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For a quarter when Wall Street trumpeted the narrative of mounting economic weakness and the need for aggressive rate cuts, they sure enjoyed quite an earnings windfall. Is it legitimate (in this day and age) to fret about a downturn and weakening labor markets with Wall Street absolutely booming?

October 16 – Bloomberg (Paige Smith): “Morgan Stanley’s (MS) record quarter in wealth management capped a banner period for one of Wall Street’s most-profitable businesses. Client assets at retail brokerage Charles Schwab Corp. (SCHW) and the wealth arms of the six largest US banks surged $5 trillion in the 12 months through September. That represented a 23% jump as the group’s revenue from the business collectively topped $84 billion so far this year. A surge in stock markets has pushed client balances higher and attracted new customers to firms…”

October 16 – Bloomberg (Sridhar Natarajan): “Morgan Stanley traders and bankers joined the rest of their Wall Street rivals in posting better-than-expected revenue, fueling a 32% profit surge for the third quarter and sending the shares up the most in almost four years… The firm’s critical wealth unit also stood out, generating record revenue of $7.27 billion, higher than analysts’ expectations, with $64 billion in net new assets… ‘It was a standout quarter in a constructive environment,’ Chief Financial Officer Sharon Yeshaya said... ‘We are only getting started and capital markets are only going to get stronger… It’s good but it’s not the peak.’”

Morgan Stanley (MS) reported record third quarter Net Income of $3.377 billion. Total Assets expanded $45.6 billion, or 15% annualized, to a record $1.258 TN. It’s worth noting that Total Assets inflated $663 billion, or 111%, since the end of 2019. While on the subject, JPMorgan (JPM) Total Assets expanded $67 billion during Q3 to a record $4.210 TN, with growth since 2019 at $1.523 TN, or 57%.

October 15 – Bloomberg (Sridhar Natarajan): “Goldman Sachs (GS)… profit soared 45% in the third quarter on a surprise increase in equity-trading revenue and a resurgent investment-banking business. The firm’s stock traders recorded their best quarter in more than three years, on track for their best year ever, while dealmakers pocketed fees that exceeded estimates across every key business line.”

As such a dominant player in securities finance, Goldman Sachs’ Q3 data are worthy of a deeper dive. Q3 Earnings surged to $2.78 billion, with y-t-d 2024 earnings 59% higher at $9.602 billion. Investment Banking revenues were up 20% y-o-y (to $1.86bn), Debt Underwriting 46% higher y-o-y ($605 million), and Equity Underwriting up 25% y-o-y ($385 million).

Notably, Net Interest Income surged to $2.62 billion. “3Q24 net interest income increased 70% YoY, reflecting an increase in interest-earning assets – 3Q24 average interest-earning assets of $1.59 trillion.” “Global Banking & Markets Net Interest Income up 37% to $1.113bn” - and compares to Q3 ‘23’s $171 million.

With Money Market Fund Assets surging $300 billion during Q3, I’ve been eagerly waiting for data to confirm a corresponding expansion in “repo” borrowings (funding “basis trade” and other levered speculations).

Goldman’s Repo Liability surged $110 billion, or an un-annualized 46%, to a record $348 billion (awaiting Repo Asset detail). Total Assets jumped $74.7 billion, or 18% annualized, to a record $1.728 TN – with one-year growth of $151 billion, or 9.7%. The asset “Short-Term and Long-Term Investments” ballooned $154.6 billion during the quarter (91% annualized) to a record $784 billion, with one-year growth of $239.5 billion, or 44%. Total Assets have inflated $993 billion, or 72%, since the end of 2019.

Goldman’s stock surged 6.7% in 10 sessions, boosting y-t-d returns to 39.6%. Stellar Wall Street 2024 returns include JPMorgan’s 35.6%, Morgan Stanley’s 33.5%, Bank of New York Mellon’s 50.6%, and Wells Fargo’s 33.5%. The KBW Bank Index sports a y-t-d return of 31.1%, with the Broker/Dealers returning 35.6% (ended Friday at an all-time high).

Highlighting a booming Wall Street, we don’t want to ignore the increasingly powerful non-bank players inflating Bubbles in “private Credit” and leveraged lending.

October 17 – Reuters (Echo Wang): “Blackstone beat Wall Street's expectations on its key quarterly earnings metric…, as the world's largest alternative investment firm's assets under management (AUM) hit a record $1.1 trillion... Blackstone said it saw $41 billion of inflows during the third quarter, while it deployed and committed $54 billion of capital - the highest in over two years - amid a revival in dealmaking activity as the U.S. Federal Reserve cut rates and the economic outlook remained sanguine.”

October 16 – Bloomberg (Laura Benitez and Jack Sidders): “In its quest to double its size by 2029, Apollo Global Management Inc. is ramping up its ability to write jumbo checks to high-grade corporations as it delves deeper into what it calls private credit’s next frontier. The alternative-asset manager is making its high-grade capital-solutions business a key plank in its growth strategy and is beefing up resources for the unit, Apollo Co-President Scott Kleinman said…”

Year-to-date returns include KKR’s 69.6%, Blackstone’s (BX) 34.3%, Apollo Management’s (APO​​​​​​​) 57.5%, and Carlyle Group’s (CG) 31.7%.

Can we be done with it already?

It’s illogical to assert that the policy rate is significantly below some hypothetical “neutral rate” with Wall Street enjoying a historic boom.

October 18 – Bloomberg (Olivia Raimonde): “A key measure of perceived riskiness in US blue-chip company bonds has fallen to its lowest levels in two decades, as investors vie for debt that can still offer relatively high yields without too much default risk. The average risk premium, or spread, on a US investment-grade bond compared with comparable Treasuries narrowed to 0.79 percentage point on Thursday, the tightest since 2005…”

As I highlighted in last week’s CBB, corporate spreads are today the narrowest since the 2005 Wall Street bonanza. And why wouldn’t risk premiums be meager? Risk-taking and speculative leverage are being so handsomely rewarded. Wall Street CEOs are making a fortune with huge compensation packages and stock grants. Traders, investment bankers, loan officers, asset managers, Credit analysts, and derivative players anticipate huge annual bonuses. From CEOs on down, loose finance and powerful asset inflation ensure risk embracement is highly incentivized.

October 15 – Bloomberg (Laura Curtis): “The rise of the private credit market may lead to less systemic risk in the US financial system despite a lack of political appetite for increasing bank capital requirements, Federal Reserve Bank of Minneapolis President Neel Kashkari said. ‘It’s scary at some level, because it’s exploded to a trillion dollar plus market fairly quickly,’ Kashkari said… ‘But as I’ve examined it, a bank in the US today — a big bank — is levered roughly 10 to one, 10 times as much assets for their equity. These private credit vehicles are typically levered one to one, so it’s much less leverage… ‘So where does systemic risk come from? The intersection between leverage and maturity transformation. So on both those dimensions, these private credit vehicles look like they’re much lower risk than banks…”

Mr. Kashkari should know better. The Federal Reserve would be well-advised to reexamine the subprime mortgage Credit fiasco. Few businesses offer the immediate “profit” and growth opportunities available from lending to high-risk borrowers. For one, typically facing limited options, risky borrowers provide a captive audience willing to pay up for money. And once commenced, a “subprime” lending boom is powerfully self-reinforcing.

So long as Credit remains loose (loans readily available), non-performing loans and charge-offs will remain relatively contained. Importantly, this inflates the accounting profitability of risky lending businesses, attracting more opportunistic lenders/speculators, aggressive lending, measly risk premiums, and only looser conditions.

Moreover, the rapid growth of risky loan portfolios masks losses from earlier loans turning bad. There’s a distinct Ponzi Finance element to “subprime” booms (think 2006-2008 Phoenix housing boom and bust). Eventually, rapidly rising loan losses catch up to slowing portfolio growth, forcing a reassessment of the true risk profile of new loans and the profitability of lending businesses more generally. Loan rates are adjusted higher, while Credit Availability tightens. Losing access to borrowings, tighter conditions hammer risky borrowers that had accumulated (rolled over) excessive debts during the boom.

Whether Mr. Kashkari and his Federal Reserve colleagues recognize it or not, the U.S. economy is in the throes of a historic – and deeply systemic - “subprime” Bubble. So-called “private Credit” is chiefly risky “subprime” corporate lending, having evolved into a primary source of finance for the ongoing proliferation of unprofitable businesses. Ditto the more general “leveraged lending.” On the consumer side, “subprime” auto and Credit card lending continues to boom. And I believe we’ll look back and view the proliferation of “buy now, pay later” lending programs as principally “subprime.”

