Market Instability Watch:
December 27 – Wall Street Journal (Heather Gillers): “Cash holdings are the lowest since the financial crisis at U.S. government pension funds and just above last year’s 13-year low for U.S. corporate pensions, heading into a year that many on Wall Street expect to test investors. Cash holdings hit 1.9% of assets at state and local government pension funds and 1.7% of assets at corporate pension funds as of June 30, according to… Wilshire Trust Universe Comparison Service. Those figures compare with the 15-year average of 2.45% at public pensions and 2.07% at corporate pensions. The recent figures are lower than in 2008, when some retirement funds had to sell whatever they could to pay benefits during the financial crisis.”
Crypto Bubble Collapse Watch:
December 28 – Bloomberg (Hannah Miller): “Solana, the blockchain network once championed by Sam Bankman-Fried, is drawing immense scrutiny as industry watchers wonder whether its former close ties to the disgraced crypto mogul and his now-defunct FTX empire will jeopardize its future. Its founders are doing everything they can to break that connection. The price of Solana’s crypto token, SOL, has plummeted 96% from its all-time high of $260 in November 2021 to about $10, hurt first by a year-long crypto rout that engulfed the whole market and then again by FTX’s fall. SOL dropped as much as 12% on Wednesday alone on concern large holders are offloading the token, which is used as the base cryptocurrency for financial transactions on the blockchain.”
Bursting Bubble and Mania Watch:
December 26 – Wall Street Journal (Akane Otani): “Almost everyone on Wall Street and in Washington got 2022 wrong. The Federal Reserve expected 2021’s inflation surge to be transitory. It wasn’t. Core inflation climbed to a four-decade high this fall, nearly tripling the Fed’s full-year forecast. Top Wall Street analysts predicted markets would have a so-so year. They didn’t. With just a few trading days left in 2022, the S&P 500 is down 19% and on course for its biggest annual loss since the 2008 financial crisis. Bonds are headed for their worst year on record. The extent to which many investors, analysts and economists were wrong-footed has left many looking at the coming year with a sense of unease.”
December 29 – Financial Times (Ivan Levingston, Ortenca Aliaj and Kaye Wiggins): “Global dealmaking suffered a record fall during the second half of this year… Mergers and acquisitions worth $1.4tn were announced during the six months to December, according to… Refinitiv, down from the $2.2tn agreed in the first half of 2022. It was the biggest swing, from one six-month period to the next, since records began in 1980. The overall volume of deals struck globally in 2022 was down 38% from 2021, the largest year-on-year drop since 2001. Still, it was at high levels by historical standards, above the global totals seen in 2016 and 2017.”
December 29 – CNBC (Ari Levy): “Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud… The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye… In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.”
December 25 – Wall Street Journal (Amrith Ramkumar): “During the boom in blank-check companies, their creators couldn’t launch them fast enough. Now they are rushing to liquidate their creations before the end of the year, marking an ugly conclusion to the SPAC frenzy… Roughly 70 special-purpose acquisition companies have liquidated and returned money to investors since the start of December. That is more than the total number of SPAC liquidations in the market’s history, according to… SPAC Research. SPAC creators have lost more than $600 million on liquidations this month and more than $1.1 billion this year…”
December 24 – Wall Street Journal (Leslie Scism): “The hottest thing in life insurance for more than a decade might be cooling off. A long-running stock-market rally and low interest rates combined to create the perfect conditions for indexed universal-life policies. Sales of these policies rose from 4% of life-insurance sales in 2008, as measured by new annualized premiums, to 28% in the third quarter… The millions of Americans who now own them saw those ideal conditions reversed in 2022, exposing the policies’ high fees and complexity. The insider joke about indexed universal-life policies is that it takes an actuary, an attorney and maybe even an engineer to understand how the product works.”
December 27 – Bloomberg (Shruti Singh): “As 2022 unfolded, Chicago’s long-troubled pension funds faced a new shortfall: A delay in property tax receipts left the system without enough money to pay the city’s retirees. Pension managers contended with the difficult decision of whether to sell off pension assets to raise cash quickly. Instead, they got an advance from Mayor Lori Lightfoot’s administration to plug the gap. In the end, Chicago funneled in at least $512 million that was earmarked for payments later in the year and early 2023. The payout was the largest advance ever in one year in Chicago, a sign of just how fragile the pension system is, especially at a time when markets are headed for their worst annual return since 2008.”
December 27 – Reuters (Hyunjoo Jin and Nivedita Balu): “Tesla buyers who waited months for their new car have had an unusual choice for much of the past two years: keep the new electric vehicle, or sell it at a profit to someone with less patience. But the days of the Tesla flip are numbered… Prices of used Teslas are falling faster than those of other carmakers and the clean-energy status symbols are languishing in dealer lots longer…The average price for a used Tesla in November was $55,754, down 17% from a July peak of $67,297. The overall used car market posted a 4% drop during that period, according to Edmunds data. The used Teslas were in dealer inventory for 50 days on average in November, compared with 38 days for all used cars.”
