Weekly Commentary: The Everything Squeeze

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Doug Noland
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Summary

  • July consumer price inflation data were somewhat better than forecast. Instead of increasing 0.2%, headline CPI was flat for the month.
  • The Nasdaq100 advanced 2.8% Wednesday, while the small cap Russell 2000 jumped 3.0%.
  • CPI hit during a key juncture for market Speculative Dynamics. A powerful short squeeze had developed across global markets.

The Vice

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Wednesday's CPI release was telling. July consumer price inflation data were somewhat better than forecast. Instead of increasing 0.2%, headline CPI was flat for the month. "Core" prices rose 0.3%, less than the expected 0.5%. From a fundamental perspective, a single month of marginally improved inflation data is not an earthshaking development. Fed officials were understandably cautious. Even dove Neel Kashkari showed restraint: "This is just the first hint that maybe inflation is starting to move in the right direction, but it doesn't change my path."

Meanwhile, the CPI report was a big deal for risk markets. The Nasdaq100 advanced 2.8% Wednesday, while the small cap Russell 2000 jumped 3.0%. Why such a spirited response? CPI hit during a key juncture for market Speculative Dynamics. A powerful short squeeze had developed across global markets. An upside inflation surprise would surely slam bond prices, pressuring stock prices lower and blunting the squeeze. Instead, a favorable inflation report provided an "all's clear" for tightening the screws on those on the wrong side of the risk market rally.

The Goldman Sachs Short Index (GSSI) surged 5.1% Wednesday (up 7.5% for the week). In what is shaping up as a major squeeze episode, the GSSI is already up 20.6% month-to-date - while rallying 47% off June lows.

It was the "Everything Bubble" and the everything bust - presently interrupted by the Everything Squeeze. After beginning the year at 295 bps, U.S. high-yield CDS surged to a June 16th high of 598 bps. HY CDS sank 43 this week to 421 bps - now down 177 bps from June highs. The iShares High Yield Corporate Bond ETF (HYG) has rallied 8.2% off June lows. Emerging Market CDS sank 37 this week to 280 bps - down 107 bps in four weeks. European high-yield ("Crossover") CDS collapsed 56 bps this week to 463 bps - a four-week drop of 160 bps. Bank CDS prices have sunk back to April levels (i.e. JPM CDS down 30 from July highs to 73 bps).

Market Structure has been a longstanding CBB theme. It's turning out to be a critical issue for the first substantive Federal Reserve tightening cycle in 25 years. Wednesday's CPI report only makes the Fed's job more difficult. Financial conditions have loosened dramatically over the past few weeks.

August 8 - Bloomberg (Jack Pitcher): "High-grade US companies are taking advantage of a broad markets rally on Monday by selling the largest number of bonds since early June. They're capitalizing on falling costs and rising demand to refinance debt, pay for acquisitions and fund new projects. Credit Suisse Group AG is among 12 issuers of investment-grade bonds, continuing momentum for a primary market that roared back to life over the last few weeks… Investment-grade borrowers have raised money at an impressive clip, with $120 billion of new debt sold over the last three weeks."

August 12 - Bloomberg (Yiqin Shen): "A surprise surge in deals is turning August into a memorable month for mergers and acquisitions, helped by rising stock prices and steadier US markets. Already $63 billion of transactions have been announced in North America, the most for a comparable monthly period since November and eclipsing the $52 billion in deals for all of July…"

Managing the monetary system with doctrine focused on market-based financial conditions and "neutral" interest-rate analysis is untenable. Financial conditions were notably tight a few weeks back. The shift back to loose has been abrupt and powerful. Thoughts that Fed policy rates were quickly approaching "neutral" are today little more than fanciful thinking.

U.S. and global systems have developed robust inflationary biases over the past year. In general, inflation promotes the necessary Credit growth to sustain price momentum. Higher prices, labor shortages, supply chain issues, and the like spur borrowing and investment spending. There are also these days unique climate change issues that drive major investment booms at home and abroad.

And there are the markets. A few short weeks ago, de-risking/deleveraging and the resulting major tightening of market financial conditions brought corporate debt markets to an abrupt halt. The prospect of the money spigot being turned off for scores of negative cash-flow and uneconomic enterprises was becoming a systemic issue. Venture capital and private equity Bubbles were bursting. Company layoff announcements were gathering momentum.

Moreover, collapsing securities prices and evaporating perceived wealth would surely add to downside pressures on spending and investment. It was reasonable to assume that tight financial conditions would mitigate some inflationary pressures percolating throughout the real economy. Focused on financial conditions, Powell signaled the Fed would quickly reach its "neutral rate" destination.

For 25 years, markets became progressively more confident in the central bank liquidity backstop. The so-called "Fed Put" became deeply embedded in Market Structure - in psychology, behavior, products, strategies and asset prices. It became instrumental to derivatives markets and hedging strategies more generally. If the Fed was there managing the weather, why not sell flood insurance? And with readily available cheap market insurance, why would anyone liquidate risk asset portfolios? Stocks always end up moving higher. Just navigate through market pullbacks with some savvy derivative hedges. More than anything, don't underperform the market. If you're going to be wrong, you had better be wrong with the group.

Over time, the backdrop had a profound impact on Market Structure. Risk management was downgraded, while risk embracement was readily rewarded. Markets turned increasingly speculative. Greed trounces Fear. "FOMO" (fear of missing out) became the dominant force throughout the securities and derivatives markets. Those concerned with mounting risks were weeded out. Employing maximum risk became the go-to default strategy. Incorporate leverage to maximize returns, keeping one eye on derivatives markets for protection if the Bubble began to succumb.

Bubbles were succumbing. A Bloomberg headline from March 18th: "Stock Traders Brace For a $3.5 Trillion 'Triple Witching' Event." A quarter later, June's expiration was another monster $3.5 TN event. And it's no coincidence that market trading lows were established June 16th - one day ahead of Q2 "Triple Witch."

It's worth noting that the Bloomberg Commodities Index sank 6.7% during June expiration week. The Dollar Index traded above 105 for the first time in almost two decades, as global risk off stoked a dollar melt-up. The dollar traded at a 24-year high versus the Japanese yen. Global currency markets were dislocating. Emerging Market currencies, stocks and bonds were all under intense liquidation. Periphery European bond markets were coming unglued, with Italian yields spiking (up 98bps in nine sessions) to 4.17%. The euro traded to a 20-year low. Trading across key markets was turning disorderly, as global derivatives markets began to dislocate (i.e. high yield CDS two-week spike of 103bps).

In short, global markets were "seizing up". With multi-trillions of market risk offloaded to the derivatives markets, the system was at a critical juncture. If de-risking/deleveraging continued, the scope of derivatives-related selling pressure ("delta" or dynamic trading to hedge protection written) would overwhelm the marketplace.

In the past, such market episodes reliably triggered central bank dovish pivots and market recoveries. Christine Lagarde led the charge, calling an emergency ECB meeting to begin crafting an anti-fragmentation tool. "…Anybody who doubts that determination will be making a big mistake." Beijing moved forward with a number of stimulus measures, while the Bank of Japan made it clear it was not about to back away from ultra-loose monetary policy or abandon JGB yield control. Testifying before Congress, Powell stated the Fed would have to be "nimble." James Bullard was talking about 2023 rate cuts.

It may not have been the typical rate cut and QE announcements, but central bankers certainly communicated acute sensitivity to market fragilities. For now, central bank market backstops appeared intact. Financial markets reversed sharply higher, inciting what would be a major reversal of hedges and bearish bets - across global markets.

It's worth underscoring that a serious global crisis of confidence was materializing around a big quarter-end U.S. derivatives expiration. The structure of U.S. and global derivatives hedging markets has created a weak link within the global financial system. Market participants have been conditioned to hedge in the derivatives markets, creating vulnerability for a self-reinforcing (1987 "portfolio insurance," but so much bigger) crash dynamic. Such a collapse would destroy faith in the central bank "put," essentially creating a crisis of confidence in Market Structure and central banking.