October 15 – Bloomberg (Laura Curtis): “Klarna Bank AB struck a deal to offload buy-now, pay-later loans that it originates in the UK as it looks for ways to free up capital ahead of its public debut. The deal with a subsidiary of the hedge fund Elliott Investment Management will give Klarna £30 billion ($39bn) of fresh firepower over the coming years as it looks to grow its business around the world… ‘By efficiently managing our assets, we can deploy shareholder equity more effectively,’ Klarna Chief Financial Officer Niclas Neglen said… ‘This is a unique deal, designed to support Klarna’s global growth’… The transaction echoes a similar arrangement that KKR & Co. struck with PayPal Holdings Inc. last year to purchase as much as €40 billion ($43bn) of buy-now-pay-later loan receivables…”

October 15 – Financial Times (Akila Quinio, Costas Mourselas, Ivan Levingston and Robert Smith): “Klarna is offloading most of its UK ‘buy now, pay later’ portfolio to US hedge fund Elliott for undisclosed terms… The deal with Paul Singer’s $70bn hedge fund is expected to bolster Klarna’s capitalisation and allow the fintech to continue to pursue ambitious growth targets ahead of a highly anticipated US initial public offering.”

Kashkari is too complacent. “Private Credit” is leverage on top of leverage. The borrowers are highly levered, the lenders are levered, and various associated securitization structures are levered. Singer’s Elliot hedge fund is surely not using its cash to provide Klarna with a fresh $39 billion of lending “firepower.”

October 17 – Bloomberg (Will Kubzansky): “Goldman Sachs… and Morgan Stanley sold $11.3 billion combined in investment-grade bonds… after both banks posted earnings that surpassed analyst expectations. Both sales came a day after rival JPMorgan… issued debt amid strong investor demand, after also reporting better-than-expected third-quarter results… The six biggest banks on Wall Street were expected to take advantage of robust investor appetite and tight spreads to sell as much as $24 billion of bonds after posting results. JPMorgan’s sale… drew about $34 billion in orders, allowing the Wall Street giant to increase the final deal size to $8 billion…”

Fed take note: Scores of new age “subprime” lenders, “private Credit,” the leveraged speculating community, along with the big money center banks, have created a powerful nexus today fueling a lending boom (extending late-cycle “terminal phase excess”). Myriad Wall Street Bubbles risk overheating in the short-term, while creating acute financial and economic vulnerability to de-leveraging and Credit tumult.

While on the subject of “terminal phase excess”…

China’s system Credit metric, Aggregate Financing, expanded a stronger-than-expected $530 billion during September, pushing two-month growth to an un-deflationary $957 billion. At $225 billion, Bank Loans somewhat missed forecasts. Corporate Loans increased $209 billion, down from September 2023’s $235 billion - but still up 10.2% over the past year. At $70 billion, Consumer (chiefly mortgage) Loans showed a pulse, though were down from September 2023’s $122 billion. One-year growth slipped to 3.0%.

Government Bonds expanded $215 billion to $10.8 TN, with two-month growth of $444 billion. At $1.01 TN, y-t-d growth is running 21% ahead of 2023. Total Aggregate Financing expanded $4.493 TN over the past year, or 8.0%. From my perspective, the most alarming aspect of the analysis is how the Chinese Bubble economy continues to deflate despite enormous ongoing Credit growth (see “China Watch” below).

October 13 – Bloomberg (Sangmi Cha and Winnie Hsu): “China’s highly anticipated Finance Ministry briefing on Saturday lacked the firepower that equity investors had hoped for, indicating that the volatility that’s gripped the market following a world-beating rally will likely extend. While Finance Minister Lan Fo’an promised more support for the struggling property sector and hinted at greater government borrowing to shore up the economy, the briefing didn’t produce a headline dollar figure for fresh fiscal stimulus that the markets had sought.”

The Shanghai Composite jumped 2.1% Monday, sank 2.5% Tuesday, was little changed Wednesday, fell 1.0% Thursday, and then surged 2.9% Friday. China’s situation is so dire that of course stock market speculators are nervously fixated on stimulus announcements. While markets might not be receiving the details they would prefer, it sure seems Beijing is signaling (skip the details, it’s) “whatever it takes.”

China’s Finance Minister didn’t offer numbers, but Caixin Global Monday cited sources suggesting six Trillion renminbi ($850bn) of special treasury bond issuance for stimulus. “China's central bank kicked off two funding schemes on Friday that will initially pump as much as 800 billion yuan ($112.38bn) into the stock market…” China pledged “to nearly double the loan quota for unfinished residential projects to 4 trillion yuan ($562bn)…”

China’s version of “whatever it takes” is destined to be incredibly expensive. Bolstering the collapsing apartment Bubble, including hopelessly insolvent builders and 48 million pre-sold/yet to be built apartments, seems like a couple Trillion (U.S.$) as a reasonable starting point. A couple more will help stabilize the broke local government sector. If Beijing plans to achieve growth targets, it seems a few Trillion more will be required for ongoing real economy stimulus. And, at some point, the egregiously bloated Chinese banking system will require its own multi-Trillions.

A historic runaway Wall Street boom, unprecedented open-ended Chinese reflation, global central banks (this week the ECB) hellbent on cutting rates despite loose conditions and speculative Bubbles, and extreme geopolitical risks. What could possibly go wrong? Gold jumped another $65, or 2.4%, to a record high $2,721, boosting 2024 gains to 31.9%. Silver’s 6.9% surge to $33.72 propelled y-t-d gains to 41.7%.

 

For the Week:

The S&P500 added 0.9% (up 23.0% y-t-d), and the Dow increased 1.0% (up 14.8%). The Utilities rallied 3.4% (up 29.6%). The Banks jumped 2.8% (up 27.6%), and the Broker/Dealers surged 3.5% (up 34.3%). The Transports gained 0.9% (up 3.0%). The S&P 400 Midcaps rose 1.4% (up 15.0%), and the small cap Russell 2000 jumped 1.9% (up 12.3%). The Nasdaq100 inched 0.3% higher (up 20.8%). The Semiconductors dropped 2.4% (up 24.7%). The Biotechs increased 0.4% (up 9.9%). With bullion rising another $65, the HUI gold index surged 7.9% (up 41.6%).

Three-month Treasury bill rates ended the week at 4.515%. Two-year government yields slipped a basis point to 3.95% (down 30bps y-t-d). Five-year T-note yields dipped two bps to 3.88% (up 3bps). Ten-year Treasury yields declined two bps to 4.08% (up 20bps). Long bond yields slipped two bps to 4.39% (up 36bps). Benchmark Fannie Mae MBS yields rose six bps to 5.41% (up 14bps).

Italian 10-year yields sank 20 bps to 3.36% (down 34bps y-t-d). Greek 10-year yields fell 18 bps to 3.02% (down 3bps). Spain's 10-year yields dropped 14 bps to 2.87% (down 12bps). German bund yields declined eight bps to 2.18% (up 16bps). French yields dropped 14 bps to 2.90% (up 34bps). The French to German 10-year bond narrowed six to 72 bps. U.K. 10-year gilt yields sank 15 bps to 4.06% (up 52bps). U.K.'s FTSE equities index gained 1.3% (up 8.1% y-t-d).

Japan's Nikkei Equities Index fell 1.6% (up 16.5% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.98% (up 33bps y-t-d). France's CAC40 added 0.5% (up 0.9%). The German DAX equities index rose 1.5% (up 17.3%). Spain's IBEX 35 equities index jumped 1.8% (up 18.0%). Italy's FTSE MIB index rose 2.6% (up 16.0%). EM equities were mixed. Brazil's Bovespa index increased 0.4% (down 2.7%), and Mexico's Bolsa index gained 1.2% (down 7.6%). South Korea's Kospi was little changed (down 2.3%). India's Sensex equities index slipped 0.2% (up 12.4%). China's Shanghai Exchange Index gained 1.4% (up 9.6%). Turkey's Borsa Istanbul National 100 index declined 0.9% (up 17.7%).

Federal Reserve Credit declined $1.5 billion last week to $7.002 TN. Fed Credit was down $1.887 TN from the June 22, 2022, peak. Over the past 266 weeks, Fed Credit expanded $3.276 TN, or 88%. Fed Credit inflated $4.192 TN, or 149%, over the past 623 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dipped $0.5 billion last week to $3.319 TN. "Custody holdings" were down $114 billion y-o-y, or 3.3%.

