US Economic News Summary for the week ending December 16, 2022

Market Instability Watch:

December 9 – Wall Street Journal (Editorial Board): “Persistent inflation and a return to quasi-normal monetary policy have exposed a growing list of financial vulnerabilities, from bad hedging at British pension funds to reckless management in a major cryptocurrency exchange. Now comes word of another danger that could dwarf the others. The global financial system is bloated with some $65 trillion in hidden dollar debts, a recent report from the Bank for International Settlements warns. This takes the form of foreign-exchange swaps that entail a currency trade made today with a commitment to reverse it in the future… This level of off-balance-sheet forex-swap debt dwarfs the $28 trillion in on-balance-sheet swap liabilities that BIS tabulates. The BIS notes that this form of credit has exploded in recent years, rising from $37 trillion in off-balance-sheet obligations on the eve of the 2008 panic.”

December 16 – Bloomberg (Isabelle Lee): “Investors are spurning mutual funds at a record clip, driving a $1.5 trillion gap in the flow of money from the old-school investment vehicles and into ever-popular ETFs. The divide this year between the two investment types widened to an all-time high, up from $950 billion in 2021…”

December 9 – Financial Times (Brooke Masters): “When Citigroup chief executive Jane Fraser was asked earlier this week what risks she was most concerned about, market liquidity topped her list. The Bank for International Settlements is worried about ‘fragility’ in the market for mortgage-backed securities. And volatility has soared in US Treasury markets this autumn due to poor liquidity. With the world poised to plunge into recession, stresses are to be expected. But there is growing evidence that the post-crisis reforms, while aimed at shoring up financial stability may have, in important areas, simply traded counterparty risk for liquidity risk.”

Crypto Bubble Collapse Watch:

December 13 – CNBC (MacKenzie Sigalos): “A federal indictment was unsealed… alleging widespread fraud by FTX co-founder Sam Bankman-Fried… The indictment in U.S. District Court in Manhattan charges Bankman-Fried with eight criminal counts: conspiracy to commit wire fraud and securities fraud, individual charges of securities fraud and wire fraud, money laundering, and conspiracy to avoid campaign finance regulations. Prosecutors allege in the indictment that the former billionaire was engaging in criminal activity that began as far back as 2019 and continued through last month. Bankman-Fried deliberately and knowingly ‘agreed with others to defraud customers of FTX.com by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research,’ the indictment alleges.”

December 14 – Financial Times (Joshua Chaffin): “The wheels of American justice do not turn nearly so fast as the cryptocurrency markets. But in the last 48 hours they caught up to Sam Bankman-Fried, the boy king of the shattered FTX empire who now stands accused of perpetrating one of the largest financial frauds in US history. A series of overlapping events unfolding in the Bahamas, Washington and Manhattan left 30-year-old Bankman-Fried in police custody… For Bankman-Fried the reckoning began on Monday, when he was arrested by local police just after 6pm at his apartment in Nassau, the Bahamas, after the US Department of Justice sought his extradition. Coincidentally, it was in the same week 14 years earlier that Bernard Madoff, mastermind of Wall Street’s biggest Ponzi scheme, was arrested on a US securities fraud charge.”

December 12 – Reuters (Angus Berwick, Dan Levine and Tom Wilson): “Splits between U.S. Department of Justice prosecutors are delaying the conclusion of a long-running criminal investigation into the world's largest cryptocurrency exchange Binance, four people familiar with the matter have told Reuters. The investigation began in 2018 and is focused on Binance's compliance with U.S. anti-money laundering laws and sanctions… Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two of the sources. Others have argued taking time to review more evidence…”

December 14 – Financial Times (Joshua Oliver and Scott Chipolina): “Binance chief executive Changpeng Zhao has blamed the collapse of FTX and the fraud charges levelled against its founder Sam Bankman-Fried for a wave of withdrawals that struck the world’s largest cryptocurrency exchange this week. Zhao sought to reassure nervous customers on a Twitter ask-me-anything discussion that Binance is financially healthy after clients pulled more than $1bn from the trading venue, the highest daily withdrawal since June. ‘There is no amount of withdrawals that would put us under pressure,’ Zhao said.”

December 14 – Bloomberg (Olga Kharif): “One of the most closely watched indicators of trader sentiment on Binance’s market-leading derivatives exchange suggests that anxiety over additional fallout from this year’s crypto market meltdown has grown. The seven-day average of open interest for Bitcoin perpetual futures has dropped 40.3% from the start of November, according to… CryptoCompare… Bitcoin perpetual contracts… have long been a favorite of crypto speculators because they allow them to more easily maintain leveraged bets.”