At least for this round, perceptions held that central bankers retain the capacity to stabilize markets. And now markets are weeks into a major unwind of hedges and short positions, a dynamic that unleashes smoldering speculative dynamics. Short squeezes are back, meme stocks are back to life, and FOMO is forcing the under-invested to get their exposures right back up. A bear market rally or a more sustainable market recovery? That's not the point. With current Market Structure, destabilizing speculative excess is always festering just below the surface. This is a serious dilemma for the execution of monetary policy.

It's also consistent with the "Fed hikes until something breaks." The Bloomberg Commodities Index surged 4.5% this week, and after rallying 12% from July lows, is up 24% y-t-d. Gasoline jumped 6.7% this week (up 37% y-t-d), with Natural Gas spiking 8.7% (up 135%). Rallying markets - in particular the unwind of hedges and the reemergence of speculative leveraging - create their own liquidity. Especially considering supply constraints and geopolitical instability, I see no reason why some of this liquidity won't reinforce powerful inflationary forces throughout the commodities complex.

August 12 - MarketWatch (Barbara Kollmeyer): "Investors counting on a softer global economy to pull commodity prices lower may instead be faced with scare supplies and inflation, as the market is awash in contradictions, Goldman Sachs has warned clients. 'Today, commodity markets appear to hold irrational expectations, as prices and inventories fall together, demand beats expectations and supply disappoints,' wrote Goldman's head of commodities research Jeffrey Currie and his team… They note the commodity space has moved from hoarding to destocking, with consumers using up inventory at higher prices on the hopes that a broad softening of the economy will create extra supply. 'Yet should this prove incorrect and excess supply does not materialize as we expect, the restocking scramble would exacerbate scarcity, pushing prices substantially higher this autumn, potentially forcing central banks to generate a more protracted contraction to balance commodities markets,' Currie said."

Market expectations currently have Fed funds peaking at 3.66% in March of next year. This seems reasonable enough in the context of China's faltering Bubble, ongoing acute global fragilities, and U.S. market and economic vulnerabilities. But if U.S. securities markets regress to their speculative ways more sustainedly, there's a scenario where loose financial conditions underpin both economic activity and inflationary pressures. A 5% Fed funds rate in 2023 would not be unthinkable.

I'm assuming surging equities speculation, bustling debt markets, and booming commodities price inflation would alarm Fed officials. A precipitous loosening of financial conditions would catch them by surprise, hastening some serious "neutral rate" contemplation. Barring a market accident, inflationary pressures will not be contained by the level of Fed funds currently anticipated by the marketplace.

At 2.83%, 10-year Treasury yields show little concern for the risk market resurgence. It's as if bonds become only more confident Things Are Going to "Break." There are certainly major risks associated with the marketplace turning bullish at this juncture - scrapping hedges while boosting exposures and leverage. It seems to ensure major liquidity challenges come the next bout of de-risking/deleveraging. And let's not forget that the Fed ratchets up QT (quantitative tightening) next month.

I also worry about the hedge funds. This rally has caught many funds poorly positioned, only compounding performance challenges. As a whole, the industry is under intense performance pressure. Most funds have no choice but to plug noses and jump on the rally. They'll also be the first to liquidate come the next leg of the bear market, selling right along with the derivatives players as a panicked marketplace rushes to reestablish hedges. And if the recent loosening of financial conditions has been spectacular, just wait until the next de-risking/deleveraging-induced tightening. Let's call it what it is: Epic Monetary Disorder.

For the Week:

The S&P500 rose 3.3% (down 10.2% y-t-d), and the Dow gained 2.9% (down 7.1%). The Utilities added 2.8% (up 6.2%). The Banks surged 5.8% (down 13.1%), and the Broker/Dealers rose 3.4% (down 4.2%). The Transports advanced 3.7% (down 8.1%). The S&P 400 Midcaps jumped 4.4% (down 8.0%), and the small cap Russell 2000 surged 4.9% (down 10.2%). The Nasdaq100 advanced 2.7% (down 16.9%). The Semiconductors increased 0.5% (down 22.3%). The Biotechs declined 0.9% (down 8.5%). With bullion jumping $27, the HUI gold index rallied 4.6% (down 17.3%).

Three-month Treasury bill rates ended the week at 2.4675%. Two-year government yields added two bps to 3.25% (up 251bps y-t-d). Five-year T-note yields were unchanged at 2.96% (up 169bps). Ten-year Treasury yields were unchanged at 2.83% (up 132bps). Long bond yields increased four bps to 3.11% (up 121bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 4.04% (up 197bps).

Greek 10-year yields jumped 18 bps to 3.22% (up 191bps). Spain's 10-year yields gained six bps to 2.10% (up 153bps). German bund yields increased three bps to 0.99% (up 116bps). French yields rose five bps to 1.55% (up 135bps). The French to German 10-year bond spread widened two to 56 bps. U.K. 10-year gilt yields rose six bps to 2.11% (up 114bps). U.K.'s FTSE equities index increased 0.8% (up 1.6% y-t-d).

Japan's Nikkei Equities Index gained 1.3% (down 0.9% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.19% (up 12bps y-t-d). France's CAC40 rose 1.3% (down 8.4%). The German DAX equities index rose 1.6% (down 13.2%). Spain's IBEX 35 equities index jumped 2.8% (down 3.6%). Italy's FTSE MIB index gained 1.7% (down 16.0%). EM equities marched higher. Brazil's Bovespa index surged 5.4% (up 7.1%), and Mexico's Bolsa index jumped 4.5% (down 8.3%). South Korea's Kospi index gained 1.5% (down 15.1%). India's Sensex equities index rose 1.8% (up 2.1%). China's Shanghai Exchange Index increased 1.5% (down 10.0%). Turkey's Borsa Istanbul National 100 index jumped 4.1% (up 54.2%). Russia's MICEX equities index rallied 4.5% (down 43.3%).

Investment-grade bond funds posted inflows of $70 million, and junk bond funds reported positive flows of $27 million (from Lipper).

Federal Reserve Credit last week declined $6.3bn to $8.841 TN. Fed Credit is down $59.4bn from the June 22nd peak. Over the past 152 weeks, Fed Credit expanded $5.115 TN, or 137%. Fed Credit inflated $6.031 Trillion, or 215%, over the past 509 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $11.1bn to a six-week high $3.378 TN. "Custody holdings" were down $118bn, or 3.4%, y-o-y.

Total money market fund assets declined $8.0bn to $4.568 TN. Total money funds were up $58bn, or 1.3%, y-o-y.

Total Commercial Paper gained $8.bn to $1.177 TN. CP was up $35.3bn, or 3.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 23 bps to 5.22% (up 235bps y-o-y). Fifteen-year rates surged 33 bps to 4.59% (up 244bps). Five-year hybrid ARM rates gained 18 bps to 4.43% (up 199bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 15 bps to 5.53% (up 247bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.9% to 105.63 (up 10.4% y-t-d). For the week on the upside, the South African rand increased 3.8%, the New Zealand dollar 3.6%, the Australian dollar 3.0%, the Mexican peso 2.8%, the Norwegian krone 2.4%, the Swiss franc 2.1%, the Brazilian real 1.8%, the Japanese yen 1.2%, the Canadian dollar 1.2%, the euro 0.8%, the Singapore dollar 0.7%, the British pound 0.5% and the Swedish krona 0.3%. On the downside, the South Korean won declined 0.3%. The Chinese (onshore) renminbi increased 0.41% versus the dollar (down 5.74% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 4.5% (up 24.2% y-t-d). Spot Gold gained 1.5% to $1,802 (down 1.5%). Silver recovered 4.7% to $20.82 (down 10.7%). WTI crude rallied $3.08 to $92.09 (up 22%). Gasoline surged 6.7% (up 37%), and Natural Gas spiked 8.7% to $8.77 (up 135%). Copper rose 3.3% (down 18%). Wheat jumped 6.0% (up 7%), and Corn rose 5.3% (up 8%). Bitcoin rallied $897, or 3.9%, this week to $24,157 (down 48%).