Total money market fund assets dipped $6.6 billion to $6.468 TN. Money funds were up $581 billion y-t-d, or 11.9% annualized, and $860 billion, or 15.3%, y-o-y.

Total Commercial Paper dropped $46 billion to $1.148 TN. CP was down $68 billion, or 5.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 12 bps this week to an eight-week high 6.44% (down 127bps y-o-y). Fifteen-year rates surged 22 bps to 5.63% (down 149bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 10 bps to 6.97% (down 106bps).


Currency Watch:

For the week, the U.S. Dollar Index increased 0.6% to 103.493 (up 2.1% y-t-d). For the week on the downside, the Mexican peso declined 3.0%, the Norwegian krone 2.1%, the Brazilian real 1.4%, the Swedish krona 1.4%, South Korean won 1.3%, the South African rand 1.1%, the Swiss franc 0.9%, the Australian dollar 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the Singapore dollar 0.4%, the Canadian dollar 0.3%, the Japanese yen 0.3%, and the British pound 0.1%. The Chinese (onshore) renminbi declined 0.5% versus the dollar (down 0.03% y-t-d).


Commodities Watch:

October 14 – Bloomberg (Yvonne Yue Li): “Gold purchases from central banks have been a key driver in bullion’s record-smashing rally this year. But officials rarely signal ahead of time when buying is top of mind. In a break to that form, reserve managers from the central banks of Mexico, Mongolia and Czech Republic on Monday sang the praises of bigger holdings. The comments provided unique insight into how they are viewing bullion, with the officials saying that gold as a percentage of their country’s reserves is more likely to increase in the years ahead... ‘Given the context that we are facing right now — lower rates, your political tension, US election, a lot of uncertainty — maybe the share of gold in our portfolios could be increasing as well,’ said Joaquín Tapia, director of international reserves at Banco de México.”

The Bloomberg Commodities Index dropped 2.5% (down 0.4% y-t-d). Spot Gold jumped 2.4% to a record $2,721 (up 31.9%). Silver surged 6.9% to $33.72 (up 41.7%). WTI crude sank $6.34, or 8.4%, to $69.22 (down 3%). Gasoline dropped 7.0% (down 5%), and Natural Gas sank 14.2% to $2.258 (down 10%). Copper fell 2.4% (up 13%). Wheat dropped 4.4% (down 9%), and Corn lost 2.6% (down 14%). Bitcoin rose $5,820, or 9.3%, to $68,350 (up 61%).


Middle East War Watch:

October 18 – Reuters (James Mackenzie, Nidal Al-Mughrabi and Samia Nakhoul): “Pledges from Israel and its enemies Hamas and Hezbollah to keep fighting in Gaza and Lebanon dashed hopes on Friday that the death of Palestinian militant leader Yahya Sinwar might hasten an end to more than a year of escalating war in the Middle East. Israel's arch-foe and the militants' main backer Iran also said Sinwar's death would only fuel ‘the spirit of resistance’… Israeli Prime Minister Benjamin Netanyahu called his killing a milestone but vowed to keep up the war, which in recent weeks expanded from fighting Hamas in Gaza into an invasion and pursuit of Hezbollah of Lebanon. ‘The war, my dear ones, is not yet over,’ Netanyahu told Israelis…”

October 18 – Financial Times (Raya Jalabi and Neri Zilber): “Lebanon’s Hizbollah militant group said it was entering a ‘new and escalating phase’ in its battle with Israel, hours after Israel announced the death of Hamas leader Yahya Sinwar in Gaza. In a defiant statement on Friday, Hizbollah boasted of its military achievements against the Israel Defense Forces in southern Lebanon and said it was shifting to ‘a new and escalating phase in its confrontation’ with Israel, which would become apparent in the coming days.”

October 15 – Bloomberg (Dan Williams): “Israel said it’s weighing US misgivings over a planned counter-strike on Iran, after a report suggested the government is keeping nuclear and energy facilities off the target list to cap a potential escalation. Yet Prime Minister Benjamin Netanyahu has also asserted the country is free to act how it chooses after more than a year of battling Iranian proxy groups and fending off two direct long-range attacks from the Islamic Republic, whose regional clout and nuclear aspirations Netanyahu sees as an existential threat. ‘We listen to the opinions of the United States, but we will make our final decisions based on our national interests,’ Netanyahu’s office said…”

October 16 – Reuters (Humeyra Pamuk, Matt Spetalnick and Simon Lewis): “The United States has told Israel it must take steps in the next month to improve the humanitarian situation in Gaza or face potential restrictions on U.S. military aid, U.S. officials said, in the strongest such warning since Israel's war with Hamas began a year ago. U.S. Secretary of State Antony Blinken and Defense Secretary Lloyd Austin wrote to Israeli officials… demanding concrete measures to address the worsening situation in the Palestinian enclave amid a renewed Israeli offensive in northern Gaza, U.S. officials said…”

October 15 – Reuters (Humeyra Pamuk and Laila Bassam): “The United States… said it opposed the scope of the country's air strikes in Beirut over the past few weeks amid a rising death toll and fears of wider escalation involving Iran… State Department spokesperson Matthew Miller said the U.S. had expressed its concerns to Prime Minister Benjamin Netanyahu's administration on the recent strikes. ‘When it comes to the scope and nature of the bombing campaign that we saw in Beirut over the past few weeks, it's something that we made clear to the government of Israel we had concerns with and we were opposed to,’ he told reporters…”

October 14 – Wall Street Journal (Anat Peled): “The Lebanese militia Hezbollah struck an Israeli military base in central Israel with a drone, killing four soldiers and wounding dozens, highlighting a weak spot in Israel’s vaunted air defense system that military officials say is hard to counter. The drone, which was launched Sunday night, was able to pass detection by Israeli forces before crashing into a Golani infantry brigade military base near Binyamina. Overall, 61 were wounded…”


Ukraine War Watch:

October 16 – Reuters (Pavel Polityuk): “As Russian forces grind their way towards the strategic supply hub of Pokrovsk in eastern Ukraine, they are also approaching a coking coal mine that fires the country's vital steel industry. Russian troops have moved to within around 12 km of Pokrovsk, overwhelming Ukraine's stretched defences with vastly superior numbers and equipment. Thousands of residents have fled and key road and rail links to other cities risk being severed.”

October 14 – Bloomberg (Olesia Safronova and Áine Quinn): “A Russian missile hit a fourth cargo ship in Ukraine this month, as the Kremlin ramps up its attacks on Kyiv’s trade infrastructure. A grain storage facility at Odesa port was attacked on Monday, killing one person and injuring two others… A ship called NS Moon was also hit, while the bulk carrier Optima was struck for a second time…”


Taiwan Watch:

October 14 – Associated Press (Johnson Lai and Huizhong Wu): “China employed a record 125 aircraft, as well as its Liaoning aircraft carrier and ships, in large-scale military exercises surrounding Taiwan and its outlying islands Monday, simulating the sealing off of key ports in a move that underscores the tense situation in the Taiwan Strait…. China made clear it was to punish Taiwan’s president for rejecting Beijing’s claim of sovereignty over the self-governed island… ‘This is a resolute punishment for Lai Ching-te’s continuous fabrication of ’Taiwan independence’ nonsense,’ China’s Taiwan Affairs Office said… Chinese Foreign Ministry spokesperson Mao Ning said… ‘I can tell you that Taiwan independence is as incompatible with peace in the Taiwan Strait as fire with water. Provocation by the Taiwan independence forces will surely be met with countermeasures’…”

October 14 – Reuters (Ben Blanchard): “China used a record 153 military aircraft in war games around Taiwan, the island's government said…, adding that such drills without prior warning were a danger to the entire region. China said the one-day ‘Joint Sword-2024B’ drill, conducted with no advance notice on Monday, was a warning against ‘separatist acts’ after a national day speech last week by Taiwan's President Lai Ching-te that Beijing had denounced. ‘Any drills without prior warning will cause great disturbance to peace and stability in the entire region,’ Taiwan's Premier Cho Jung-tai told reporters…”

October 17 – Wall Street Journal (Joyu Wang and Austin Ramzy): “As Beijing dispatched its military Monday in a show of force that encircled Taiwan, China’s coast guard posted a map showing its ships ringing the island in a heart-shaped formation, describing it as ‘an act of love.’ To Taiwan, the social-media message was just one piece of China’s multifaceted campaign to intimidate, isolate and influence the people and leaders of the island democracy to give up their commitment to self-rule. Alongside its most high-profile tactic—sending a message of military dominance—China is employing what Taiwan says is an expanding army of hackers, diplomats, prosecutors and celebrities in its effort to persuade Taiwan to submit to Beijing.”