Bursting Bubble and Mania Watch:

December 14 – Financial Times (Jennifer Hughes, Nicholas Megaw and Madison Darbyshire): “The main US markets watchdog has proposed the most sweeping overhaul of stock trading in almost two decades in an effort to improve prices and transparency for small investors. Gary Gensler, chair of the Securities and Exchange Commission, said the measures outlined in more than 1,500 pages of documents… would improve ‘competition and benefit both everyday investors and institutional investors’. But his plans led to resistance from market-making firms that dominate the system. Taken together, the proposals would produce the biggest changes to US equity trading rules since 2005, reshaping the business of executing deals for retail investors. The agency’s focus on the inner workings of the US stock market was revived after pandemic lockdowns prompted an explosion of activity from consumers.”

December 14 – Bloomberg (Jeran Wittenstein): “US companies are cutting share buybacks to conserve cash in the face of economic uncertainty, which threatens to add another weight to the equity market’s attempted rebound. S&P 500 Index firms bought back just over $200 billion of their own shares during the third quarter, marking the slowest quarter for repurchases since the middle of last year and coming in roughly 25% below the levels seen in late 2021 and early 2022…”

December 14 – Bloomberg (Silas Brown): “The biggest lenders are bagging bigger chunks of the $1.4 trillion market for private credit as investors get choosier about where they park their money. The 10 largest funds that have closed in the first nine months of the year, including ones run by Goldman Sachs… and Blackstone Inc., accounted for half of the $172 billion raised globally for direct lending in the period, according to… Preqin… While global fundraising is on track to match last year’s $215 billion record, a closer look at the data shows a ‘more fragile' picture emerging of a market buffeted by higher interest rates and weaker prospects for economic growth, according to Preqin.”

December 16 – Bloomberg (Dawn Lim and John Gittelsohn): “Steve Schwarzman’s Blackstone Inc. paved the way for private equity firms to pitch the everyday millionaire. Now, a flight of money from some of the industry’s retail funds is inviting scrutiny… That’s prompted the Securities and Exchange Commission to reach out to the firms, according to people familiar… The regulator is trying to understand the market impact and circumstances of the events, and asked how the firms met redemptions and if affiliates sold before clients, one of the people said.”

December 11 – Financial Times (Antoine Gara): “Blackstone has warned of the risk of delays to the launch of a new private equity fund designed for wealthy individuals, as it copes with heavy investor withdrawals at two other funds in real estate and credit aimed at a similar clientele. The… investment manager has been preparing to open a fund called the Blackstone Private Equity Strategies Fund, or BXPE, that would become its flagship strategy for rich individuals to participate in its private equity business… Blackstone has in recent days informed wealthy investors and their financial advisers that it may wait for fundraising conditions and financial markets to improve before launching BXPE, according to people familiar with the matter.”

December 12 – Financial Times (Sujeet Indap): “After Blackstone’s retail-focused credit and retail funds were hit by a wave of redemption requests, its rival Apollo is facing scrutiny over its own plans to target wealthy individuals. Apollo co-founder Marc Rowan last week defended his group’s drive to offer private capital products to rich clients as it rolls out a gated product that it says can match the returns of the S&P 500 but with less volatility. ‘I actually think it’s good for the industry right now,’ Rowan told a Goldman Sachs investor conference, as questions emerged about the suitability of so-called alternative investments for retail investors after Blackstone restricted withdrawals from a $69bn property fund. ‘We are going to train clients and advisers to think about how much liquidity they need and how much they’re prepared to stock away…’ ‘Private equity firms never wanted retail. Retail was not smart money. Now they are knocking on our door’ said one wealth management executive at a prominent Wall Street bank…”

December 16 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… may eliminate as many as 4,000 jobs, or roughly 8% of the workforce, as Chief Executive Officer David Solomon battles to contain a slump in profit and revenue. Top managers have been asked to identify potential cost-reduction targets, and no final job-cut number has been determined…”

December 12 – Bloomberg (Ben Scent, Dinesh Nair, and Aaron Kirchfeld): “Dealmakers racing to get transactions across the line before the holidays have finalized nearly $70 billion of mergers and acquisitions this week. Biotech giant Amgen Inc. is leading the flurry of transactions, saying… it will buy Horizon Therapeutics Plc for $28 billion in the year’s biggest health-care deal... Thoma Bravo announced a takeover of business-spend management platform Coupa Software Inc. for $8 billion including debt…”

December 15 – CNBC (Diana Olick): “As the housing market cools quickly, house flippers are finding it harder to make fast profits. In the third quarter, gross flipping profit, which is the difference between the median purchase price paid by investors and the median resale price, dropped to $62,000, according to ATTOM… That’s down 18.4% from the second quarter and down 11.4% year-over-year. It represents the smallest profit since the end of 2019 and the fastest quarterly drop since 2009… Roughly 7.5% were flips in the third quarter, still historically high, but down from 8.2% in the second quarter.”