Market Instability Watch:

August 8 - Bloomberg (Sagarika Jaisinghani): "A dimming earnings outlook is at odds with the recent rebound in stock markets, according to strategists at Morgan Stanley and Goldman Sachs… Both Morgan Stanley's Michael J. Wilson and Goldman's David J. Kostin expect corporate profit margins to contract next year given unrelenting cost pressures, they wrote in separate notes. According to Wilson, who has been one of the most vocal bears on US stocks, 'the best part of the rally is over.'"

August 7 - Financial Times (Emma Boyde): "Money rushed back into investment grade corporate bond exchange traded funds in July with flows buoyed by 'significant' buying of European-focused vehicles in a sign of improving sentiment. Purchases of fixed income ETFs surged to $32.5bn in July from $3.2bn in June, largely due to a pick-up in credit, or corporate bond, ETF buying, which amounted to $13.8bn, more than recouping the $9.9bn lost in outflows in June, according to… BlackRock. Investment grade credit vehicles accounted for the lion's share of inflows, taking in $9.9bn in July."

August 9 - Bloomberg (Ronan Martin): "Europe's bond market is enduring its worst drought in at least 8 years. The market has seen 32 days without a single public debt offering from governments and corporations this year, already surpassing 2018 as the slowest year since records begin in 2014… That tally is certain to rise since activity usually slows markedly during the August vacation season… Last week, there were only 2.6 billion euros ($2.65 billion) of primary-market deals in Europe, the lowest so far this year, and year-to-date volumes are down over 22% from 2021, the data shows."

Bursting Bubble and Mania Watch:

August 5 - Wall Street Journal (Veronica Dagher): "There are a lot of unhappy people in the housing market right now. Among the most miserable are sellers realizing they have listed their properties too late. For much of the country, real estate had been on a tear since the start of the pandemic. Home prices are up about 44% over the past two years, according to Redfin. But prices have cooled lately and many homeowners are coming to grips with the reality that they may not get the same prices their neighbors did. Roughly one in seven homes on the market had a price reduction in June, according to Realtor.com. That is nearly double the rate of one in 13 homes a year ago."

August 9 - Wall Street Journal (Heather Gillers): "Public pension plans lost a median 7.9% in the year ended June 30, according to Wilshire Trust Universe Comparison Service data…, their worst annual performance since 2009 and a fresh sign of the chronic financial stress facing governments and retirement savers. Much of the damage occurred in April, May and June, when global markets came under intense pressure driven by concerns about inflation, high stock valuations and a broad retreat from speculative investments including cryptocurrencies. Funds that manage the retirement savings of teachers, firefighters and police officers returned a median minus 8.9% for that three-month period… 'It was a really, really bad quarter for investing, there's no way around it,' said Michael Rush, a senior vice president at Wilshire."

August 6 - Financial Times (Antoine Gara): "The private equity businesses at some of the buyout industry's most prominent firms are beginning to contract as a sharp slide in financial markets and a slowing of new investment from institutional investors lead to declining assets under management. Most publicly traded US buyout firms, including KKR, Carlyle Group and Apollo Global, reported declining assets within their private equity units in the second quarter as they sold investments at a faster pace than they could raise new cash from institutional investors. Executives warned shareholders that pensions and endowments, nursing heavy losses in public markets, feel overexposed to buyouts. In response, these institutional investors are slowing their pace of new investment, increasing the difficulty of fundraising."

August 9 - Bloomberg (Manya Saini): "Several high-flying startups are being brought down to earth, as a recent carnage in global equity markets and lackluster demand for new listings force companies to raise funds at a substantial discount to their sky-high valuations. Easy money from venture capital dealmaking is fast evaporating in an inflation-induced high interest-rate environment as many private investors take a hard look at funding startups, many of which could be years away from turning a profit. Already high-profile companies such as payments firm Stripe, Swedish buy-now-pay-later firm Klarna and delivery startup Instacart have seen their valuations get knocked down by a peg or two this year. In the United States alone, 81 U.S. companies had to take a haircut to their valuation during their funding rounds, in what venture capital firms call a 'down round', data from PitchBook showed."

August 8 - Bloomberg (Bailey Lipschultz and Elena Popina): "Retail traders who lurk in forums like Reddit's WallStreetBets are back to betting against Wall Street pros and the Federal Reserve as rallies for meme stocks like Bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc. show shades of last year's mania. The home-good retailer has nearly tripled over a nine-day winning streak while the movie-theater firm is riding a more than 75% rally of its own as speculative pockets of the stock market surge. The pair have powered a basket of 37 meme stocks tracked by Bloomberg higher by 12% over the past week while the most-hated stocks tracked by a Goldman Sachs Group Inc. basket is up nearly 20% over the same period."

August 11 - Wall Street Journal (Nicole Friedman): "Home prices continued to climb across nearly all the U.S. in the second quarter, when buyer demand started to fade due to higher mortgage rates but still exceeded the housing market's unusually low supply. The median sales price was higher in the quarter compared with a year ago for 184 of the 185 metro areas tracked, the National Association of Realtors said... More of the country also experienced double-digit-percentage price gains than earlier in the year. Median prices rose by more than 10% from a year earlier in 80% of the 185 metro areas, up from the first quarter when 70% of metro areas reported double-digit-percentage growth."

August 8 - Bloomberg (John Gittelsohn): "A palatial five-bedroom home built in 1932 with stained-glass windows, hand-carved doors and jaw-dropping hillside views of downtown San Francisco hit the market in April for $9.5 million. In June, the owners dropped the price to $7 million. It went up for auction last week with an opening bid of $4.5 million. No offers emerged. That kind of pullback is a stark turn for a tech-fueled city long marked by extreme wealth and ever-escalating home prices. Now, as the US housing market slows from a pandemic-era frenzy, the San Francisco area stands to be among the hardest-hit places."

August 9 - Bloomberg (Prarthana Prakash and Ian King): "Micron Technology Inc., the leading US maker of memory semiconductors, became the latest chipmaker to declare that demand is falling off rapidly. It warned investors that revenue won't meet projections, sending industry stocks tumbling… The… company is the latest to reveal just how quickly demand for electronic components is declining, following a warning by Nvidia… and weak reports by Intel Corp. and other chipmakers this earnings season."

August 7 - Wall Street Journal (Suzanne Vranica and Alexandra Bruell): "U.S. television networks and news publishers are feeling the effects of a slowdown in the advertising market, the latest indication that an ad-spending retrenchment previously flagged by giant technology companies is spreading. Warner Bros. Discovery Inc., home of cable channels including CNN, TNT and the Food Network, on Thursday cut its outlook for this year and next in part because of a slowdown in advertising. In recent days, the owners of outlets including the CBS television network, the New York Times and USA Today all said their ad revenue was under pressure during the latest quarter."

Ukraine War Watch:

August 11 - Reuters (Tom Balmforth): "Satellite pictures released… showed devastation at a Russian air base in Crimea, hit in an attack that suggested Kyiv may have obtained new long-range strike capability with potential to change the course of the war. Pictures released by independent satellite firm Planet Labs showed three near-identical craters where buildings at Russia's Saki air base had been struck with apparent precision. The base, on the southwest coast of Crimea, had suffered extensive fire damage with the burnt-out husks of at least eight destroyed warplanes clearly visible."