October 14 – Bloomberg (Yian Lee): “China’s military warned it would ramp up pressure on Taiwan when necessary, a sign that the US-backed democracy of 23 million people can expect a repeat of the intense exercises seen to start the week. ‘Once ‘Taiwan independence’ provokes, the PLA’s actions will be pushed further until the Taiwan issue is completely resolved,’ said Wu Qian, a spokesman for the Defense Ministry…, referring to the People’s Liberation Army. ‘We just want to use language that the ‘Taiwan independence’ elements can understand to make them understand that a sharp sword hangs high over their heads,’ Wu said…”

October 16 – Reuters (Joe Cash and Ben Blanchard): “China will never commit to renouncing the use of force over Taiwan, the government in Beijing said… after another bout of war games and a visit by Chinese President Xi Jinping to the scene of a famous defeat for Taiwanese forces. China… staged a day of large-scale drills around the island on Monday that it said were a warning to ‘separatist acts’ following last week's national day speech by Taiwan President Lai Ching-te. ‘We are willing to strive for the prospect of peaceful reunification with the utmost sincerity and endeavour,’ Chen Binhua, spokesperson for China's Taiwan Affairs Office, told a regular press briefing... ‘But we will never commit ourselves to renouncing the use of force,’ he said.”


Market Instability Watch:

October 17 – Bloomberg (Ye Xie): “Bond investors are bracing for historic yield swings in the days after the Nov. 5 US presidential election, according to the creator of a decades-old volatility gauge. Options prices anticipate that Treasury yields across maturities will move about 18 bps immediately after the election, according to Harley Bassman, who created the MOVE Index of expected Treasury market volatility in 1994… ‘This is one of the largest ‘event days’ that I’ve seen in my career,’ said Bassman, managing partner at Simplify Asset Management and a four-decade veteran of US bond markets. ‘It’s huge.’”

October 15 – Bloomberg (Michael Msika): “Investors are getting so bullish that it might be time to sell global stocks, according to an investor survey by Bank of America Corp. Allocations to stocks surged, while bond exposure sank and cash levels in global portfolios fell to 3.9% in October from 4.2% last month, triggering a ‘sell signal’ on global equities, strategists led by Michael Hartnett wrote… The October survey showed ‘the biggest jump in investor optimism since June 2020 on Federal Reserve cuts, China stimulus, soft landing’…”

October 16 – Bloomberg (Kurt Schussler and Youkyung Lee): “Investors in chip stocks are facing a fresh gut check after a tepid outlook from key equipment supplier ASML Holding NV sparked a global rout in the sector. Combined market value losses for an index of US-traded chipmakers plus the largest Asian stocks reached more than $420 billion.”


Global Credit Bubble Watch:

October 14 – Reuters (David Lawder): “The world's total public debt is set to exceed $100 trillion this year for the first time, and may grow more quickly than forecast as political sentiment favors higher spending and slow growth amplifies borrowing needs and costs, the International Monetary Fund said... The IMF's latest Fiscal Monitor report showed global public debt will reach 93% of global gross domestic product by the end of 2024 and approach 100% by 2030. That would exceed its 99% peak during COVID-19. It would also be up 10 percentage points from 2019…”

October 15 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… boosted this year’s goal for alternatives fundraising 20% on the promise of surging demand in credit markets. Now the firm expects to raise more than $60 billion… The firm is one of the best-placed firms to capitalize on the private-credit boom, given its ability to scour the market for new deals, executives said. ‘A lot of the raise has been in the broad credit area,’ Marc Nachmann, who runs Goldman’s $3.1 trillion money-management business, said... ‘It plays to our strength’… Private credit remains a key focus at the… bank.”

October 15 – Bloomberg (Ellen Schneider): “Banks are upping their exposure to private credit by funding the $1.7 trillion sector’s largest lenders, according to… Moody’s… Across 32 banks, Moody’s found average annual lending grew 18% between 2021 and 2023, in lock-step with the 19% increase in capital raising from private credit funds over the same period… Loans tied to private credit still makes up a small portion of banks’ total lending — about $525 billion in 2023 made up less than 4% of all commitments… Still, this exposure has become a source of concern for regulators… ‘Private credit has grown a lot, and there’s a critical point to be made about how much leverage it takes and where it comes from,’ Ana Arsov, a global head of private credit for Moody’s, said…”

October 17 – Wall Street Journal (Vicky Ge Huang): “Low-rated corporate loans are having a banner year. Wall Street is trying to find more ways to sell them to ordinary people. At least four asset managers, including BlackRock and Nuveen, have recently asked permission from the Securities and Exchange Commission to launch new exchange-traded funds of collateralized loan obligations—securities made by bundling junk-rated loans together. Those will join about a dozen CLO ETFs that have already entered the market in recent years and that now have about $16 billion in assets under management. The funds mark the latest effort to bring a hot Wall Street product within reach of ordinary investors. CLO sales have been rising fast: Firms such as Ares Management and Blackstone have logged around $147 billion in sales this year, compared with $87 billion during the same period last year…”

October 13 – Wall Street Journal (Amelia Pollard and Eric Platt): “A growing list of cash-strapped companies have turned to their lenders at private credit funds for relief in recent months, seeking to conserve capital by delaying payments on their debt. The rate at which companies are opting to increase their principal balance instead of paying cash, known as ‘payment-in-kind’ or PIK, edged higher during the second quarter, according to… Moody’s. These types of loans have a catch: while they provide temporary relief, they often come with a higher interest rate on a mounting debt load as the deferred payments pile up.”

October 16 – Bloomberg (Tasos Vossos and Abhinav Ramnarayan): “Carmakers’ woes are turning into one of the global corporate bond market’s biggest pain points, with investors bailing out of the sector’s debt as vehicle sales stall and competition rises. The total return of bonds issued by global car companies is on track for its biggest underperformance versus the broader high-grade market since 2019…”


AI Bubble Watch:

October 17 – Reuters (Yimou Lee, Ben Blanchard and Faith Hung): “Taiwan Semiconductor Manufacturing (TSM), the world's largest contract chipmaker, bet on sustaining its strong growth, after reporting… a forecast-beating 54% jump in quarterly profit driven by soaring demand for chips used in artificial intelligence (AI). Taiwan Semiconductor Manufacturing Co, the dominant producer of advanced chips used in AI applications whose customers include Apple (AAPL) and Nvidia (NVDA), has benefited from a surge towards AI across a spectrum of industries. TSMC estimated its capital spending in the current quarter would more than double to around $11.5 billion and that the budget was likely to increase further next year…”

October 16 – Reuters (Karen Kwok): “As the sole maker of the most advanced chip-making machines, ASML’s health is a bellwether of sorts for the semiconductor industry. As such, the 260 billion euro company led by Christophe Fouquet sent a sobering message on Tuesday as it lowered guidance after disappointing bookings in the third quarter. Investors assuming that a wave of artificial intelligence-fuelled chip demand will lift all boats should take note… In the third quarter, the Dutch group booked less than half the 4 to 6 billion euros of new machine orders that analysts polled by LSEG had anticipated. Fouquet also walked back ASML’s bullish 2025 sales guidance range of between 30 and 40 billion euros to the bottom half of that range.”

October 15 – Bloomberg (Mackenzie Hawkins): “Biden administration officials have discussed capping sales of advanced AI chips from Nvidia Corp. (NVDA) and other American companies on a country-specific basis, people familiar with the matter said. The approach would set a ceiling on export licenses for certain countries in the interest of national security, according to the people, who described the private discussions on condition of anonymity. Officials are focused on Persian Gulf countries that have a growing appetite for AI data centers and the deep pockets to fund them…”

October 16 – Associated Press (Alexa St. John and Jennifer McDermott): “Amazon… said that it was investing in small nuclear reactors, coming just two days after a similar announcement by Google, as both tech giants seek new sources of carbon-free electricity to meet surging demand from data centers and artificial intelligence. The plans come as the owner of the shuttered Three Mile Island nuclear power plant said last month it plans to restart the reactor so tech giant Microsoft can buy the power to supply its data centers. All three companies have been investing in solar and wind technologies… Now they say they need to go further in the search for clean electricity to meet both demand and their own commitments to cut emissions.”


