Saturday, January 25, 2020
Weekly Commentary:
Coronavirus and the
End of Boom and Bust
by Doug Noland
full column here:
Portions that
interested me
are below
Ye Editor
For the week ending
January 24, 2020
S&P500 declined 1.0% (up 2.0% y-t-d)
Dow fell 1.2% (up 1.6%)
Utilities jumped 2.5% (up 5.9%)
Transports slumped 1.9% (up 1.5%)
S&P 400 Midcaps fell 1.5% (up 0.1%)
Small cap Russell 2000 dropped 2.2% (down 0.4%)
Nasdaq100 slipped 0.4% (up 4.7%)
Biotechs sank 4.3% (down 2.2%).
With bullion jumping $14,
the HUI gold index rallied 3.4%
(down 2.2%).
U.K.'s FTSE fell 1.2% (up 0.6%).
Japan's Nikkei declined 0.9% (up 0.7% y-t-d).
France's CAC40 lost 1.3% (up 0.8%).
German DAX added 0.4% (up 2.5%).
Spain's IBEX 35 fell 1.2% (up 0.1%).
Italy's FTSE MIB declined 0.7% (up 2.0%)
Brazil's Bovespa was little changed (up 2.4%)
Mexico's Bolsa dropped 1.5% (up 3.7%).
South Korea's Kospi slipped 0.2% (up 2.2%).
India's Sensex declined 0.8% (up 0.9%).
China's Shanghai sank 3.2% (down 2.4%).
Turkey's Istanbul National 100 added 0.5% (up 6.7%).
Russia's MICEX fell 1.6% (up 3.3%).
US BONDS & MORTGAGES
Ten-year Treasury bond yields
sank 14 bps to 1.685% (down 23bps).
Thirty-year Treasury bond yields
fell 15 bps to 2.13% (down 26bps).
Freddie Mac 30-year fixed mortgage rates
fell five bps to 3.60% (down 85bps y-o-y).
Fifteen-year rates
declined five bps to 3.04% (down 84bps).
Five-year hybrid ARM rates
sank 11 bps to 3.28% (down 62bps).
Jumbo mortgage 30-year fixed rates
down four bps to 3.95% (down 51bps).
Federal Reserve Credit
last week declined $18.5bn to $4.114
Over the past year,
Fed Credit expanded $103.5bn, or 2.6%.
M2 (narrow) "money" supply
surged $46.3bn last week
to a record $15.397 TN.
"Narrow money" surged $969 TN,
or 6.7%, over the past year.
Commodities Watch:
Bloomberg Commodities Index sank 3.1% (down 4.4% y-t-d).
Spot Gold rallied 0.9% to $1,572 (up 3.5%).
Silver added 0.2% to $18.113 (up 1.1%).
WTI crude sank $4.35 to $54.19 (down 11%).
Gasoline dropped 7.6% (down 10%)
Natural Gas fell 5.8% (down 14%).
Copper sank 5.7% (down 4%).
Wheat increased 0.5% (up 3%).
Corn declined 0.5% (unchanged).
NEWS FROM LAST WEEK
January 22 – Reuters:
“U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018. …Existing home sales increased 3.6% to a seasonally adjusted annual rate of 5.54 million units last month, the highest level since February 2018. November’s sales pace was unrevised at 5.35 million units… Existing home sales, which make up about 90% of U.S. home sales, surged 10.0% on a year-on-year basis in December. For all of 2019, sales were unchanged at 5.34 million units.”
January 17 – Bloomberg (Prashant Gopal):
“U.S. home prices rose the most in 19 months in December, fueled by low mortgage rates and the tightest supply on record, according to Redfin. Prices jumped 6.9% from a year earlier to a median of $312,500, the biggest annual increase since May 2018… Values fell in just two of the 85 largest metropolitan areas Redfin tracks: New York, with a 2.4% decline, and San Francisco, down 1.7%... Some of the most-affordable cities in Redfin’s study had the biggest price gains, led by Memphis, Tennessee, with a 16% jump. The inventory of available homes for sale nationwide tumbled 15% from a year earlier. There were fewer properties for sale last month than at any time since at least December 2012…”
January 21 – CNBC (Diana Olick):
“Homebuilding took a sharp turn higher to end 2019, but it is far from enough to satisfy the current demand.