August 12 - Reuters (Natalia Zinets): "Ukraine and Russia accused each other on Friday of risking nuclear disaster by shelling Europe's largest nuclear power plant, occupied by Russian forces in a region expected to become one of the next big front lines of the war. Western countries have called for Moscow to withdraw its troops from the Zaporizhzhia nuclear power plant, and the United Nations called… for it to be declared a demilitarised zone. But there has been no sign so far of Russia agreeing to move its troops out of the facility they seized in March."

August 8 - Reuters (Natalia Zinets and Max Hunder): "Kyiv and Moscow traded blame… for the weekend shelling of Ukraine's Zaporizhzhia nuclear complex amid international alarm that their battle for control of the plant could trigger catastrophe. Calling any attack on a nuclear plant 'suicidal', United Nations chief Antonio Guterres demanded U.N. nuclear inspectors be given access to Zaporizhzhia, the largest complex of its kind in Europe. Russia's invading forces seized the southern Ukrainian region containing Zaporizhzhia in March, when the site was struck without damage to its reactors. The area, including the city of Kherson, is now the target of a Ukrainian counter-offensive."

U.S./Russia/China Watch:

August 8 - Reuters: "Russia told the United States… it would not allow its weapons to be inspected under the START nuclear arms control treaty for the time being because of travel restrictions imposed by Washington and its allies. Inspection conditions proposed by Washington created 'unilateral advantages for the United States and effectively deprive the Russian Federation of the right to conduct inspections on American territory,' the Moscow foreign ministry said…"

August 10 - Reuters: "China, which Russia has sought as an ally since being cold-shouldered by the West over its invasion of Ukraine, has called the United States the 'main instigator' of the crisis… China's ambassador to Moscow, Zhang Hanhui, accused Washington of backing Russia into a corner with repeated expansions of the NATO defence alliance and support for forces seeking to align Ukraine with the European Union rather than Moscow. 'As the initiator and main instigator of the Ukrainian crisis, Washington, while imposing unprecedented comprehensive sanctions on Russia, continues to supply arms and military equipment to Ukraine,' Zhang was quoted as saying. 'Their ultimate goal is to exhaust and crush Russia with a protracted war and the cudgel of sanctions…' Zhang said Sino-Russian relations had entered 'the best period in history, characterised by the highest level of mutual trust, the highest degree of interaction, and the greatest strategic importance'."

August 11 - Washington Post (Ishaan Tharoor): "The autocratic leaders of China and Russia seem to be withdrawing further into the same corner. The Russian invasion of Ukraine has made Russian President Vladimir Putin persona non grata throughout Europe and isolated the Kremlin from Western capitals… China under President Xi Jinping, meanwhile, is hardly a global pariah. But its escalation of military exercises around democratic Taiwan, its expanding naval footprint throughout the Pacific and its ruthless crackdowns in Hong Kong and Xinjiang are all pushing Beijing down a geopolitical collision course with the United States and its allies. A few weeks before Russia launched its war, Putin and Xi met at a summit and declared a partnership with 'no limits.' Now, after a summer of spiraling tensions, their governments are locked in a tighter embrace, voicing their shared animus toward the American hegemon that looms over their own perceived spheres of influence."

China/Taiwan/U.S. Watch:

August 11 - Associated Press: "China… renewed its threat to attack Taiwan following almost a week of war games near the island. Taiwan has called Beijing's claims to the self-governing democracy 'wishful thinking' and launched its own military exercises. Taiwan's 'collusion with external forces to seek independence and provocation will only accelerate their own demise and push Taiwan into the abyss of disaster,' Chinese Foreign Ministry spokesperson Wang Wenbin said at a daily briefing."

August 10 - Associated Press: "China… repeated military threats against Taiwan while appearing to wind down wargames near the self-governing island it claims as its own territory that have raised tensions… to their highest level in years. The message in a lengthy policy statement issued by the Cabinet's Taiwan Affairs Office and its news department followed almost a week of missile firings and incursions into Taiwanese waters and airspace by Chinese warships and air force planes. The actions disrupted flights and shipping in a region crucial to global supply chains, prompting strong condemnation from the U.S., Japan and others… The Chinese statement said Beijing would 'work with the greatest sincerity and exert our utmost efforts to achieve peaceful reunification.' 'But we will not renounce the use of force, and we reserve the option of taking all necessary measures. This is to guard against external interference and all separatist activities,' it said."

August 6 - Reuters (David Brunnstrom): "U.S. Secretary of State Antony Blinken accused China of 'irresponsible steps' on Saturday by halting key communication channels with Washington, and said its Taiwan actions showed a move from prioritising peaceful resolution towards use of force. His comments came as Chinese aircraft and warships practised on Saturday for an attack on Taiwan…"

August 9 - Reuters (Sarah Wu and Yimou Lee): "Taiwan's foreign minister said… China was using the military drills it launched in protest against U.S. House Speaker Nancy Pelosi's visit as a game-plan to prepare for an invasion of the self-ruled island. Joseph Wu, who offered no time-table for a possible invasion of Taiwan…, said Taiwan would not be intimidated even as the drills continued with China often breaching the unofficial median line down the Taiwan Strait. 'China has used the drills in its military play-book to prepare for the invasion of Taiwan,' Wu told a news conference…"

August 9 - Financial Times (Kathrin Hille): "Taipei has warned that China could use military drills around the island to establish control over the entire Taiwan Strait, impeding international shipping and air traffic and strengthening Beijing's efforts to deny the US military access to the area. The warning from foreign minister Joseph Wu came as the People's Liberation Army said it was extending joint air and naval exercises around Taiwan on Tuesday... The live-fire drills… were originally scheduled to last for four days ending on Sunday. 'China has openly declared its ownership over the Taiwan Strait,' Wu said. 'It aims to influence the international community's freedom of navigation in the waters and airspace of the Taiwan Strait by denying the status quo that it is an international waterway.'"

August 7 - Wall Street Journal (Alastair Gale and Nancy A. Youssef): "Four days of exercises around Taiwan offered a rare glimpse into China's progress toward its goal of prevailing in any major conflict, including against the U.S. in a potential war over the island. What the drills demonstrated, military analysts said, is the progress China has made coordinating different branches of its armed services, a hallmark of a modern military. China appeared to lack the military assets to impose a total blockade on Taiwan, they said, but Beijing showed it had enough maritime firepower to severely disrupt the island's economy. The exercises were seen as a particular success for the People's Liberation Army Eastern Theater Command, the main regional command responsible for Taiwan that was created in a military reorganization in 2016 to improve the ability to conduct joint operations…"

August 7 - New York Times (Chris Buckley, Amy Chang Chien and John Liu): "China's 72-hour spectacle of missiles, warships and jet fighters swarming Taiwan was designed to create a firewall - a blazing, made-for-television warning against what Beijing sees as increasingly stubborn defiance, backed by Washington, of its claims to the island. 'We're maintaining a high state of alert, ready for battle at all times, able to fight at any time,' declared Zu Guanghong, a Chinese navy captain in a People's Liberation Army video about the exercises… 'We have the determination and ability to mount a painful direct attack against any invaders who would wreck unification of the motherland, and would show no mercy.'"

August 10 - Reuters (Yew Lun Tian): "China has withdrawn a promise not to send troops or administrators to Taiwan if it takes control of the island, an official document showed…, signalling a decision by President Xi Jinping to grant less autonomy than previously offered. China's white paper on its position on self-ruled Taiwan follows days of unprecedented Chinese military exercises near the island…"

Economic War/Iron Curtain Watch:

August 7 - Financial Times (Laura Pitel, Amy Kazmin, Alice Hancock and James Politi): "Western capitals are increasingly alarmed at the deepening ties between Turkey's president Recep Tayyip Erdoğan and Vladimir Putin, raising the prospect of punitive retaliation against the Nato member if it helps Russia avoid sanctions. Six western officials told the Financial Times they were concerned about the pledge made by Turkish and Russian leaders to expand co-operation on trade and energy after the two had a four-hour meeting... One EU official said the 27-member bloc was monitoring Turkish-Russian relations 'more and more closely'. A senior western official also suggested countries could call on their companies and banks to pull out of Turkey if Erdoğan follows through with the intentions he outlined on Friday - a highly unusual threat against a fellow Nato member state that could severely damage its already fragile $800bn economy."

