U.S. Economic News Summary of the week ending December 9, 2022

Market Instability Watch:

December 6 – Reuters (Marc Jones): “Pension funds and other 'non-bank' financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said. The BIS, dubbed the central bank to the world's central banks, also said in its latest quarterly report that 2022's market upheaval had largely been navigated without major issues… Its main warning concerned what it described as the FX swap debt ‘blind spot’ that risked leaving policymakers in a ‘fog’. FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen before later repaying them, have a history of problems.”

December 5 – Bloomberg (Greg Ritchie): “There’s a hidden risk to the global financial system embedded in the $65 trillion of dollar debt being held by non-US institutions via currency derivatives, according to the Bank for International Settlements. In a paper with the title ‘huge, missing and growing,’ the BIS said a lack of information is making it harder for policy makers to anticipate the next financial crisis. In particular, they raised concern with the fact that the debt is going unrecorded on balance sheets because of accounting conventions on how to track derivative positions. The findings… offer a rare insight into the scale of hidden leverage. Foreign-exchange swaps were a flashpoint during the global financial crisis of 2008 and pandemic of 2020, when dollar funding stress forced central banks to step in to help struggling borrowers.”

December 4 – Financial Times (Eric Platt, Kate Duguid, Tommy Stubbington, Jonathan Wheatley and Leo Lewis): “After a decade of falling interest rates and central bank largesse, global financial markets are facing a reckoning. Soaring inflation is being met by rising interest rates, the slowing of central bank asset purchases and fiscal shocks, all of which are sucking liquidity, the ability to transact without dramatically moving prices, out of markets. Violent, sudden price moves in one market can provoke a vicious loop of margin calls and forced sales of other assets, with unpredictable results. ‘The market is so illiquid and so erratic and so volatile,’ Elaine Stokes, a portfolio manager at Loomis Sayles, said. ‘It’s trading on every impulse and we can’t keep doing that.’ Policymakers are paying close attention to market plumbing and financial stability risks, with the vice-chair of the Federal Reserve last month warning a ‘shock could lead to the amplification of vulnerabilities’.”

December 3 – New York Times (Alan Rappeport): “Developing nations are facing a catastrophic debt crisis in the coming months as rapid inflation, slowing growth, rising interest rates and a strengthening dollar coalesce into a perfect storm that could set off a wave of messy defaults and inflict economic pain on the world’s most vulnerable people. Poor countries owe, by some calculations, as much as $200 billion to wealthy nations, multilateral development banks and private creditors. Rising interest rates have increased the value of the dollar, making it harder for foreign borrowers with debt denominated in U.S. currency to repay their loans. Defaulting on a huge swath of loans would send borrowing costs for vulnerable nations even higher and could spawn financial crises…”

December 6 – Bloomberg (Alexandra Harris): “Banks are starting to have a tougher time obtaining funds in the financial system as the Federal Reserve shrinks its balance sheet and hikes interest rates, leaving analysts searching for any signs that the strains are approaching the magnitude of past credit crunches. Short-term funding rates are already rising as banks return to the markets for cash, a phenomenon that analysts anticipated, while balances at the Fed’s reverse repo facility have begun to ebb.”

Crypto Bubble Collapse Watch:

December 5 – New York Times (David Yaffe-Bellany): “Not long after several Wall Street banks collapsed in 2008, a nine-page document circulated on an obscure mailing list, proposing a new kind of financial system that wouldn’t rely on any ‘trusted third party.’ The paper was the basis for what became the cryptocurrency industry. Using sweeping, idealistic language, its adherents vowed to conduct business in a transparent and egalitarian way, rejecting the high-risk practices of a small number of powerful financial firms that caused the Great Recession. But last month, the actions of a single crypto firm — the $32 billion exchange FTX — plunged the emerging industry into its own version of a 2008-style crisis. Once considered a safe marketplace for people to trade virtual currencies, FTX filed for bankruptcy after the crypto equivalent of a bank run…”

December 8 – Bloomberg (Anders Melin, Vicky Feng and Venus Feng): “In Japan, the logo spelling F-T-X was plastered on a billboard next to the face of star baseball player Shohei Ohtani. In China, social media influencers peppered followers with sponsored posts pointing them to the platform and its frizzy-haired founder. In late October, just days before FTX’s spectacular collapse, Sam Bankman-Fried himself spoke at a Hong Kong conference organized by the local government. Like in the US, legions of people in East Asia were drawn to Bankman-Fried’s righteous nerd-of-the-people veneer. SBF had been a trader himself, some reasoned. He had the textbook look and feel of a tech genius. What’s more, signing up for FTX was much easier than many other platforms. Thousands from Seoul to Singapore are now living with the consequences of trusting him.”