Bubble and Mania Watch:

October 16 – Financial Times (Joshua Franklin): “The biggest US investment banks generated $36bn in revenues from deals and trading in the last quarter, as volatile markets and corporate debt issuance fueled a rebound on Wall Street. The combined figure was 11% higher than a year ago… The strongest business was underwriting debt and overall the five banks made $8bn in revenues in the third quarter of 2024 from advising on debt and equity deals and acquisitions, 31% higher than a year ago and comfortably ahead of analysts’ expectations. At Morgan Stanley, investment banking fees increased more than 50% to $1.5bn…”

October 17 – Financial Times (Sam Flemming): “The head of the IMF has warned of an ‘unforgiving’ economic backdrop for government finances around the world as she highlighted a widespread reluctance among politicians to rein in spending and raise taxes. Kristalina Georgieva, the fund’s managing director, said rising levels of borrowing meant a growing share of government revenues was being used to cover interest payments, while ‘lacklustre’ growth heightened the challenge of curbing debts. ‘Our forecasts point to an unforgiving combination of low growth and high debt — a difficult future,’ said Georgieva. Countries faced ‘high and rising public debt — way higher than before the pandemic’, she added, even after a fall in debt-to-GDP levels as inflation lifted nominal growth.”

October 15 – Financial Times (Robin Wigglesworth): “FT Alphaville was moseying around Jane Street’s website… and took a look at some of its current job openings. There are a lot of them, highlighting just how quickly the firm is growing at the moment — even after doubling in size since 2021. There are 58 positions open in New York alone, for everything from Linux engineers and options traders to an interior designer. Many of the roles list a base salary range of $250,000 to $300,000, with the important caveat that this ‘is only one part of Jane Street total compensation, which includes an annual discretionary bonus’. We gather that this bonus can be a multiple of the annual salary. In its latest loan docs, Jane Street disclosed compensation and benefits of $2.4bn last year, which works out to over $900k for each employee on average. And that’s just the grunts. The 40 equity partners get to share the billions of dollars’ worth of profits that Jane Street currently spits out.”

October 14 – Wall Street Journal (Sean McLain): “Electric cars have gone from pricey purchases to some of the biggest bargains on the used-car lot, as resale values for the vehicles have tumbled. Two years ago, some used electric-car models were selling for as much or more than new ones because of a supply-chain crisis that resulted in a broader car shortage. Now, the dynamic has flipped. Dealer lots are full of unsold EVs, and car companies—largely led by Tesla—have slashed prices on new models in an effort to sell them… But the flood of discounts has caused prices for previously owned electric vehicles to plunge, adding to the challenges confronting the auto industry as its big bet on battery technology continues to sputter. In September, the average selling price of a three-year-old electric vehicle was about $28,400, less than that of a gas-engine vehicle of the same age and a 25% drop from the start of 2023…”


De-globalization and Iron Curtain Watch:

October 17 – Reuters: “Russia is warning Israel to not even consider striking Iranian nuclear facilities… TASS quoted Deputy Foreign Minister Sergei Ryabkov as saying… ‘We have repeatedly warned and continue to warn, to caution (Israel) against even hypothetically considering the possibility of a strike on (Iranian) nuclear facilities and nuclear infrastructure…’ Russian state media also quoted Ryabkov as saying that Moscow was in constant contact with Iran, irrespective of the level of tensions in the region. Russia has strengthened ties with the Islamic Republic since the start of its war in Ukraine and is preparing to sign a major partnership agreement with Tehran.”

October 16 – Associated Press (Munir Ahmed): “Leaders and top officials from an international group founded to counter Western alliances met in Pakistan’s capital…, with Moscow and Beijing announcing they will boost cooperation. The 23rd meeting of the China-and Russia-founded Shanghai Cooperation Organization was held amid tight security in Islamabad, virtually on lockdown, and attended by leaders including Chinese Premier Li Qiang, Russian Prime Minister Mikhail Mishustin, Indian External Affairs Minister Subrahmanyam Jaishankar and the prime ministers of Kyrgyzstan, Belarus, Kazakhstan, Tajikistan and Mongolia…”

October 14 – Reuters (Joe Cash): “China's exports to Russia grew 15.7% in September from a year earlier, the fastest pace in nine months and up from a 10.1% gain a month prior… By contrast the data, in yuan terms, showed that imports from Russia fell 9.2% last month from a year earlier, compared with a 1.1% drop in August, following reports Russian exporters were struggling to process payments with Chinese buyers.”

October 15 – Financial Times (Amanda Chu, Jamie Smyth and Patrick Temple-West): “US battery start-up Lyten is committing more than $1bn to build the world’s first large-scale factory to produce lithium sulphur batteries, an emerging technology that could help break US dependence on China for metals crucial for the energy transition. The factory, located in Reno, Nevada, is expected to start production by 2027, the first target set for the commercialisation of a type of battery that could challenge the incumbent lithium ion. The battery does not rely on graphite, nickel, manganese, or cobalt — metals in which the vast majority of the world’s supply is controlled by Beijing.”


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

October 16 – Wall Street Journal (Laurence Norman): “The Cold War’s end promised relief from nuclear nightmares. Long-adversarial governments agreed to eliminate warheads and collaborated to stop the spread of atomic weapons. That promise is now slipping away. Russian President Vladimir Putin last month touted new rules on using nuclear arms, offering Moscow’s latest signal of readiness to use atomic weapons in its defense. North Korea’s nuclear arsenal is expanding. Iran is close to developing usable nuclear weapons, prompting fears of a Middle East arms race. One of the two critical U.S.-Russian nuclear-arms-control treaties has collapsed.”

October 14 – Bloomberg (Arne Delfs and Andrea Palasciano): “Russian President Vladimir Putin is determined to ‘test the West’s red lines’ and will be prepared for a military engagement with NATO by the end of the decade, according to Germany’s top spy. Bruno Kahl, the president of the Federal Intelligence Service, or BND, told lawmakers in Berlin… that Putin is seeking to expand the Kremlin’s sphere of influence in Europe and drive US military forces out of the continent as its defense spending outstrips European Union levels. ‘The Kremlin sees the West — and Germany as well — as an adversary,’ Kahl said… The chances of the North Atlantic Treaty Organization invoking its mutual defense clause at some point are high, Kahl added.”

October 14 – Reuters (Dmitry Antonov): “Russia said… a treaty it signed with North Korea earlier this year provides for ‘strategic cooperation’ in all areas… Russian President Vladimir Putin signed the treaty with North Korean leader Kim Jong Un when he visited Pyongyang in June, and said it included a mutual assistance clause under which each side agreed to help the other repel external aggression. Asked if this meant that Russia could be drawn into backing Pyongyang in a conflict on the Korean peninsula or that North Korea could side with Russia in a conflict with the West, Kremlin spokesman Dmitry Peskov said the treaty wording was ‘quite unambiguous’ and needed no clarification.”


Inflation Watch:

October 17 – Bloomberg (Shawn Donnan and Claire Ballentine): “As US Election Day approaches, inflation is largely tamed and wage gains have lifted incomes. Yet the economy remains the most pressing issue in the presidential race for one big reason: Increasingly, for many Americans, the long-standing building blocks of middle-class life feel frustratingly unattainable. The standard 20% down payment on a median-priced home now costs 83% of a year’s income for the typical family ready to buy a home, up from 65% on the eve of the 2016 election… Buying a new car takes almost two extra weeks of work for the median household compared to eight years ago. Child care then cost the same family about a quarter of its weekly income. Now it swallows up more than a third. And while the cost of attending college has gone down as a share of income in recent years, a median household can expect to pay 75% of its annual income for a private college and more than third for a public in-state university… That represents a repricing of the American Dream…”

October 16 – Reuters (Lucia Mutikani): “U.S. import prices fell by the most in nine months in September amid a sharp decrease in the cost of energy products, pointing to a benign inflation outlook that keeps the Federal Reserve on course to continue cutting interest rates… Import prices excluding fuel barely rising over the past three months… Import prices slipped 0.4% last month, the biggest drop since December 2023, after a revised 0.2% decrease in August…”


Federal Reserve Watch:

October 15 – Financial Times (Katie Martin): “It increasingly looks like Jay Powell rang the bell at the top of the bond market. In mid-September, the US Federal Reserve that he chairs delivered two things that, on paper, should be good news for bonds: a supersized interest rate cut and a strong hint of more cuts to come. But this market, which underpins every other asset class on the planet, has sagged from that day on. Yields on benchmark 10-year US government bonds have picked right back up to over 4% — the flip side of sliding prices. About 40% of the rally in 2024 has gone up in smoke, said Steven Major at HSBC, one of the big banks’ more keenly watched bond analysts. ‘That was quite some move,’ he said. ‘In the space of a few weeks, bonds gave back a significant proportion of the gains of the previous six months.’”