August 6 - Bloomberg (Tugce Ozsoy): "Five Turkish banks have adopted Russia's Mir payments system, Turkey's President Recep Tayyip Erdogan said on his return from talks with President Vladimir Putin in the Black Sea resort of Sochi. There are serious developments regarding the work that Turkish banks are doing on Russia's Mir card, Turkey's state-run Anadolu Agency cited Erdogan as saying... That's a relief for both Russian tourists and Turkey, he told reporters. Payment in rubles will be a source of financial support for both Russia and Turkey, he said, adding the central bank governors of the two countries also met during the visit."

Inflation Watch:

August 10 - Bloomberg (Olivia Rockeman): "US inflation decelerated in July by more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively hiking interest rates. The consumer price index increased 8.5% from a year earlier, cooling from the 9.1% June advance that was the largest in four decades… Prices were unchanged from the prior month. A decline in gasoline offset increases in food and shelter costs. So-called core CPI, which strips out the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago."

August 10 - Bloomberg (Molly Smith): "Food prices in the US soared in July, keeping the cost of living painfully high even as lower gasoline costs offered some relief to consumers. Overall food prices climbed 10.9% from a year earlier, the biggest increase since 1979… Several essentials like cereal and certain dairy products posted record year-over-year rises. While the headline rate of inflation declined from the previous month, largely due to a drop in energy prices, the surging cost of food -- as well as rising rents -- continues to pinch consumers, especially low-income Americans who spend a bigger chunk of their household budgets on groceries."

August 10 - Bloomberg (Martine Paris): "Inflation is wreaking havoc on breakfast, with egg prices at grocery stores soaring a whopping 47% in July over last year, according to retail analytics firm Information Resources Inc… Although the Consumer Price Index came in lower than expected at 8.5% in July, inflation is continuing to hit grocery shopping. The food-at-home category soared to 13.1 % over the last year, the largest increase since the period ending March 1979… Overall, food prices are up 14% year over year through July, according to the company."

August 11 - Financial Times (Reade Pickert): "A key measure of US producer prices unexpectedly fell in July for the first time in more than two years, largely reflecting a drop in energy costs and representing a welcome moderation in inflationary pressures. The producer price index for final demand decreased 0.5% from a month earlier and rose 9.8% from a year ago… The pullback was due to a decline in the costs of goods, though services prices only edged up."

August 9 - Reuters: "U.S. small business confidence edged up in July as fuel prices eased and job openings became marginally easier to fill, but inflation worries intensified, a survey showed… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose four-tenths of a point last month to 89.9, the first monthly increase since December. Still, the level remains well below the 48-year average of 98. Some 37% of owners reported that inflation was their most important problem, the highest level since the fourth quarter of 1979."

August 8 - CNBC (Jeff Cox): "The consumer outlook for inflation decreased significantly in July amid a sharp drop in gas prices and a growing belief that the rapid surges in food and housing also would ebb in the future. The New York Federal Reserve's monthly Survey of Consumer Expectations showed that respondents expect inflation to run at a 6.2% pace over the next year and a 3.2% rate for the next three years. While those numbers are still very high by historical standards, they mark a big drop-off from the respective 6.8% and 3.6% results from the June survey."

August 10 - Bloomberg (Maria Paula Mijares Torres and Jonnelle Marte): "Rental costs in the US are soaring at the fastest pace in more than three decades, surpassing a median of $2,000 a month for the first time ever and pushing rents above pre-pandemic levels in most major cities. Increases are particularly steep in metropolitan areas that saw large influxes of new residents during the pandemic, but the rental market is sparing almost nowhere and no one. While the affordability crisis in the US is not new, it has snowballed over the past year as people returned to big cities and some areas short on housing supply saw a boom of new residents. Demand for rentals has soared, with many would-be homebuyers backing out of the market after mortgage rates jumped this year as a result of the Federal Reserve's aggressive interest-rate hikes."

August 9 - Reuters (Tom Polansek): "U.S. consumers grappling with soaring inflation face more pain from high beef prices as ranchers are reducing their cattle herds due to drought and lofty feed costs, a decision that will tighten livestock supplies for years, economists said. The decline in cattle numbers, combined with stiff costs for other production expenses, illustrate why a recent fall in grain prices to levels not seen since Russia's invasion of major corn and wheat exporter Ukraine may not immediately translate into lower food prices at the grocery store."

August 10 - Bloomberg (David Shepardson): "Surging inflation will prompt the U.S. Postal Service to seek higher prices for stamps and other services in January, just five months after its recent hike, as it continues to lose money. USPS raised prices in July by about 6.5%, including increasing the price of a first-class stamp from 58 cents to 60 cents after hiking stamps by 3 cents in August 2021. U.S. Postmaster General Louis DeJoy said… inflation would cause costs to exceed its 2022 budget plan 'by well over $1 billion.'"

Biden Administration Watch:

August 7 - Reuters (Richard Cowan, David Morgan and Rose Horowitch): "The U.S. Senate… passed a sweeping $430 billion bill intended to fight climate change, lower drug prices and raise some corporate taxes, a major victory for President Joe Biden that Democrats hope will aid their chances of keeping control of Congress in this year's elections. After a marathon, 27-hour weekend session of debate and Republican efforts to derail the package, the Senate approved the legislation known as the Inflation Reduction Act by a 51-50 party line vote Vice President Kamala Harris cast the tie-breaking ballot… Schumer said the legislation contains 'the boldest clean energy package in American history' to fight climate change while reducing consumer costs for energy and some medicines."

August 10 - New York Times (David E. Sanger, Eric Schmitt and Ben Dooley): "The Biden administration is vowing to continue sailing warships through the Taiwan Strait and to conduct air operations in the region in response to Chinese military drills that U.S. officials say are evolving into a long-term strategy of heightened military pressure on the island. Administration officials said they did not want to escalate the tense confrontation… But… American and Taiwanese officials made clear they now believe China used Ms. Pelosi's visit as a pretext to step up its operations to intimidate Taiwan for months or years to come, and perhaps speed the timetable of its plans to establish control over the island's 23 million people, much as it did in Hong Kong."

August 11 - Reuters (Jeff Mason and David Lawder): "China's war games around Taiwan have led Biden administration officials to recalibrate their thinking on whether to scrap some tariffs or potentially impose others on Beijing, setting those options aside for now, according to sources familiar with the deliberations. President Joe Biden's team has been wrestling for months with various ways to ease the costs of duties imposed on Chinese imports during predecessor Donald Trump's tenure, as it tries to tamp down skyrocketing inflation."

Federal Reserve Watch:

August 10 - Bloomberg (Matthew Boesler): "Two Federal Reserve officials responded to softening inflation data by saying it doesn't change the US central bank's path toward even higher interest rates this year and next. Minneapolis Fed President Neel Kashkari, who prior to the pandemic was the central bank's most dovish policy maker, said… he wants the Fed's benchmark interest rate at 3.9% by the end of this year and at 4.4% by the end of 2023. 'I haven't seen anything that changes that,' Kashkari said, responding to a question about a Labor Department report… that showed consumer prices rose 8.5% from a year earlier in July."