December 6 – Bloomberg (Sidhartha Shukla and Emily Nicolle): “Contagion from the messy implosion of Sam Bankman-Fried’s crypto empire is spilling into the world of decentralized finance, after a hedge fund was declared in default on almost $36 million of loans. Orthogonal Trading said… it had been ‘severely impacted by the collapse of FTX and associated trading activities,’ making it unable to repay on a $10 million crypto loan. That prompted the entity that runs the lending pool on DeFi protocol Maple to issue a notice of default for all the fund’s active borrowings.”

December 3 – Reuters (Shubhendu Deshmukh and Rhea Binoy): “Crypto broker Genesis and its parent company Digital Currency Group (DCG) owe customers of the Winklevoss twins' crypto exchange Gemini $900 million, the Financial Times reported… Crypto exchange Gemini is trying to recover the funds after Genesis was wrongfooted by last month’s failure of Sam Bankman-Fried’s FTX crypto group… Venture capital company Digital Currency Group, which owns Genesis Trading and cryptocurrency asset manager Grayscale, owes $575 million to Genesis' crypto lending arm…”

December 7 – Wall Street Journal (Ben Foldy and Jean Eaglesham): “Investors bemoan the lack of disclosure in the crypto industry. But many crypto companies disclose a lot of information, and some of it is worrisome, a review of financial statements shows. The blowups of FTX and Celsius Network LLC exposed hidden risks that might have raised red flags for investors, including related-party transactions, commingled customer funds, sketchy record-keeping and questionable accounting. Some of these problems often appear in disclosures by public crypto companies, including weak systems used to keep numbers accurate. A look at 19 of the publicly traded crypto miners showed that 16 disclosed significant internal-control weaknesses in the past four years, some of which were ‘alarming,’ according to Bedrock AI, which makes software that analyzes financial filings.”

Bursting Bubble and Mania Watch:

December 7 – Reuters (Chibuike Oguh): “Blackstone Inc Chief Executive Stephen Schwarzman said… redemptions in his firm's $69 billion non-traded real estate income trust (REIT) were driven by investors roiled by market volatility rather than dissatisfaction with the fund. Blackstone shares have lost 15% of their value since Dec. 1, when the… firm disclosed it had for the first time limited redemptions from the REIT, which is marketed to high net-worth investors rather than institutional clients… Blackstone relies on the REIT for about 17% of its earnings… Schwarzman told the Goldman Sachs financial services conference that individual investors were hit particularly hard by a liquidity crunch in Asia, as the Hang Seng Index nosedived and many also had to cover positions they amassed with debt, causing financial distress.”

December 6 – Reuters (Chibuike Oguh): “Blackstone Inc said redemptions from its $50 billion non-traded business development company reached its pre-set limit for the first time but investors were still allowed to cash out on their investments. This is the first time redemption requests had reached the pre-set limit of 5% since Blackstone launched the product in January last year. It also comes after Blackstone announced… that it would curb withdrawals from its $69 billion unlisted real estate income trust (REIT) following a surge in redemption requests. Blackstone Private Credit Fund (BCRED) received withdrawal requests from its investors that were about 5% of the fund's outstanding shares in the fourth quarter that ended on Nov. 30…”

December 6 – Wall Street Journal (Konrad Putzier and Peter Grant): “Big and small investors are queuing up to pull money out of real-estate funds, the latest sign that the surge in interest rates is threatening to upend the commercial-property sector. Blackstone Inc. last week said it would limit the amount of money investors could withdraw from its $69 billion flagship real-estate fund following a surge in redemption requests. Starwood Capital Group shortly after notified investors that it was also restricting withdrawals in a $14.6 billion fund… The Blackstone and Starwood funds are the two largest nontraded real-estate investment trusts, a popular investment structure with wealthy individuals.”

December 5 – Bloomberg (David Pan and Naureen S Malik): “The digital gold rush in Texas is losing its luster as Bitcoin miners grapple with financial woes, leaving behind what some fear will be a wasteland of unfinished sites and abandoned equipment. In an effort to become a haven for crypto mining, Texas has aggressively lured miners with cheap power and favorable regulations, prompting many to take out billions in loans to buy pricey machines and build out infrastructure. However, soaring energy costs, a sharp decline in Bitcoin prices and more competition have compressed profit margins and made it difficult for miners to repay debt. Some are on the verge of bankruptcy. ‘There are just tons of assets everywhere, it’s like a mess.’ said Mason Jappa, chief executive at… crypto-mining service firm Blockware Solutions. ‘I got messages about transformers, switch gears, and mobile data centers and containers for mining, they are just sitting there.’”