The U.S. housing market is short nearly 4 million homes, according to new analysis from realtor.com. Analyzing U.S. census data, the report showed that the 5.9 million single-family homes built between 2012 and 2019 do not offset the 9.8 million new households formed during that time. Even with an above average pace of construction, it would take builders between four and five years to get back to a balanced market. The shortfall today can be blamed on the epic housing crash of more than a decade ago… With loans available to even the riskiest buyers, builders responded by putting up 1.7 million single-family homes at the peak of the construction boom in 2005, according to the U.S. census. That was about 5 million more than the 20-year average.”
January 21 – CNBC (Yun Li):
“Billionaire investor Paul Tudor Jones said the stock market today is reminiscent of the latter stages of the bull market in 1999 that saw a giant surge that ultimately ended with the popping of the dot-com bubble. ‘We are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination,’ Jones said… ‘It reminds me a lot of the early ’99. In early ’99 we had 1.6% PCE, 2.3% CPI. We have the exact same metrics today.’ ‘The difference is fed funds were 4.75%; today it’s 1.62%. And back then we had budget surplus and we’ve got a 5% budget deficit,’ Jones added. ‘Crazy times.’”
January 24 – Bloomberg (Brian Chappatta):
“‘Worrisome.’ ‘Dangerous and aggressive.’ ‘Abuse of documentation.’ ‘Peak greed.’ These are just a few of the ways investors and analysts have described the riskiest corners of the debt markets in the past few days.
From the U.S. to Europe, whether in collateralized loan obligations or junk bonds, the feeling that the reach for yield in fixed income is fast approaching a breaking point is becoming too powerful to ignore. It’s perhaps best encapsulated by a quote in the Wall Street Journal from Luca Cazzulani, a senior fixed-income strategist at UniCredit: ‘Investors are not really interested in safety, they are quite keen on yield.’
January 21 – Associated Press (Elaine Kurtenbach):
“News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum. Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion to $50 billion in losses from reduced travel and spending.”
January 21 – Reuters (Shubham Kalia):
“The Phase 2 trade deal with China would not necessarily be a ‘big bang’ that removes all existing tariffs, U.S. Treasury Secretary Steven Mnuchin told the Wall Street Journal… ‘We may do 2A and some of the tariffs come off. We can do this sequentially along the way,’ he added. Mnuchin also warned that Italy and Britain will face U.S. tariffs if they proceed with a tax on digital companies like Alphabet Inc's Google and Facebook…”
January 23 – Reuters (Susan Heavey and Doina Chiacu):
“Treasury Secretary Steven Mnuchin said… the U.S. government cannot sustain federal deficits growing at current levels and will have to slow the rate of spending. As he acknowledged the administration of Republican President Donald Trump was considering additional tax cuts to stimulate the economy, Mnuchin blamed government spending - and Democrats in Congress - for the federal deficit.”
January 22 – Bloomberg (Alfred Cang, Javier Blas, and Isis Almeida):
“Donald Trump’s trade truce with Beijing included a pledge to buy billions of dollars of U.S. foodstuffs over the next two years, reopening one of the most important export markets for America’s farm belt.
‘The farmers are really happy with the new China Trade Deal,’ the president tweeted the day after a signing ceremony in the White House. The euphoria is fading fast. The dispute with Washington exposed Beijing’s vulnerability when it comes to food imports -- especially the soybeans needed to feed its massive herd of livestock -- and the Communist Party leadership will now do all it can to wean itself off the U.S. ‘Anytime you have a disruption in your supply chain, and especially with something as sensitive as food, they have to diversify their supply chain,’ said David MacLennan, chief executive of Cargill…”
January 21 – Reuters (Stephanie Nebehay):
“North Korea said… it was no longer bound by commitments to halt nuclear and missile testing,
blaming the United States’ failure to meet a year-end deadline for nuclear talks and ‘brutal and inhumane’ U.S. sanctions. North Korean leader Kim Jong Un set an end-December deadline for denuclearization talks with the United States and White House national security adviser Robert O’Brien said at the time the United States had opened channels of communication.”
January 21 – Wall Street Journal (Jean Eaglesham):
“A brewing battle over how to treat more than $5.5 trillion in assets on company books is pitting investors against businesses, investment advisers against academics and even banks against their own trade association. At issue is an accounting term known as goodwill, which is the premium a company pays when it buys another for more than the value of its net assets. An unprecedented five-year boom in mergers and acquisitions has added urgency over how to account for the financial concept. When Amazon.com Inc. bought Whole Foods Market Inc. for $13.7 billion in 2017, the e-commerce giant paid $9 billion more than the value of the supermarket’s stores and other net assets. That amount was added to Amazon’s books as goodwill.”