December 14 – Bloomberg (Bailey Lipschultz and Lydia Beyoud): “The great SPAC crash is closing out the year in dramatic fashion as more shareholders prepare to cash out of the speculative-investing industry for good. At least 80 special-purpose acquisition companies, which have raised $24 billion in total, face a wall of investor meetings that will give clients the chance to exit ahead of a new US tax that could hurt their returns. At least 32 SPACs holding roughly $18 billion are looking to close up shop and return capital over the coming 2 1/2 weeks…”

December 16 – Bloomberg (Romy Varghese): “San Francisco is projecting a $728 million budget gap over the next two fiscal years as the technology hub reels from the economic hit of remote work and the depletion of one-time federal aid. Mayor London Breed asked municipal departments Thursday to find ways to reduce costs by 5% in the next fiscal year and by 8% in the year after that…”

December 14 – Reuters (Lananh Nguyen, Saeed Azhar and Shankar Ramakrishnan): “Some of the banks that lent Elon Musk $13 billion to buy Twitter are preparing to book losses on the loans this quarter, but they are likely to do so in a way that it does not become a major drag on their earnings… Banks typically sell such loans to investors at the time of the deal. But Twitter's lenders, led by Morgan Stanley, could face billions of dollars in losses if they tried to do so now…”

Inflation Watch:

December 13 – CNBC (Jeff Cox): “Prices rose less than expected in November… The consumer price index... rose just 0.1% from the previous month, and increased 7.1% from a year ago… Economists surveyed by Dow Jones had been expecting a 0.3% monthly increase and a 7.3% 12-month rate… Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% on an annual basis, compared with respective estimates of 0.3% and 6.1%.”

December 13 – Bloomberg (Michael Hirtzer and Marvin G. Perez): “Dessert is likely to hurt the wallet. Ice cream, flour, cakes and cookies jumped the most ever, Labor Department data show, while eggs are up 49.1%, the biggest surge in almost four decades. The worst-ever outbreak of bird flu has shrunk egg supply, while refined-sugar costs have been driven higher by adverse weather for the US sugar beet crop and tighter global supplies that limited imports. Meat eaters can take heart as beef roast prices fell 8.1% in November from a year ago, the biggest slump in six years.”

December 12 – New York Times (Jeanna Smialek): “At this time last year, economists were predicting that inflation would swiftly fade in 2022 as supply chain issues cleared, consumers shifted from goods to services spending and pandemic relief waned. They are now forecasting the same thing for 2023, citing many of the same reasons. But as consumers know, predictions of a big inflation moderation this year were wrong… That raises the question: Should America believe this round of inflation optimism?”

December 9 – Bloomberg (Elizabeth Elkin): “Prices for vegetables have almost doubled since last year after the states that grow fresh produce for the US winter saw water cuts and storms that decimated supply. Vegetable prices saw a 38% jump in November from the prior month, according to… producer price index data. On a year-over-year basis, the surge was more than 80%... Farmers in Arizona, who provide more than 90% of the US’s leafy greens each November through March, have seen cuts to the amount of water they receive from the Colorado River.”

December 11 – Wall Street Journal (Jennifer Hiller): “After powerful storms wreaked havoc on America’s utility system in recent years, bills to cover recovery costs are coming due for customers. Electric and gas utilities are increasingly turning to lower-interest, ratepayer-backed bonds to finance mounting investments to fix and bolster their systems or cover extraordinary energy costs following hurricanes, wildfires and winter freezes. Customers are on the hook for repaying the loans… In the past year, around $12.4 billion of weather-related utilities debt that customers will have to pay has been issued…, up from around $7 billion in long-term recovery bonds that states and utilities issued from 2007 to 2021.”

U.S. Bubble Watch:

December 15 – Reuters (Lucia Mutikani): “Retail sales fell 0.6% last month, the biggest drop since December 2021, after an unrevised 1.3% jump in October… Retail sales increased 6.5% year-on-year in November. Last month's decrease in sales also reflected the fading boost from one-time tax refunds in California… Sales at food services and drinking places… increased 0.9%. Electronics and appliance store sales fell 1.5%. There were also decreases in receipts at general merchandise stores as well as sporting goods, hobby, musical instrument and book stores. Clothing stores sales fell 0.2%. Nevertheless, the almost broad weakness in sales suggests higher borrowing costs and the threat of an imminent recession are hurting household spending. Savings, which have helped to cushion consumers against inflation, are dwindling.”

December 15 – CNBC (Jessica Dickler): “As of November, 63% of Americans were living paycheck to paycheck, according to a monthly LendingClub report — up from 60% the previous month and near the 64% historic high hit in March. Even high-income earners are under pressure, LendingClub found. Of those earning more than six figures, 47% reported living paycheck to paycheck, a jump from the previous month’s 43%. ‘Americans are cash-strapped and their everyday spending continues to outpace their income, which is impacting their ability to save and plan,’ said Anuj Nayar, LendingClub’s financial health officer.”