December 7 – Reuters (Priyamvada C, Medha Singh, Sruthi Shankar and Eva Mathews): “Carvana Co is speaking with lawyers and investment bankers about options for managing its debt load, Bloomberg Law reported…, as concerns grow about the company's solvency due to plunging used-car prices, while a rating cut hammered shares. Carvana has spoken with advisers at Kirkland & Ellis and Moelis & Co…”

December 8 – CNBC (Greg Iacurci): “The share of retirement savers who withdrew money from a 401(k) plan to cover a financial hardship hit a record high in October, according to… Vanguard Group. That dynamic — when coupled with other factors like fast-rising credit card balances and a declining personal savings rate — suggests households are having a tougher time making ends meet amid persistently high inflation and need ready cash… Nearly 0.5% of workers participating in a 401(k) plan took a new ‘hardship distribution’ in October, according to Vanguard, which tracks 5 million savers. That’s the largest share since Vanguard began tracking the data in 2004.”

December 7 – Reuters (John Mccrank): “The U.S. Securities and Exchange Commission will vote on whether to propose some of the biggest changes to the American equity markets in nearly two decades at a Dec. 14 meeting, the agency said… The potential changes include new rules that would require marketable retail stock orders to be sent to auctions before they are executed, a new standard for brokers to show they get the best possible executions for client orders, and lower trading increments and access fees on exchanges, the SEC said.”

Inflation Watch:

December 8 – Reuters (Robert Frank): “Manhattan rents rose 2% in November, dashing hopes that prices would cool and forcing many renters to give up their leases or downsize… The median rent for a Manhattan apartment in November hit $4,033, up from $3,964 in October, according to… Douglas Elliman and Miller Samuel. The average rent, which is often skewed by luxury sales, fell slightly for the month but is still up 19% over last year, hitting $5,249 in November.”

December 7 – Bloomberg (Kevin Crowley): “Exxon Mobil Corp. is awarding US employees above-inflation pay increases just weeks after the Texas oil giant posted its highest quarterly profit, underlining how strong 2022 has been for the fossil-fuel industry while other sectors like technology and finance cut jobs. Workers will receive an average salary bump of 9%, and those who got promoted will see a further 5% increase…”

December 6 – Bloomberg (Colin McKerracher): “Falling battery prices have been one of the most consistent trends in the electric vehicle industry for the last decade. Prices dropped from well over $1,000 per kilowatt hour in 2010 to $141 per kWh last year. This jump-started one of the biggest shifts in the auto industry in the last century, spurring automakers to plow billions of dollars into EVs. The (declining pice) trend has ground to a halt this year, with BloombergNEF’s annual lithium-ion battery price survey showing a 7% increase in average pack prices in 2022 in real terms. This is the first increase in the history of the survey.”

U.S. Bubble Watch:

December 8 – Bloomberg (Augusta Saraiva): “Recurring applications for US unemployment benefits rose to the highest since early February, suggesting that Americans who are losing their job are having more trouble finding a new one as the labor market shows tentative signs of cooling. Continuing claims… climbed by 62,000 to 1.7 million… Initial unemployment claims increased by 4,000 to 230,000 in the week ended Dec. 3.”

December 6 – Reuters (Deborah Sophia, Akash Sriram, Granth Vanaik and Yuvraj Malik): “U.S. companies, from tech majors to consumer firms, are bracing for a potential economic downturn by shrinking their employee base to streamline operations. Job cuts announced by U.S.-based employers jumped 13% to 33,843 in October, the highest since February 2021…”

December 6 – CNBC (Huge Son): “JPMorgan… CEO Jamie Dimon said inflation could tip the U.S. economy into recession next year. While consumers and companies are currently in good shape, that may not last much longer, Dimon said… Consumers have $1.5 trillion in excess savings from Covid pandemic stimulus programs and are spending 10% more than in 2021… ‘Inflation is eroding everything I just said, and that trillion and a half dollars will run out sometime midyear next year,’ Dimon said. ‘When you’re looking out forward, those things may very well derail the economy and cause a mild or hard recession that people worry about.’”

December 7 – Bloomberg (Molly Smith): “US mortgage rates fell for a fourth week in a row, the longest such stretch of declines since May 2019. The contract rate on a 30-year fixed mortgage eased 8 bps to 6.41% in the week ended Dec. 2, still the lowest since mid-September…”

December 7 – CNBC (Diana Olick): “Lower mortgage rates are pulling some current homeowners back to the refinance market, but not enough to offset the drop in demand from homebuyers… Mortgage applications to purchase a home fell 3% for the week and were 40% lower than the same week one year ago.”

December 7 – Reuters (Saeed Azhar and Noor Zainab Hussain): “The biggest U.S. banks are bracing for a worsening economy next year as inflation threatens consumer demand, according to executives… JPMorgan… Chief Executive Jamie Dimon told CNBC that consumers and companies are in good shape, but noted that may not last much longer as the economy slows down and inflation erodes consumer spending power. ‘Those things might very well derail the economy and cause this mild to hard recession that people are worried about,’ he said. Consumers have $1.5 trillion in excess savings from pandemic stimulus programs, but it may run out some time in mid-2023, he told CNBC. Dimon also said the Federal Reserve may pause for three to six months after raising benchmark interest rates to 5%, but that may ‘not be sufficient’ to curb high inflation.”