August 9 - Bloomberg (Liz McCormick and Jonnelle Marte): "The Federal Reserve is penciling in at least another couple of years of running down its bond portfolio of around $8 trillion. But observers are increasingly predicting it will end a whole lot sooner than that. Even before the Fed's balance-sheet runoff plan, known as quantitative tightening, gets up to full speed in September -- at a monthly clip of up to $95 billion, or over $1.1 trillion a year -- two camps of economists and strategists have emerged predicting an early end, at some point in 2023. One group says the central bank will have to abandon QT as early as next year, when it turns to cutting rates to combat an economic downturn -- unwinding some of the aggressive monetary tightening now under way… A second group sees an early end for reasons not unlike those that drove the Fed to halt its last effort at QT, in 2019: essentially, taking too much liquidity out of the US banking system."

U.S. Bubble Watch:

August 9 - Reuters: "U.S. worker productivity in the second quarter fell at its steepest pace on an annual basis since 1948 when the Labor Department began tracking it, while growth in unit labor costs accelerated, suggesting strong wage pressures will continue to help keep inflation elevated. Nonfarm productivity, which measures hourly output per worker, fell at a 2.5% pace from a year ago... It also declined sharply in the second quarter at a 4.6% annualized rate, after having declined by an upwardly revised 7.4% in the first three months of the year."

August 11 - Reuters (Lindsay Dunsmuir): "The number of Americans filing new claims for unemployment benefits rose for the second straight week, indicating further softening in the labor market despite still tight conditions as the Federal Reserve tries to slow demand to help tame inflation. Initial claims for state unemployment benefits rose 14,000 to a seasonally adjusted 262,000 for the week ended Aug. 6…"

August 7 - Bloomberg (Ros Krasny): "About 69% of Americans think the US economy is getting worse, the highest since 2008, according to an ABC News/Ipsos poll. Three months before mid-term Congressional elections, only 37% said they approve of how President Joe Biden is handling the economic recovery, unchanged from June."

August 11 - Wall Street Journal (Sarah O'Brien): "More than a third of U.S. adults are dipping into their savings accounts to help them afford higher prices... In the face of high inflation, 36% of people say they have withdrawn an average of $617 from their savings during the first six months of this year, according to New York Life's latest Wealth Watch survey. In that same time period, the U.S. personal savings rate fell to 5.1% in June from 8.7% in December 2021, according to… the Federal Reserve Bank of St. Louis."

August 8 - Bloomberg (Carmen Arroyo): "Consumers have become the most pessimistic about housing since 2011, when home prices bottomed in the wake of the global financial crisis... Fannie Mae's Home Purchase Sentiment Index dropped to the lowest level in over a decade, as consumers expressed pessimism about home buying prospects. The index, which reflects consumers' views on the housing market, has fallen from roughly 76 to 63 year-over-year… Sentiment hasn't been as bad since the post-crisis era, when home values plunged as borrowers struggled to make payments, leaving millions facing foreclosure."

August 9 - Bloomberg (Natalie Wong and Prashant Gopal): "The supply of homes for sale across the US grew at a record rate last month, another sign that higher mortgage costs are cooling down the housing market. The number of active listings nationwide jumped 31% from a year earlier, a record-high increase for a third straight month, according to.. Realtor.com… 'With inventories increasing, buyers will have more negotiating power,' said Danielle Hale, chief economist for Realtor.com. 'The two years of a market heavily tipped in favor of sellers appears to be in the rearview mirror.'"

August 9 - Wall Street Journal (Sarah Chaney Cambon): "Workers' wages are rising briskly, a factor contributing to four-decade high U.S. inflation. Average hourly earnings grew 5.2% in July from a year earlier, and annual wage gains have exceeded 5% each month this year…The rapid earnings growth adds to other evidence that employers are continuing to increase pay as they try to find and keep workers in a tight job market. Wage gains help consumers spend money in the face of higher prices for restaurant meals, groceries and lodging. But many companies are having to pay more for labor at the same time that other business expenses are rising, including for transportation and logistics, said Omair Sharif, head of forecasting firm Inflation Insights LLC. 'The entire cost structure of operating a business has increased, including wages,' Mr. Sharif said. 'That's allowing firms in a high-inflation environment to pass those costs on to consumers.'"

August 8 - Reuters (Timothy Aeppel): "Business investment appears to be an early victim of red-hot U.S. inflation and rising interest rates. Nonresidential fixed investment… slipped 0.1% on an annualized basis in the second quarter. This acted as a drag on gross domestic product, the broadest measure of U.S. economic output. It also ended a seven-quarter run of outsized additions to GDP that on average were more than double the category's historic contributions to growth. The cutbacks hit every industry except mining and drilling."

August 11 - Financial Times (Andrzej Rzońca): "Zombie companies - businesses whose operating profits are persistently lower than their interest payments - have something in common with high global inflation. Surprisingly, the root cause of both is the Federal Reserve. How did we find ourselves in a situation where, according to a 2021 report, roughly 10% of public companies in the US are zombies? The 2008 financial crisis scared policymakers. US and European central banks introduced unconventional monetary policies - ultra-low interest rates and large-scale asset purchasing programmes. When Lawrence Summers, former US Treasury secretary, claimed that the 'natural' interest rate was negative, and thus conventional policies were ineffective, this was an excuse for monetary policymakers to keep their feet on the accelerator pedal. Focused on boosting demand, policymakers forgot about supply and started zombifying the economy."

China Watch:

August 10 - Bloomberg: "The People's Bank of China said it will safeguard the economy against inflation threats, pledging to avoid massive stimulus and excessive money printing to spur growth. The central bank will both support economic growth and ensure stable prices, the PBOC said in its quarterly monetary policy report... At the same time, it will provide stronger and higher-quality support to the real economy, it said. 'Structural inflation pressure may increase in the short term, and the pressure of imported inflation remains,' the PBOC said. 'We can't lower our guards easily.'"

August 9 - Bloomberg: "China's consumer inflation accelerated in July to the highest level in two years, largely due to surging pork costs, while weak consumer demand kept overall price pressures in check. The consumer price index rose 2.7% last month from a year earlier as pork prices surged 20.2%...The pickup in CPI was lower than the 2.9% median estimate… and compares with 2.5% growth in June. Producer price inflation, meanwhile, slowed to 4.2% in July from 6.1% in June as commodity prices weakened."

August 10 - Bloomberg (Ye Xie): "China has been one oasis in a world confronted with soaring inflation. But in its quarterly monetary report, the People's Bank of China sounded the alarm about inflation risks. That suggests that the bulk of the policy easing may be in the rearview mirror, leaving the leveraged bond market vulnerable to a less-supportive liquidity environment."

August 7 - Reuters (Ellen Zhang and Ryan Woo): "China's export growth unexpectedly picked up speed in July, offering an encouraging boost to the economy as its struggles to recover from a COVID-induced slump… Exports rose 18.0% in July from a year earlier, the fastest pace this year…"

August 11 - Reuters (Clare Jim and Xie Yu): "A group of property developers in the eastern Chinese city of Hefei urged the local government this month to crack down on what they described as 'malicious protests' by homebuyers, according to a joint letter... The letter is one of the first known efforts by developers joining together to push back against a spreading revolt by homebuyers, who have threatened to stop paying mortgages on hundreds of unfinished housing projects."

August 11 - Reuters (Liangping Gao, Ryan Woo and Clare Jim): "A Chinese property think tank owned by KE Holdings apologized… for sparking a 'heated public discussion' with its report on rising housing vacancy rates in China, and said its assessment may not be sufficiently accurate. The apology comes at a time when policymakers are urging banks to extend loans to property firms and local governments are relaxing downpayment rules for home purchases as sales and confidence sag amid weak macroeconomic conditions… The report said the average housing vacancy rate in 28 major cities is higher than in the United States, Canada, France, Australia and Britain, with a 7% vacancy rate in tier-one cities including Beijing, and 12% in tier-two cities."