October 14 – Bloomberg (Amara Omeokwe): “Federal Reserve Governor Christopher Waller said recent economic data signals policymakers can approach subsequent interest-rate reductions with less urgency than they applied at their gathering last month. ‘I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting,’ Waller said… He added that if current economic conditions continue, ‘we can proceed with moving policy toward a neutral stance at a deliberate pace.’”

October 15 – New York Times (Jeanna Smialek): “Federal Reserve officials predicted at their last meeting that they would make two more quarter-point rate cuts before the end of 2024 as inflation continued to slow and the job market cooled further. But in the weeks since, labor data have come in stronger, opening a big question: What does it mean for the interest rate outlook if the job market does not slow from here? One Fed official suggested… that the central bank should keep lowering interest rates as expected even if the economy is chugging along, so long as inflation continues to cool. Policymakers… should not try to slow the economy down if evidence suggests that price increases are coming under control. ‘I’m very opposed to cutting off expansion out of fear,’ Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said…”

October 15 – Reuters (Dan Burns): “Atlanta Federal Reserve President Raphael Bostic… said he penciled in just one more interest rate reduction of 25 bps this year when he updated his projections for last month’s U.S. central bank meeting. ‘The median was for… 50 bps more, above and beyond the 50 bps that was done in September. My dot was 25 bps more,’ Bostic said… Bostic said, however, that his projection is not fixed in stone…”


U.S. Economic Bubble Watch:

October 17 – Bloomberg (Vince Golle): “US retail sales strengthened in September by more than forecast in a broad advance, illustrating resilient consumer spending that continues to power the economy. The value of retail purchases… increased 0.4% after a 0.1% gain in August… Excluding autos and gasoline stations, sales climbed 0.7%. The sales figures cap another likely quarter of solid economic growth and consumer demand fueled by a hardy labor market… In the retail data, ten of the report’s 13 categories posted increases… The… so-called control-group sales… surged 0.7% in September, the strongest in three months… Control-group sales increased at a robust 6.4% annualized pace in the three months ended in September, the strongest since early 2023.”

October 18 – Associated Press (Christopher Rugaber): “It’s a trend that has surprised many: Why, despite being squeezed by high prices, have Americans kept spending at retail stores and restaurants at a robust pace? One key reason is a relatively simple one: Wealthier consumers, boosted by strong gains in income, home equity and stock market wealth, have increasingly driven the spending. That trend, documented by Federal Reserve research, represents something of a shift from the pre-pandemic period. And it suggests that consumer spending, the primary driver of the U.S. economy, could help sustain healthy growth this year and next.”

October 17 – Associated Press (Matt Ott): “The number of Americans filing for unemployment benefits last week fell by the most in three months as the job market continues to show resilience despite high interest rates… Applications for jobless claims fell by 19,000 to 241,000 for the week of Oct. 12. That’s well below the 262,000 analysts were expecting.”

October 16 – CNBC (Diana Olick): “Mortgage interest rates rose last week for the third straight week, hitting the highest level since August. That caused demand from both current homeowners and potential homebuyers to take a big step back… Refinance demand… fell the hardest, down 26% week to week. It was still 111% higher… than the same week one year ago… Applications for a mortgage to purchase a home fell 7% for the week but were 7% higher than the same week one year ago.”

October 17 – Yahoo Finance (Claire Boston): “Mortgage rates rose for the third consecutive week, prompting fewer homebuyers and refinancers to move forward with transactions. The average 30-year fixed-rate mortgage rose to 6.44% in the week…, hitting the highest level since August… A week earlier, it was 6.32%. Average 15-year mortgages jumped to 5.63%, from 5.41% a week earlier.”

October 18 – Bloomberg (Michael Sasso): “US housing starts eased in September as a drop in multifamily projects outweighed a pickup in construction of single-family dwellings. Housing starts decreased 0.5% last month to a 1.35 million annualized rate…, after a big rebound in construction in August… Starts of single-family homes climbed 2.7% to an annualized 1.03 million, the strongest in five months. Construction of multifamily homes slumped 9.4% to a four-month low. The number of overall building permits… fell 2.9% to a 1.43 million annualized rate. Permit applications for single-family home construction rose 0.3% to a 970,000 pace.”

October 17 – Reuters (Lindsay Dunsmuir): “U.S. home builder confidence rose in October for the second consecutive month but volatile mortgage rates and low housing affordability continued to pose headwinds. The NAHB/Wells Fargo Housing Market Index of builder confidence increased to 43 this month from 41 in September… A Reuters poll showed economists expected the outlook to rise to 42 this month.”

October 15 – Wall Street Journal (Gina Heeb): “Daniel Garcia Parra is the kind of home buyer that builders are aggressively courting. With mortgage rates at the highest level in decades last year, the 35-year-old found little he could afford when touring for-sale houses in Dallas, Ga., outside Atlanta. He had about given up when he passed through a neighborhood of newly built homes that caught his eye. Months later, Garcia Parra was the owner of a new two-story, five-bedroom house. The builder offered him a mortgage product that lowered his payment by hundreds of dollars a month. His mortgage rate was just below 4% for the first year and 5% for the rest of the 30-year loan, compared with a market rate of more than 7%. The home builder agreed to cover the difference. ‘With their promotional rates, it was the best option, I guess the only option, I could afford,’ he said.”

October 15 – Bloomberg (Alex Tanzi): “Perceptions among American households that they might become delinquent on debts increased last month to the highest levels since April 2020, according to a Federal Reserve Bank of New York survey. The anticipated probability of missing a minimum debt payment over the next three months rose to 14.2% in September, marking the fourth straight month of increases… The rise was driven by middle-aged respondents.”

October 15 – CNBC (Michael Wayland): “A growing number of Americans with auto loans owe more than their vehicles are worth, according to… Edmunds.com. The auto data and consumer research company reports the average amount owed on so-called upside-down loans climbed to an all-time high of $6,458 during the third quarter. That compares to $6,255 in the prior quarter and $5,808 a year earlier… ‘Consumers owing a grand or two more than their cars are worth isn’t the end of the world, but seeing such a notable share of individuals affected at the $10,000 or even $15,000 level is nothing short of alarming,’ Jessica Caldwell, Edmunds’ head of insights, said…”


Fixed Income Watch:

October 18 – Bloomberg (Gowri Gurumurthy): “US junk bonds are headed for a first weekly gain in three, propelled by CCCs, the riskiest part of the high-yield market, after strong economic data underlined the resilience of the economy… CCCs are poised to record gains for the 16th consecutive week, the longest streak since March 2017. They rallied for five straight sessions this week…”

October 16 – Bloomberg (Amanda Albright): “With the US elections less than three weeks away, the sale of local and state government debt is surging. The 30-day supply of municipal bonds rose to about $22.9 billion as of Wednesday, the highest since October 2020… That figure could be even higher since the data represents a fraction of what comes to market… Supply is on track to hit $500 billion, MMA said in an Oct. 15 note.”

October 17 – Bloomberg (Will Kubzansky, Gowri Gurumurthy and Jeannine Amodeo): “Jane Street Group LLC sold a $1.15 billion junk bond… and is repricing a $3.212 billion loan, raising additional capital for trading as the firm pushes further into fixed-income. The company borrowed $150 million more from the junk-bond market than originally planned, marking its second note sale this year, after a $1.4 billion issue in April.”

October 17 – Bloomberg (Immanual John Milton and Charles Williams): “A behemoth $3.4 billion bond sale backed by Rockefeller Center, one of New York City’s real estate crown jewels, wrapped up on Thursday, adding the iconic attraction to a deluge of commercial mortgage-backed securities sold in 2024… Investors have backed roughly $90 billion in private-label CMBS so far in 2024, outpacing year-to-date amounts for most years over the prior decade…”

October 15 – Reuters (Abhijith Ganapavaram and Utkarsh Shetti): “Boeing set out to shore up its sagging finances…, announcing plans to raise up to $25 billion through stock and debt offerings and a $10 billion credit agreement with major lenders amid a production and regulatory crisis. It was not clear when and how much the planemaker would eventually raise, but analysts estimate Boeing needs somewhere between $10 billion and $15 billion to maintain its credit ratings, which are now just one notch above junk.”