December 13 – Reuters (Lucia Mutikani): “U.S. small-business confidence rebounded in November, according to a survey…, which also showed that inflation and worker shortages remained major issues for owners. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose 0.6 point to 91.9 last month amid an improvement in the share of owners who expected better business conditions over the next six months. Still, it was the 11th straight month that the index was below the 49-year average of 98. The share of owners expecting better business conditions over the next six months increased three points to -43%. It was -61% as recently as June. Thirty-two percent of owners reported that inflation was their single most important problem, down a point from October and 5 points lower than July's reading…”

December 12 – Associated Press (Christopher Rugaber): “Still eager to hire, America’s employers are posting more job openings than they did before the pandemic struck 2½ years ago. Problem is, there aren’t enough applicants. The nation’s labor force is smaller than when the pandemic struck. The reasons vary — an unexpected wave of retirements, a drop in legal immigration, the loss of workers to COVID-19 deaths and illnesses. The result, though, is that employers are having to compete for a smaller pool of workers and to offer steadily higher pay to attract them. It’s a trend that could fuel wage growth and high inflation well into 2023.”

December 15 – Bloomberg (Patrick Clark): “US mortgage rates dropped for a fifth straight week, bringing slight relief to a housing market that’s been slammed by the rise in borrowing costs this year. The average for a 30-year, fixed loan fell to 6.31%, the lowest since late September…”

December 14 – CNBC (Diana Olick): “After a month of declines, mortgage application volume is rising, as current homeowners and potential buyers move on lower mortgage rates… Mortgage applications to purchase a home rose 4% for the week and were 38% lower than the same week one year ago. That annual comparison is now shrinking slightly as rates drop.”

December 13 – Financial Times (Harriet Clarfelt): “The Federal Reserve’s most aggressive pace of interest rate increases in decades is set to trigger a surge of defaults over the next two years in the $1.4tn market for risky corporate loans, according to Wall Street banks and rating agencies. Analysts across the industry forecast that defaults will at least double from today’s relatively low 1.6%... Deutsche Bank expects the default rate on leveraged loans in the US to climb to 5.6% next year — up from 1.6% — before rising to 11.3% in 2024. That would leave defaults close to all-time highs set in 2009.”

December 13 – Wall Street Journal (Peter Grant): “The sharp decline in office building values is likely to become a growing problem for the budgets of cities, schools and other jurisdictions that depend heavily on property taxes from these building owners… Property tax is the largest single expense for most office landlords. Many hope to reduce it to help offset lost revenue from the sluggish return of employees to their desks and the cascading damage it is causing to local businesses catering to these workers. More recently, job cuts in the tech sector are reducing demand for workspace.”

Fixed-Income Watch:

December 16 – Bloomberg (Ronan Martin, Irene García Pérez and Priscila Azevedo Rocha): “Companies are set to raise the least new debt in more than a decade this year and there’s an unusual contributing factor: wild swings in markets mean borrowing windows often shut before firms can begin to sell their bonds. The trend is set to continue into 2023 because credit committees at some firms aren’t used to the levels of volatility, meaning demand can evaporate by the time they sign off on issuing securities, according to people with knowledge of the matter. It’s a major headache for companies that need to refinance…”

Environmental and Covid Watch:

December 15 – CNBC (Greg Iacurci): “Long Covid results in $9,500 of total average medical costs for workers and their employers in the six months following a diagnosis, according to a study by Nomi Health. Long Covid is a chronic illness that can carry potentially debilitating symptoms, which may last for months or years… Up to 30% of Americans who get Covid have developed long-haul symptoms; that means as many as 23 million Americans have been affected…”

December 14 – Los Angeles Times (Hayley Smith and Ian James): “As California faces the prospect of a fourth consecutive dry year, officials with the Metropolitan Water District of Southern California have declared a regional drought emergency and called on water agencies to immediately reduce their use of all imported supplies. The decision from the MWD's board came about eight months after officials declared a similar emergency for 7 million people who are dependent on supplies from the State Water Project, a vast network of reservoirs, canals and dams that convey water from Northern California.”

Leveraged Speculation Watch:

December 14 – Wall Street Journal (Eric Wallerstein): “A cadre of quant investment strategies that benefit during times of tumult are on pace for their best year since at least 2000… The funds wager on various assets as they rise or fall, building their bets as a trend strengthens. When algorithmic warning signs flash, they pivot into fresh positions. Those strategies have been a rare haven for much of the year… The SG CTA Index, run by Société Générale and BarclayHedge to track the 20 largest such strategies, is up 18% in 2022, on pace for its best year since launching in 2000.”