Inflation Watch:
December 26 – Financial Times (Chris Giles): “Inflation regained its position as the enemy of economic progress this year after a 40-year absence. With the rate of price increases hitting peaks close to 10% in the US, eurozone and UK, a generation has had to worry about a rapidly rising cost of living for the first time in their working careers. They have hated it. US president Joe Biden classed inflation as ‘the bane of our existence’, making its defeat his top economic priority. He released the US strategic petroleum reserves in a bid to bring oil prices down. In Europe, leaders first blamed Vladimir Putin’s invasion of Ukraine and then, realising they had to do more, subsidised energy bills to take the sting out of a cost of living crisis. Central banks could no longer claim to have given birth to a ‘great moderation’ in inflation and instead have joined together in battle against the beast.”
December 28 – Wall Street Journal (Jon Hilsenrath and Rachel Wolfe): “Inflation is often called a tax on the poor, but this time it’s hit middle-income households the hardest. Many low-income households, benefiting from exceptionally low unemployment rates, have found jobs and experienced wage increases that lifted income more than the cost of living… At the high end, many households have seen big losses in stock and bond markets, but their income and savings were large enough that they were able to keep spending aggressively. The middle has been in a vise. Purchasing power from paychecks fell 2.9% for middle-income households in 2022 compared with 2021, while rising 1.5% for the bottom fifth of households and 1.1% for the top, according to the CBO study. A growing share of middle-income households say they are having more trouble making ends meet…”
Biden Administration Watch:
December 29 – Reuters (Jeff Mason): “President Joe Biden… signed a $1.66 trillion bill funding the U.S. government for fiscal year 2023, the White House said… The legislation includes record military funding, emergency aid to Ukraine, more aid for students with disabilities, additional funding to protect workers' rights and more job-training resources, as well as more affordable housing for families, veterans and those fleeing domestic violence.”
December 27 – Reuters (Anirban Sen and Diane Bartz): “Investment bankers and deal lawyers accustomed to regulatory hurdles to their mergers face an unprecedented challenge under U.S. President Joe Biden - antitrust watchdogs who are undaunted when they lose such battles in court. The U.S. Justice Department and Federal Trade Commission (FTC) have attempted to thwart 22 mergers since Biden came into office in January 2021… That outnumbers the antitrust challenges during the first two years of former President Barack Obama's first term in office and is twice as many as in Donald Trump's first two years…”
Federal Reserve Watch:
December 24 – Financial Times (Colby Smith): “Persistently high US inflation will be difficult to squelch after taking root in the services sector of the economy, economists warn, suggesting the Federal Reserve will be forced to press ahead with further interest rate rises in 2023. After a year of skyrocketing consumer prices, the US inflation rate is poised to decline rapidly next year. But many economists caution underlying pressures will keep it at levels well above what the Fed considers palatable. ‘The risk of confusion here is that this is going to sound on the one hand like massive progress and it’s going to feel like maybe we can relax,’ said Jean Boivin, the former deputy governor of the Bank of Canada who now heads up the BlackRock Investment Institute. ‘But those numbers at the end of year will be nowhere near the zip code of [what] the Fed will be comfortable with.’”
U.S. Bubble Watch:
December 27 – Dow Jones (Gregg Robb): “The numbers: The U.S. international trade deficit in goods narrowed 15.6% to $83.3 billion in November… It is the smallest deficit since December 2020. In October, the deficit had widened to $98.8 billion from $92.6 billion in the prior month. Economists… were looking for the deficit to narrow only to a $97 billion deficit in November.”
December 28 – Bloomberg (Augusta Saraiva): “US pending home sales fell for a sixth month in November to the second-lowest on record as higher borrowing costs and an uncertain economic outlook kept many potential buyers out of the market. The National Association of Realtors index of contract signings to purchase previously owned homes decreased 4% last month to 73.9, the lowest outside of the pandemic in data back to 2001… Contract signings were down nearly 39% in November from a year ago on an unadjusted basis. Pending sales fell in all four regions in the month, led by the Northeast and Midwest.”
December 27 – Reuters (Dan Burns): “Annual price growth in the increasingly fragile U.S. housing market slid into the single digits in October for the first time in about two years… The S&P CoreLogic Case Shiller national home price index increased by 9.2% in October, down from 10.7% in September and notching the first single-digit gain since November 2020. Meanwhile the Federal Housing Finance Agency… said annual home price growth slowed to 9.8% in October from 11.1% in September… On a month-over-month basis, S&P Case Shiller's index fell for a fourth straight month, while FHFA's gauge was unchanged.”
December 28 – Bloomberg (Alice Kantor): “High-end US home sales slumped the most on record in the three months ended Nov. 30… Sales of luxury homes fell 38% year-over-year, according to… Redfin Corp., which measured the top 5% of listings in the 50 most populous US metro areas. That’s the biggest decline in data going back to 2012. Nassau County on Long Island fared the worst, with sales falling 66%... San Diego, San Jose, Riverside and Anaheim in California also experienced large drops in sale volumes. Home prices are falling across the spectrum as overstretched budgets and an anticipated economic downturn keep buyers on the sidelines.”
