familiar... In response, the funds have erected so-called ‘gates,’ or barriers that limit withdrawals of money from a fund. Gates are a controversial tool used by hedge funds during the financial crisis, but have been deployed rarely since then.”

Geopolitical Watch:

December 22 – Reuters (Hyonhee Shin): “South Korean and U.S. special forces troops recently conducted drills simulating the infiltration of an enemy facility, U.S. military photos seen by Reuters… show, as tensions with North Korea ratchet up ahead of a year-end deadline.”

December 21 – Reuters (Josh Horwitz): “China’s top lawmaking body… criticized the defense bill that Washington passed this week as ‘interference’… You Wenze, a spokesperson for the Foreign Affairs Committee of China’s National People’s Congress (NPC), expressed ‘strong dissatisfaction’ with the National Defense Authorization Act (NDAA), passed overwhelmingly in the U.S. Senate this week… You said the Taiwan content of the bill undermined peace and stability across the Taiwan strait. Under the bill, the United States would work to support the military strength of Taiwan, the self-governing island that Beijing considers a part of the People’s Republic of China.”

December 26 – Reuters (Ben Blanchard and Babak Dehghanpisheh): “China, Iran and Russia will hold joint naval drills starting on Friday in the Indian Ocean and Gulf of Oman, China’s defense ministry said…, amid heightened tension in the region between Iran and the United States. China will send the Xining, a guided missile destroyer, to the drills, which will last until Monday and are meant to deepen cooperation between the three countries’ navies, ministry spokesman Wu Qian told a monthly news briefing.”

December 26 – Reuters (Ece Toksabay and Ali Kucukgocmen): “Turkey will send troops to Libya at the request of Tripoli as soon as next month, President Tayyip Erdogan said…, putting the North African country’s conflict at the center of wider regional frictions.”

December 24 – Reuters (Norihiko Shirouzu): “Japanese Prime Minister Shinzo Abe… told Chinese Premier Li Keqiang that there would be no true improvement in bilateral relations without stability in the East China Sea… The two leaders held a bilateral meeting in the Chinese city of Chengdu, on the sidelines of a three-way summit with South Korea. Abe also urged Li to swiftly remove import restrictions on Japanese food products, the ministry said…”

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