August 7 - Asia Markets (Henry Chia): "In the wake of some of the most challenging economic conditions seen in decades, China's middle class is demonstrating a level of defiance that has arguably never been seen in the country's modern history. The outside world first became aware of rumblings when China Evergrande's inability to meet its debt obligations, totalling over $300 billion, began to make headlines throughout 2021. Since, China's second-largest property developer has been on a downwards spiral - defaulting on its offshore bonds, selling off assets, and for the most part of 2022 its Hong Kong-listed shares have been suspended pending a restructuring proposal, while projects have stalled. But it's now becoming clear that China Evergrande is just the headline act in what is Chinese debt horror story that runs far deeper."

August 9 - Bloomberg: "Chinese banks' issuance of securities backed by home mortgages has plunged, as the crisis in the nation's property sector drags down a once-popular and relatively safe investment tool. Sales of residential mortgage-backed securities have fallen 92% so far this year to 24.5 billion yuan ($3.63bn)… There's been no RMBS issuance since the end of February, the longest dry spell since 2015."

August 10 - Bloomberg: "Covid-19 cases in China jumped to a three-month high, with almost half of the 1,993 infections reported nationally for Wednesday coming from the widely shuttered Hainan island where tourists had thronged in search of respite. Sanya, a beach resort town in Hainan, saw infections triple in a day to 1,254 for Wednesday. It's the first time the daily number of cases in any Chinese province or city has exceeded 1,000 since May, when an outbreak shut down Shanghai for two months."

August 9 - Bloomberg: "China's plans to accelerate its world-leading expansion of solar and wind power are facing a major hurdle as floods, droughts and food-supply issues present authorities with a reality check about how much precious farmland the nation can afford to lose. Solar and wind farms have been supercharged in the past two years since Chinese President Xi Jinping announced a 2060 target for the nation to be carbon neutral, creating an incentive for local governments to allow more large-scale renewable energy projects. But the pandemic and recent bouts of extreme weather have shown how susceptible the nation is to disruptions in food supply. Good arable land is relatively limited considering the appetite of the nation's 1.4 billion people, and large tracts of some of the most fertile soil in the heavily populated eastern and central provinces have already been swallowed up by urban growth."

August 9 - Bloomberg: "China's top auditor is conducting a review of the $3 trillion trust industry, paving the way for a potential overhaul of a key shadow banking sector where losses on property loans are mounting. In an unscheduled move, the National Audit Office -- which previously led an examination of bank exposures to Jack Ma's Ant Group Co. -- has for the past month been inspecting the books of at least 20 trust firms, including the top five, to gauge the risks they pose to financial stability…. The firms are being asked to report on their risky loans to developers and any plans to dispose of them…"

August 8 - Financial Times (Tom Mitchell): "Xi Jinping finally has something that eluded him for almost a decade: a trusted confidante at the top of China's police ministry. Wang Xiaohong's appointment as public security minister in June marked another breakthrough for Xi in his relentless consolidation of power since being appointed head of the Chinese Communist party and its Central Military Commission in 2012. Over the past week, China's president has wielded his authority over the latter to historic effect, launching unprecedented military exercises that have irrevocably altered the status quo in the Taiwan Strait. He is expected to retain both those posts for an unprecedented third term in power at a party congress this year, followed by his reappointment as state president at next year's annual session of China's parliament."

Central Banker Watch:

August 7 - Financial Times (Nikou Asgari): "The European Central Bank is using its pandemic-era bond-buying programme to shield highly indebted eurozone countries from the effects of its decision to unwind stimulus programmes in its bid to fight inflation. The central bank concluded net purchases under its pandemic emergency purchase programme in March, but is focusing reinvestments of maturing bonds on the bloc's more financially fragile members. Between June and July, the ECB injected €17bn into Italian, Spanish and Greek markets, while allowing its portfolio of German, Dutch and French debt to fall by €18bn… 'The deviation now is very large,' said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management... 'It looks like the ECB has been very active by reinvesting almost all the proceeds from core countries into peripheral countries.'"

Global Bubble and Instability Watch:

August 7 - Wall Street Journal (Tom Fairless and Megumi Fujikawa): "From Berlin to Tokyo to Wellington, economic growth is slowing or turning negative across advanced economies, yet labor markets remain historically tight. Talk of a 'jobful recession' has centered on the U.S., where payrolls grew by more than half a million in July and the unemployment rate declined to its pre-pandemic low of 3.5% even as economic output contracted in the three months through June. The same conundrum crops up around the world. In Germany, growth stalled in the three months through June… But the unemployment rate remains close to a 40-year low, and almost half of companies say worker shortages are hampering production. The jobless rate in the wider eurozone is at a record low. New Zealand's economy shrank in the first three months of the year, but its jobless rate, at 3.3%, has stayed close to a multidecade low."

August 10 - Reuters (Lucy Craymer): "New Zealand house prices fell in July with the median price recording its first annual fall since 2011, the Real Estate Institute of New Zealand (REINZ) said… The seasonally adjusted median nationwide house value in July fell 2.8% compared with the previous month and was down 1.6% year-on-year... The unadjusted median house price was down 1.8% on year."

Europe Watch:

August 8 - Bloomberg (William Mathis): "German and French power prices hit record highs as a heat wave bolstered demand, putting pressure on energy supplies ahead of the critical winter period. While demand and prices typically drop off in the summer, this year a decline in Russian gas supplies during the key stockpiling season -- as well as reduced power output in France -- has underpinned a blistering rally."

August 10 - Associated Press (Daniel Niemann and Frank Jordans): "Water levels on the Rhine River could reach a critically low point in the coming days, German officials said…, making it increasingly difficult to transport goods - including coal and gasoline - as drought and an energy crisis grip Europe. Weeks of dry weather have turned several of Europe's major waterways into trickles, posing a headache for German factories and power plants that rely on deliveries by ship and making an economic slowdown ever more likely. Transporting goods by inland waterways is more important in Germany than in many other Western European countries, according to Capital Economics. 'This is particularly the case for the Rhine, whose nautical bottleneck at Kaub has very low water levels but which remains navigable for ships with small drafts,' said Tim Alexandrin, a spokesman for Germany's Transport Ministry."

August 10 - Bloomberg (William Wilkes, Jack Wittels and Irina Vilcu): "In the midst of an arid summer that set heat records across Europe, the continent's rivers are evaporating. The Rhine - a pillar of the German, Dutch and Swiss economies for centuries - is set to become virtually impassable at a key waypoint later this week, stymieing vast flows of diesel and coal. The Danube, which snakes its way 1,800 miles through central Europe to the Black Sea, is gummed up too, hampering grain and other trade. Across Europe, transport is just one of the elements of river-based commerce that's been upended by climate change. France's power crisis has worsened because the Rhone and Garonne are too warm to effectively cool nuclear reactors, and Italy's Po is too low to water rice fields and sustain clams for 'pasta alle vongole.'"

August 11 - Reuters (Manuel Ausloos and Stephane Mahe): "European nations sent firefighting teams to help France tackle a 'monster' wildfire on Thursday, while forest blazes also raged in Spain and Portugal and the head of the European Space Agency urged immediate action to combat climate change. More than 1,000 firefighters, backed by water-bombing planes, battled for a third day a fire that has forced thousands from their homes and scorched thousands of hectares of forest in France's southwestern Gironde region."

August 11 - Bloomberg (Priscila Azevedo Rocha): "England is officially in a drought across vast swathes of the country, the government's Environment Agency has announced, as another heat wave intensifies and water companies impose restrictions on household use."