December 29 – Bloomberg (Ian Kullgren and Rebecca Rainey): “At least 150 large union contracts are set to expire next year, potentially heralding more worker unrest amid soaring inflation and rising corporate profits. The lapsing agreements represent at least 1.6 million workers… Among those are the Detroit automakers with 150,000 workers among three companies, UPS with 256,000 workers, and SAG-AFTRA performers with 160,000 workers…”
Fixed-Income Watch:
December 29 – Wall Street Journal (Telis Demos): “While some investors were hibernating in the fourth quarter, the private market for deal financing has been roaming free. The overwhelming majority of private equity-style deals late in the year have used financing by so-called private credit rather than by the marketing and selling of loans to a wide group of investors by banks. PitchBook LCD tracked 46 leveraged buyouts financed by private credit in the fourth quarter through Dec. 8, versus just one financed by the broadly syndicated loan market… Private credit is made up of firms and funds, including business-development companies, that directly lend money to companies, and the loans aren’t designed to be traded.”
Social and Environmental Instability Watch:
December 26 – Associated Press (Carolyn Thompson): “Buffalo residents hovered around space heaters, hunted for cars buried in snow drifts and looked for more victims Monday, after 28 people died in one of the worst weather-related disasters ever to hit western New York. The rest of the United States also was reeling from the ferocious winter storm, with at least another two dozen deaths reported in other parts of the country… ‘This is not the end yet,’ said Erie County Executive Mark Poloncarz, calling the blizzard ‘the worst storm probably in our lifetime,’ even for an area accustomed to punishing snow.”
December 26 – Associated Press (Carolyn Thompson and Jake Bleiberg): “Millions of people hunkered down against a deep freeze Sunday to ride out the winter storm that has killed at least 34 people across the United States and is expected to claim more lives after trapping some residents inside houses with heaping snow drifts and knocking out power to tens of thousands of homes and businesses. The scope of the storm has been nearly unprecedented, stretching from the Great Lakes near Canada to the Rio Grande along the border with Mexico. About 60% of the U.S. population faced some sort of winter weather advisory or warning, and temperatures plummeted drastically below normal from east of the Rocky Mountains to the Appalachians…”
December 26 – Financial Times (Ian Smith): “The chief executive of one of Europe’s biggest insurance companies has warned that cyber attacks, rather than natural catastrophes, will become ‘uninsurable’ as the disruption from hacks continues to grow. Insurance executives have been increasingly vocal in recent years about systemic risks, such as pandemics and climate change, that test the sector’s ability to provide coverage. For the second year in a row, natural catastrophe-related claims are expected to top $100bn. But Mario Greco, chief executive at insurer Zurich, told the Financial Times that cyber was the risk to watch. ‘What will become uninsurable is going to be cyber,’ he said. ‘What if someone takes control of vital parts of our infrastructure, the consequences of that?’”
December 26 – Bloomberg (Ari Natter): “Four power substations in Washington State were attacked on Christmas Day, disrupting service to thousands of residents, just weeks after gunfire at electricity facilities in North Carolina prompted an investigation by the FBI. Law enforcement agencies are now investigating at least eight attacks on power stations in four states in the past month that have underscored the vulnerability of the nation’s power grid.”
Leveraged Speculation Watch:
December 29 – Reuters (Patturaja Murugaboopathy and Summer Zhen): “Global hedge funds are set to register their worst returns in 14 years in 2022… Some hedge fund strategies that put money in commodities and currencies using macro-focused strategies and exploited price differences between related securities outperformed in 2022, handing decent gains to investors… According to… Preqin, hedge fund returns have fallen 6.5% this year, their biggest since a 13% decline in 2008… Alongside the tumble in traditional assets from equities to bonds, net assets of global hedge funds fell 4.8% in the first three quarters of this year to $4.3 trillion. They saw a combined outflow of $109.8 billion in that period…”
December 30 – Bloomberg (Hema Parmar and Miles Weiss): “Tiger Global Management started out as a traditional stock-picking hedge fund that dabbled in venture investments. Now, after a tumultuous 2022, its startup bets vastly outstrip equities… With the bulk of its assets now in venture-capital funds, Chase Coleman’s firm has been insulated from even steeper losses because such private investments are less susceptible to declines in public equities or the short-term whims of clients. The hedge fund tumbled 54% through the first 11 months of this year, on track for its worst annual performance, while its long-only fund plunged more than 60%, fueling a $42 billion drop in total assets.”
December 28 – Bloomberg (Katherine Burton and Hema Parmar): “In 2020, tech-heavy hedge fund Light Street Capital Management posted a banner year on bets including Amazon.com Inc. and Alibaba Group Holding Ltd. That was the last of the good times. The firm, along with other once-high-flying stock hedge funds, is coming off a second year of losses that erased billions of dollars in clients’ wealth. Light Street, Whale Rock Capital Management, Tiger Global Management and Perceptive Advisors each posted declines of more than 40% during the last two years…”
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