December 3 – Wall Street Journal (Yang Jie and Aaron Tilley): “In recent weeks, Apple Inc. has accelerated plans to shift some of its production outside China, long the dominant country in the supply chain…, say people involved in the discussions. It is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam…, and looking to reduce dependence on Taiwanese assemblers led by Foxconn Technology Group. Turmoil at a place called iPhone City helped propel Apple’s shift. At the giant city-within-a-city in Zhengzhou, China, as many as 300,000 workers work at a factory run by Foxconn to make iPhones and other Apple products. At one point, it alone made about 85% of the Pro lineup of iPhones…”

December 4 – CNBC (Lori Ann LaRocco): “U.S. logistic managers are bracing for delays in the delivery of goods from China in early January as a result of canceled sailings of container ships and rollovers of exports by ocean carriers. Carriers have been executing on an active capacity management strategy by announcing more blank sailings and suspending services to balance supply with demand. ‘The unrelenting decline in container freight rates from Asia, caused by a collapse in demand, is compelling ocean carriers to blank more sailings than ever before as vessel utilization hits new lows,’ said Joe Monaghan, CEO of Worldwide Logistics Group. U.S. manufacturing orders in China are down 40%, according to the latest CNBC Supply Chain Heat Map data.”

Fixed-Income Watch:

December 5 – Bloomberg (Greg Ritchie): “Investors watch leveraged loans for the first signs that aggressive central-bank rate hikes are starting to hit companies hard. They also brace for more FTX-like blowouts in the private equity industry and expect investment grade to do well next year. A majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse. Any trouble for leveraged loans would represent a key shift in this credit cycle. For most of this year, buying loans seemed like a smart bet, because they carry floating interest rates and pay higher yields as central banks tighten the money supply.”

December 2 – Bloomberg (Scott Carpenter): “As interest rates rise, so are concerns about the credit quality of the floating-rate loans that back the $1.2 trillion market for collateralized loan obligations. Loans are widely believed to face higher downgrades next year, and according to Amherst Pierpont Securities LLC… Most of the structures feature a guideline that can press them to cut off payments to holders of their riskiest bonds, and maybe even multiple groups of noteholders, if too many of their loans are cut to the CCC tier… ‘If 2022 was a year of interest-rate risk and volatility, then 2023 will be a year of credit risk and fundamentals,’ said Pratik Gupta, head of CLO research at Bank of America Corp.”

December 6 – Bloomberg (Josyana Joshua): “While the year of rising rates is hindering corporate borrowing and hurting investor returns, Wall Street is enjoying a likely record year in the business of trading investment-grade bonds. So far in 2022, an attention-getting $6 trillion of US high-grade bonds have changed hands. That’s 2% more than in all of last year and closing in on the $6.2 trillion traded in 2020, the all-time high, according to… JPMorgan… The frantic pace is unexpected, given how the Federal Reserve’s inflation-fighting rate-rise regime has kept new bond sales to a subdued $1.18 trillion, down 14% from last year…”

Social and Environmental Instability Watch:

December 6 – Reuters (Susan Heavey and Caroline Humer): “The United States is experiencing the highest levels of hospitalizations from influenza that it has seen in a decade for this time of year, the head of the U.S. Centers for Disease Control and Prevention (CDC) said… CDC Director Rochelle Walensky added that U.S. hospital systems also continue to be stressed with a high number of patients with other respiratory illnesses such as respiratory syncytial virus (RSV) and COVID-19.”

December 6 – Bloomberg (Josh Saul): “The attacks that left two electrical substations in North Carolina riddled with gunfire and knocked out power to 45,000 homes and businesses underscores the fragility of US grids, experts said… ‘From this incident, it appears that the electrical grid continues to be extremely vulnerable,’ said Jon Wellinghoff, chief executive officer of GridPolicy Consulting Inc. and former chairman of the Federal Energy Regulator Commission.”

Leveraged Speculation Watch:

December 5 – Financial Times (Robin Wigglesworth): “The Blackstone Real Estate Income Trust made headlines for the wrong reasons last week. But Blackstone also has a similar investment trust focused on corporate debt that has yet to come under similar scrutiny. We suspect that will change. While BREIT buys real estate, the Blackstone Private Credit Fund (BCRED) lends money to companies. Despite only celebrating its first birthday in February, BCRED had amassed a $50bn portfolio of corporate loans as of Oct. 31… That makes it nearly as big as Pimco’s Total Return Fund… (though if you take out leverage, BCRED’s net asset value is about $22bn).”