January 24 – Bloomberg (Lisa Lee and Olivia Raimonde):
“Investors, eager to snatch up higher-yielding corporate debt, are buying even the leveraged loans they shied away from for most of 2019. Some of the riskiest companies are now jumping at the opportunity to borrow. Private equity firms are piling bigger loads of debt onto buyout targets. Junk-rated corporations, including one that exited bankruptcy not long ago, are managing to cut interest rates on loans at the fastest pace since November 2017 by one measure… Money managers are looking to buy new loans now that the chances of recession seem to be falling and the Federal Reserve is evidently on hold.”
January 24 – Reuters (Judy Hua and Cate Cadell):
“China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday… as authorities rush to contain a virus that has killed 26 people and infected more than 800. The World Health Organization (WHO) has declared the new coronavirus an “emergency in China” but stopped short of declaring it of international concern.”
January 21 – Wall Street Journal (Chao Deng):
“For years, China’s small banks had a field day. They lent to overstretched borrowers, disguised loans as investment products and fueled their business with short-term funds. One chairman dined out on delicacies like sea cucumber while ramping up lending to politically connected borrowers. Some banks funneled money to their own shareholders, others hid debt with financial engineering and haven’t reported complete information for years. Regulators used a light touch, eager to keep credit flowing to areas ignored by big national lenders. The country’s years of rapid economic growth papered over shoddy practices. Now, the bill is coming due. China’s growth rate is down by more than half from its peak a decade ago, nonperforming loans have expanded and the government is reining in banking risk. China is confronting a bank cleanup that could require hundreds of billions of dollars in bailouts.”
January 20 – Reuters (Marc Jones and John Revill):
“Central banks can’t be expected to save the world from climate change, a new book by the Bank for International Settlement said…, urging instead global co-ordination ranging from government policy to financial regulation. The book, titled ‘the Green Swan’, in a play on the idea of ‘black swan’ events, warned of the potentially seismic effects of climate change on the world’s financial system.”
January 21 – Wall Street Journal (Santiago Pérez and Ryan Dube):
“A far-left governor of Argentina’s most populous province is rattling investors with plans to hold off paying back foreign debt, raising fears that his faction of the ruling Peronist coalition could push the rest of the federal government into a messy new debt default.
Axel Kicillof, Argentina’s former finance minister and new governor of Buenos Aires province, has given creditors until Wednesday night to accept a three-month delay in the repayment of $250 million in foreign debt issued by the Buenos Aires province due this coming Sunday. Prices of those bonds plunged after his announcement last week… The move comes as Argentina’s federal government prepares for negotiations with creditors to try to restructure more than $100 billion in debt that the government says it can’t repay.”
January 19 – Financial Times (Colby Smith and Robin Wigglesworth):
“The developing world’s rapidly swelling corporate debt market is an accident waiting to happen,
according to a prominent emerging-markets hedge fund that says a lack of liquidity could lead to violent price declines in a crisis. In a letter to investors…, Gramercy Funds Management wrote that the risk of sudden dislocations has been increased by a wave of bond buying by mutual funds and exchange traded funds that allow investors to pull out money quickly. ‘We are convinced that ‘liquid markets’ are not necessarily liquid,’ Robert Koenigsberger, chief investment officer, wrote… ‘The ‘perfect dislocation storm’ [is] waiting to happen.’”
January 22 – Reuters (Tetsushi Kajimoto):
“Japan’s exports fell for a 13th straight month in December, hurt by U.S.-bound shipments of cars, construction and mining machinery,
suggesting weak external demand is likely to remain a drag on the trade-reliant economy for a while longer. The 6.3% year-on-year fall in exports was worse than a 4.2% decrease expected… It followed a revised 7.9% year-on-year decline in the previous month…”
January 19 – Reuters (George Obulutsa):
“The world’s richest 2,153 people controlled more money than the poorest 4.6 billion combined in 2019,
while unpaid or underpaid work by women and girls adds three times more to the global economy each year than the technology industry, Oxfam said…”
January 22 – CNBC (Fred Imbert):
“Billionaire hedge fund manager Seth Klarman is warning this rally that has taken stocks to record highs could soon end. Klarman, who runs Baupost Group in Boston, wrote in a letter to investors that the ‘the rocket fuel that has propelled markets in 2019 will run out,’ according to a Bloomberg News report.”
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