EM Crisis Watch:

August 9 - Reuters (Brendan O'Boyle and Gabriel Araujo): "Mexican annual inflation reached its highest level in nearly 22 years in July…, rising faster than expected and fueling expectations that the central bank will raise the country's benchmark interest later this week. Inflation rose to 8.15% in the year through July from 7.99% in June…"

August 10 - Bloomberg (Sydney Maki and Maria Elena Vizcaino): "Sergio Camacho, the chief executive of Unifin Financiera SAB de CV, was sick of the questions about the financial health of his firm, the largest shadow lender in Mexico, and he was out of patience. Unifin was doing well, he blurted out, and would grow its business and thrive. 'The market has been irrational,' Camacho barked at one investor after cutting him off during the firm's earnings call last month. 'No matter what I do, they are not reacting to the fundamentals of the company.' Just 17 days later, the equipment-leasing firm halted payments on its $2.4 billion in foreign bonds and told creditors it would initiate talks to restructure the terms of the debt."

Social, Political, Environmental, Cybersecurity Instability Watch:

August 8 - Associated Press (Kathleen Ronayne): "Charlie Hamilton hasn't irrigated his vineyards with water from the Sacramento River since early May, even though it flows just yards from his crop. Nearby to the south, the industrial Bay Area city of Antioch has supplied its people with water from the San Joaquin River for just 32 days this year… They may be close by, but these two rivers, central arms of California's water system, have become too salty to use in some places as the state's punishing drought drags on. In dry winters…, less fresh water flows down from the mountains into the Sacramento River... That allows saltier water from Pacific Ocean tides to push farther into the state's main water hub, known as the Delta. It helps supply water to two-thirds of the state's 39 million people and to farms that grow fruits and vegetables for the whole nation… A drought that scientists say is part of the U.S. West's driest period in 1,200 years plus sea level rise are exposing the fragility of that system, forcing state water managers, cities, and farmers to look for new ways to stabilize their supply of fresh water. The Delta's challenges offer a harbinger of the risks to come for critical water supplies elsewhere in the nation amid a changing climate."

August 11 - Reuters (Daniel Trotta): "California Governor Gavin Newsom unveiled a new water strategy… that plans for a future with 10% less water and shifts the emphasis from conservation to capturing more water that otherwise flows out to sea. Climate change has contributed to more severe drought but has also set the stage for more intense flooding when rain does fall… 'The hots are getting a lot hotter, the dries are getting a lot drier and ... the wets are getting wetter,' Newsom said in announcing the plan at a desalination plant under construction in Antioch… that will turn brackish water into drinking water."

August 7 - Wall Street Journal (Yuriko Schumacher and Elissa Miolene): "Across the world, food prices are rising. But because households in lower-income countries typically spend a higher percentage of their income on food, the pain in those regions is often more extreme. Many agricultural prices soared in the run-up to Russia's invasion of Ukraine, an agricultural heavyweight. Prices have fallen more recently, but lower costs won't show up in grocery stores or market stalls for months. By 2030, the Food and Agriculture Organization of the United Nations estimates that nearly 670 million people would be facing hunger-8% of the world's population."

August 10 - Reuters (Steve Gorman): "Antarctica's coastal glaciers are shedding icebergs more rapidly than nature can replenish the crumbling ice, doubling previous estimates of losses from the world's largest ice sheet over the past 25 years, a satellite analysis showed... The first-of-its-kind study, led by researchers at NASA's Jet Propulsion Laboratory (JPL) near Los Angeles and published in the journal Nature, raises new concern about how fast climate change is weakening Antarctica's floating ice shelves and accelerating the rise of global sea levels."

Levered Speculation Watch:

August 8 - Bloomberg (Min Jeong Lee and Takahiko Hyuga): "SoftBank Group Corp.'s Masayoshi Son said he plans widespread cost cutting at his Japanese conglomerate and its Vision Fund investment arm after a record $23.4 billion loss on plunging portfolio valuations and foreign currency losses. Shares dropped. The Tokyo-based company lost the vast majority of that money -- $17.3 billion -- in the Vision Fund, as it marked down the value of holdings such as Coupang Inc., SenseTime Group Ltd. and DoorDash Inc. SoftBank also reported a $6.1 billion foreign exchange loss because of the weaker yen."

August 7 - Bloomberg (Ruth Carson and Chikako Mogi): "The juiciest profits from betting against the yen -- one of the hottest macro trades of 2022 -- are a thing of the past, a growing cohort of strategists say. Three key pillars of the sell-the-yen trade -- a widening US-Japan interest-rate gap, soaring oil prices and the loss of the currency's haven status -- are crumbling as growing recessionary fears keep a cap on yields, put pressure on crude and send investors back into the arms of traditional safe assets. Dollar-yen, which soared 38% from a March 2020 trough to mid-July this year, is in retreat."

Geopolitical Watch:

August 6 - Financial Times (Demetri Sevastopulo): "Ahead of Nancy Pelosi's visit to Taiwan this week, there was concern from the White House to Tokyo that the US House Speaker's trip would spark a crisis at a time when relations with China were already in a dangerous state. Beijing's aggressive response has crystallised the high stakes for US allies and partners in the region. Whatever fears many had about Pelosi's trip, the dramatic missile launches and live-fire drills have created a negative outcome for Beijing, by galvanising an increasingly united chorus of critics. Before the Chinese military launched exercises on an unprecedented scale this week, the G7 had warned Beijing 'not to unilaterally change the status quo by force'. Speaking alongside Pelosi in Tokyo…, Japanese prime minister Fumio Kishida said the drills were a 'grave problem' after five missiles, at least one of which flew over Taipei, landed in Japan's economic exclusive zone."

August 8 - Reuters (Chen Lin): "Singapore Prime Minister Lee Hsien Loong… warned of the scope for miscalculations over tensions in the Taiwan Strait, which he said were unlikely to ease soon amid deep suspicion and limited engagement between the United States and China. In a televised address…, Lee said Singapore would be buffeted by that intense rivalry and tension in the region, which should prepare for a future less peaceful and stable than now. 'Around us, a storm is gathering. U.S.-China relations are worsening, with intractable issues, deep suspicions, and limited engagement,' Lee said."

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I'm at about 30 years persevering as a “professional bear.” My lucky break came in late-1989, when I was hired by Gordon Ringoen to be the trader for his short-biased hedge fund in San Francisco. Working as a short-side trader, analyst and portfolio manager during the great nineties bull market – for one of the most brilliant individuals I’ve met – was an exciting, demanding and, in the end, a grueling and absolutely invaluable learning experience. Later in the nineties, I had stints at Fleckenstein Capital and East Shore Partners. In January 1999, I began my 16 year run with PrudentBear (that concluded at the end of 2014), working as strategist and portfolio manager with David Tice in Dallas until the bear funds were sold in December 2008. In the early-nineties, I became an impassioned reader of The Richebacher Letter. The great Dr. Richebacher opened my eyes to Austrian economics and solidified my lifetime passion for economics and macro analysis. I had the good fortune to assist Dr. Richebacher with his publication from 1996 through 2001. Prior to my work in investments, I worked as a treasury analyst at Toyota’s U.S. headquarters. It was working at Toyota during the Japanese Bubble period and the 1987 stock market crash where I first recognized my love for macro analysis. Fresh out of college I worked as a Price Waterhouse CPA. I graduated summa cum laude from the University of Oregon (Accounting and Finance majors, 1984) and later received an MBA from Indiana University (1989). By late in the nineties, I was convinced that momentous developments were unfolding in finance, the markets and policymaking that were going unrecognized by conventional analysis and the media. I was inspired to start my blog, which became the Credit Bubble Bulletin, by the desire to shed light on these developments. I believe there is great value in contemporaneous analysis, and I’ll point to Benjamin Anderson’s brilliant writings in the “Chase Economic Bulletin” during the Roaring Twenties and Great Depression era. Ben Bernanke has referred to understanding the forces leading up to the Great Depression as the “Holy Grail of Economics.” I believe “The Grail” will instead be discovered through knowledge and understanding of the current extraordinary global Bubble period.

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