China Watch:

October 15 – Wall Street Journal (Lingling Wei): “With China’s economy sinking deeper into a funk last month, Xi Jinping finally decided something had to be done. After resisting calls to take forceful steps to prop up the economy for two years, Xi relented in late September and ordered a barrage of interest-rate cuts and other measures to put a floor under growth. But Xi didn’t give his economic mandarins a blank check. According to officials and government advisers close to decision-making, he wanted to bail out indebted Chinese municipalities on the brink of collapse and revive the stock market without veering too far from his focus on letting the state drive China’s transformation into an industrial and technological powerhouse. For Xi, the officials and advisers say, the near-term goal isn’t to massively stimulate demand but to fend off a brewing financial crisis—or ‘derisking,’ in official lingo…”

October 13 – Wall Street Journal (Andy Kessler): “China’s property market is imploding. In January… Evergrande Group was forced to liquidate, owing $300 billion. An estimated 90 million apartments are empty in China, many in underoccupied ‘ghost cities’ such as Shenyang and Ordos. In 1980 the British band the Vapors sang: ‘I’m turning Japanese, I think I’m turning Japanese, I really think so.’ Is China’s economy turning Japanese? Other Chinese property developers such as Country Garden, Fantasia Holdings and Sunac are in disarray. China’s economy is slowing…The International Monetary Fund forecasts that China’s long-term growth rate is receding—over 10% in 2010 and now under 4%. In the 1990s Japan’s growth rate slowed a similar amount.”

October 14 – Wall Street Journal (Walter Russell Mead): “Wars in the Middle East and Ukraine dominate the headlines, but the Indo-Pacific remains the fulcrum of world politics and where the 21st century will take shape. While bombs fall and missiles fly elsewhere, the Chinese Communist Party is wrestling with its greatest challenges since Deng Xiaoping’s reforms fueled a generation of blistering growth in the 1980s. Unfortunately, the economic choices China is making look set to promote greater repression at home and increased tension with neighbors and trading partners around the world… Up to 90 million housing units across China stand empty in a country whose population is falling. Real-estate developers cannot service their loans. Local governments, which have long funded their programs by land sales to developers, are drowning in debt. With government encouragement, Chinese households invested nearly 80% of their total savings in real estate. Now that house prices have fallen about 30% since 2021 in some markets, shocked consumers are reining in their spending.”

October 15 – Reuters (Kevin Yao and Liangping Gao): “China may raise an additional 6 trillion yuan ($850bn) from special treasury bonds over three years to stimulate a sagging economy…, a figure that failed to revive sentiment in the country's stock market. The Caixin Global report, which cited sources with knowledge of the matter, comes after Finance Minister Lan Foan on Saturday said Beijing will ‘significantly increase’ debt, although the absence of details on the size and timing of the fiscal measures disappointed some investors.”

October 18 – Reuters (Ella Cao and Ryan Woo): “China's central bank kicked off two funding schemes on Friday that will initially pump as much as 800 billion yuan ($112.38bn) into the stock market through newly-created monetary policy tools. The People's Bank of China (PBOC) spelt out operational details of the swap and relending schemes first announced in late September, aiming to support ‘steady development’ of capital markets.”

October 16 – Bloomberg: “China’s pledge to nearly double the loan quota for unfinished residential projects to 4 trillion yuan ($562bn) fell short of market expectations, causing property shares to retreat as investors looked for stronger policies. The government set the new year-end target for loans to so-called ‘white-list’ property projects after disbursing 2.23 trillion yuan as of Oct. 16. The measure, aimed at ensuring home completion, was part of a basket of initiatives announced during a Thursday briefing. The plans underwhelmed, with some analysts calling them ‘incremental’.”

October 17 – Reuters: “China's central bank and financial regulators have held meetings with key financial institutions, urging them to swiftly implement expansive policies to support the economy and the capital markets. The People's Bank of China (PBOC) said… Friday that it urged financial institutions to boost credit support for the real economy, and maintain reasonable growth in the total amount of money and credit.”

October 13 – Wall Street Journal (Jason Douglas): “It’s the biggest question in the global economy: How many hundreds of billions of dollars will Beijing plow into pumping up China’s wobbling economy? And the next biggest: How much of that will go to consumers? Chinese Finance Minister Lan Fo’an didn’t offer detailed answers to either question when he hosted a hotly anticipated news conference on Saturday… Still, Lan did outline a laundry list of high-priority challenges that he vowed to tackle, signaling that he would spend some $300 billion of funds that have been earmarked for this year but haven’t yet been deployed.”

October 17 – Bloomberg: “China’s home prices fell in September at almost the same pace as the previous month, suggesting that the country’s efforts to stabilize its real estate sector may not be enough. New-home prices in 70 cities… dropped 0.71% from August, largely in line with a 0.73% decline a month earlier… Values of used homes fell 0.93%, following a 0.95% decline a month earlier… New-home prices fell 6.1% in September compared with a year ago, steeper than August’s 5.7% drop… Existing-home prices decreased 9%. Residential sales slipped 8.7% in September from a year earlier…”

October 18 – Reuters (Kevin Yao): “China’s economy grew at the slowest pace since early 2023 in the third quarter, and though consumption and factory output figures beat forecasts last month a tumbling property sector remains a major challenge for Beijing as it races to revitalise growth… The world's second-largest economy grew 4.6% in July-September…, a touch above a 4.5% forecast… but below the 4.7% pace in the second quarter… On a quarterly basis, the economy expanded 0.9% in the third quarter, compared with a revised 0.5% growth in April-June, and below forecast of 1.0%.”

October 14 – Reuters (Joe Cash): “China’s export growth slowed sharply in September while imports also unexpectedly decelerated, undershooting forecasts by big margins and suggesting manufacturers are slashing prices to move inventory ahead of tariffs from several trade partners. Export momentum had been one bright spot for the Chinese economy that has struggled to gain traction due to weak domestic demand and a property market debt crisis… Outbound shipments from the world's second-largest economy grew 2.4% year-on-year last month, the slowest pace since April…, missing a forecast 6.0% increase… and a 8.7% rise in August.”

October 13 – Reuters (Liangping Gao and Ryan Woo): “China's consumer inflation unexpectedly eased in September, while producer price deflation deepened, heightening pressure on Beijing to roll out more stimulus measures quickly… The consumer price index (CPI) rose 0.4% from a year earlier last month, the slowest in three months, against a 0.6% rise in August…, missing a 0.6% increase forecast... The producer price index (PPI) fell at the fastest pace in six months, down 2.8% year-on-year in September, versus a 1.8% decline the previous month and below an expected 2.5% decline.”

October 17 – Reuters (David Lawder): “International Monetary Fund Managing Director Kristalina Georgieva told Reuters on Thursday that China is too large to continue relying on exports to drive its economy and faces dangerously slower growth unless it shifts toward a consumer-driven economic model. Georgieva told Reuters… China's growth could fall below 4% in the medium term if it stays on its current path, a level ‘that is going to be very difficult for China. It's going to be very difficult from a social standpoint.’”


Central Banker Watch:

October 17 – Financial Times (Olaf Storbeck and Ian Smith): “The European Central Bank has cut interest rates by a quarter-point to 3.25%, amid mounting confidence that Eurozone inflation is finally weakening and increasing concerns about lacklustre economic growth. Thursday’s move took Eurozone rates to their lowest point since May 2023 and followed a cut of the same size at the ECB’s last meeting, held in early September. ECB president Christine Lagarde said after the meeting that the disinflationary process was ‘well on track’ and that all of the data since the September vote ‘were heading in the same direction — lower’. “


Global Bubble Watch:

October 15 – Wall Street Journal (Paul Hannon): “Government debts are set to match the annual output of the global economy by the end of this decade, and could cross that threshold much sooner if economic growth is weaker or interest payments are higher than expected, the International Monetary Fund said… In its twice-yearly report on government finances, the Fund said spending cuts and tax rises of an unprecedented size would be needed over the coming five to seven years to stabilize or reduce debt. ‘It’s time for governments to get their house in order,’ said Era Dabla-Norris, deputy director for fiscal affairs at the IMF. ‘For all countries, a strategic pivot is needed to reduce debt risks.’”

October 14 – CNBC (Jenni Reid): “U.S.-based economists Daron Acemoglu, Simon Johnson and James Robinson were awarded the Nobel Prize in economic sciences on Monday for their work on wealth inequality between nations. The academics have helped show why societies with ‘poor rule of law and institutions that exploit the population do not generate growth or change for the better,’ the Nobel committee said, demonstrating the ‘importance of societal institutions for a country’s prosperity.’”

October 14 – Reuters (Alessandro Parodi and Greta Rosen Fondahn): “Global sales of fully electric and plug-in hybrid vehicles rose by an annual 30.5% in September, as China surpassed its record numbers recorded in August and Europe resumed growth, market research firm Rho Motion said… Gains in the U.S. market have been slow and steady in anticipation of the Nov. 5 election… EVs - whether fully electric (BEV) or plug-in hybrids (PHEVs) - sold worldwide reached 1.69 million in September... Sales in China jumped 47.9% in September and reached 1.12 million vehicles, while in the United States and Canada they were up 4.3% to 0.15 million.”


Europe Watch:

October 15 – Associated Press (Sylvie Corbet): “France’s new government has unveiled its 2025 belt-tightening budget bill, with plans for major tax hikes and spending cuts aimed at tackling the country’s giant deficit. Prime Minister Michel Barnier, a conservative, described the massive hole in the public finances as a ‘sword of Damocles’ that could bring the euro zone’s second-biggest economy ‘to the edge of the precipice.’ Still, his budget plans have angered many in the country and are expected to be harshly debated in parliament in the coming weeks, with his government’s survival at stake.”

October 15 – Reuters (Balazs Koranyi): “The euro zone economy showed some signs of life… with a raft of indicators pointing to lukewarm but still positive growth for a bloc that has been skirting a recession for over a year. Industrial output expanded and lending demand rose, while expectations in a key German sentiment survey also increased more than predicted… Output in Germany… surged more than 3% on the month, the biggest rise among the bloc's larger economies… Demand for bank loans, the key source of funding for the corporate sector, rose in the third quarter and a further increase is expected in the final three months of the year…”

October 16 – Reuters (Andy Bruce and William Schomberg): “British inflation slowed sharply last month and key price gauges watched by the Bank of England also fell, bolstering bets on a November interest rate cut… Annual consumer price inflation eased to 1.7% in September from 2.2% in August, the lowest reading since April 2021 and driven down by lower airfares and petrol prices… Core inflation… slowed to 3.2% from 3.6% in August. Services inflation - which the BoE views as the most important gauge of domestically-generated price pressure - sank to its lowest since May 2022 at 4.9% in September, down from 5.6% in August.”

 

Japan Watch:

October 12 – Reuters (Leika Kihara): “Japanese Prime Minister Shigeru Ishiba said… he would not intervene in monetary policy affairs, as the central bank is mandated to achieve price stability. ‘It’s important to avoid vocally intervening’ in monetary policy affairs, or appear as if he was doing so, Ishiba said… ‘Whatever the government has to say, the Bank of Japan makes an individual decision on policy… I believe the BOJ's governor and staff have a strong sense of responsibility over achieving price stability.’”

October 15 – Bloomberg (Toru Fujioka): “Bank of Japan Board Member Seiji Adachi emphasized the need for taking a gradual approach to raising the benchmark interest rate, in comments that will likely cement views in the market that authorities will stand pat when they gather to set policy this month. ‘What we need to be careful of, in a gradual rate hike process, is that we raise it extremely gradually while keeping financial conditions accommodative’ until the price trend gets to 2%, Adachi said…”

October 15 – Reuters (Kantaro Komiya): “Japan's upcoming stimulus package will be bigger than last year's measures that were financed with a 13 trillion yen ($87bn) extra budget, a government spokesperson said… The government will draft a package that will exceed the size of last year's stimulus, Deputy Chief Cabinet Secretary Kazuhiko Aoki said, echoing Prime Minister Shigeru Ishiba's remarks…”


Emerging Markets Watch:

October 14 – Reuters (Nikunj Ohri and Sarita Chaganti Singh): “India's retail inflation in September accelerated to its highest in nine months, due to higher food prices… Annual retail inflation was at 5.49% in September, higher than 3.65% in August, and economists' forecast of 5.04%. The print was the highest since December 2023, when retail inflation was at 5.69%.”

October 18 – Reuters (Siddhi Nayak): “India's foreign exchange reserves dropped for a second consecutive week, falling to a one-month low of $690.43 billion as of Oct. 11… The reserves fell by $10.75 billion…, the biggest drop since April 1, 2022. They had fallen by $3.7 billion in the previous week.”


Leveraged Speculation Watch:

October 17 – Bloomberg (Miles Weiss and Hema Parmar): “Citadel employees’ investment in its $45 billion flagship hedge fund surged during the past several years, driven by robust returns and lockups that the firm imposes on a big chunk of their annual compensation… In dollar terms, the value of their combined stake, including that of founder Ken Griffin, more than tripled to about $9 billion during that span.”


Social, Political, Environmental, Cybersecurity Instability Watch:

October 15 – Financial Times (Oliver Ralph and Joshua Oliver): “Hurricane Milton, which tore through central Florida last week causing widespread damage, will lead to about $36bn of insurance payouts for the private sector, according to risk modeller Karen Clark & Company. The claims will come from damage caused by wind, storm surge, and inland flooding. The estimate is lower than early fears about the impact of the storm, but is well above the $6bn of claims that KCC estimates Hurricane Helene caused last month. Moody’s… said the combined insured losses from the two storms would probably amount to between $35bn and $55bn.”

October 16 – Associated Press (Seth Borenstein): “Monstrous hurricanes Helene and Milton caused so much complex havoc that damages are still being added up, but government and private experts say they will likely join the infamous ranks of Katrina, Sandy and Harvey as super costly $50-billion-plus killers. Making that even more painful is that most of the damage — 95% or more in Helene’s case — was not insured, putting victims in a deeper financial hole.”

October 15 – CBS (Nicole Sganga and Kelsie Hoffman): “As the nearly 65,000 residents of hard-hit Rutherford County, North Carolina, struggle to clear endless mud and debris left behind by Hurricane Helene, help hit a roadblock. Federal Emergency Management Agency crews were forced to relocate due to a reported armed threat against workers… FEMA said later on Monday that it would resume normal operations because the threat turned out to be less serious than first feared.”

October 17 – Reuters (Michelle Conlin and Matt Tracy): “For 32 years, Jim Tynan had a homeowners' policy with Allstate on his 1,200-square foot condo in Ponte Vedra, Florida. In January, Tynan's Allstate subsidiary told him it was going to drop him. Tynan called ten different agencies, ‘and none would cover me,’ he said. Finally, he found one that would. It cost 50% more. Florida has been hit with four major hurricanes in the past four years, which has sent insurance premiums rocketing and caused some insurers to pull back on coverage. For residents cleaning up after storms or living nearby water, they have another worry: Will they still have insurance?”

October 12 – Wall Street Journal (Arian Campo-Flores): “Cin-dee Cawley moved to Florida two decades ago for the same reason so many others have: the lure of tropical living at a reasonable price. That was before the latest hurricane, Milton, lashed Englewood with fierce winds and storm surge this week. It was also before Hurricane Helene two weeks ago, Hurricane Debby in August and Hurricane Ian in 2022. Each time, Cawley endured the anxiety of facing a potentially devastating loss, the disruption of preparing for the storm and the sometimes laborious cleanup afterward. The succession of destructive storms, coupled with climbing insurance and other costs, is prompting her to seriously consider selling her coastal home south of Sarasota… ‘It’s too much,’ said Cawley, 64 years old… ‘It’s like playing Russian roulette. I don’t want to play anymore.’”

October 16 – Wall Street Journal (Jean Eaglesham and Carl Churchill): “Driving through the mess left behind by the twin hurricanes that slammed Florida, it doesn’t take long to pass a construction site for another batch of new homes. Among them is La Linda Estates, which is being built in a high-risk flood zone on a barrier island near where Milton made landfall. Florida built 77,000 new properties in high-risk flood areas since 2019, the most in the nation… The building binge is putting the real-estate industry, and the banks that finance it, on a collision course with insurers. The new construction is one reason insurance bills for Milton and Helene are expected to be between $40 billion and $75 billion…”


Geopolitical Watch:

October 15 – Reuters (Krishn Kaushik, Sakshi Dayal and Promit Mukherjee): “Canada expelled six Indian diplomats including the high commissioner…, linking them to the murder of a Sikh separatist leader and alleging a broader effort to target Indian dissidents in Canada. Earlier in the day, India retaliated by ordering the expulsion of six high-ranking Canadian diplomats… The diplomatic row represents a major deterioration of relations between the two Commonwealth countries… The government now has ‘clear and compelling evidence that agents of the government of India have engaged in and continue to engage in activities that pose a significant threat to public safety,’ Trudeau said…”

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