Global “Risk Off” gathers momentum by the week. Crisis Dynamics fester, as global central banks coalesce around a united front for battling Inflation. The reality is that central bankers will aggressively hike rates until something breaks has begun to sink in.

JPMorgan CDS rose seven this week to a six-week high 88 bps. Citi CDS jumped nine to a one-month high 103 bps, and Goldman CDS gained seven to a six-week high 112 bps. It’s worth noting that Credit Suisse CDS traded Thursday to 230 bps, surpassing July’s spike to decade highs.

August 31 – Bloomberg (Alexander Weber): “Euro-area inflation accelerated to another all-time high, strengthening the case for the European Central Bank to consider a jumbo interest-rate hike when it meets next week. Consumer prices in the 19-nation currency bloc jumped 9.1% from a year ago in August… The question now is whether the data are enough to nudge the ECB toward the 75 bps rate increase that some on its 25-strong Governing Council want debated… ‘There’s an urgent need for the Governing Council to act decisively at its next meeting to combat inflation,’ Bundesbank chief Joachim Nagel said… ‘We need a strong rise in interest rates in September. And further interest rate steps are to be expected in the following months.’ Six Governing Council members have said publicly that they think a rate move of more than 50 bps should be discussed, with money markets putting the probability of 75 bps at more than 60%.”

With the ECB poised to launch a more aggressive tightening cycle next Thursday, the rout in European bonds – a global market weak link – runs unabated. Italian yields jumped another 14 bps (three-week gain 77bps) to 3.84%, trading this week to the high since the June spike. Greece yields surged 23 bps (three-week gain 96 bps) to 4.18%, the high back to June 16th. German bund yields rose 14 bps to the high since June 29th (1.53%).

European high-yield (“crossover”) CDS dropped a notable 30 bps in Friday trading. This will surely be reversed when trading resumes next week, unless there’s a reversal in the Friday decision to delay the reopening of Nord Stream 1.

And with the Bank of England fixated on its inflation fight, UK yields surged 32 bps this week to 2.91% – the high since January 2014. UK yields have surged 105 bps over the past month. Meanwhile, the yen (vs. $) dropped further to a 24-year low, as JGB yields rose two bps to within a hair of the BOJ’s 0.25% yield ceiling. It’s another looming crisis that this week reached ever closer to the boiling point.

EM bonds remain under pressure, with notable yield surges in dollar-denominated EM debt. Dollar yields were up 31 bps in Turkey to 10.40%, 23 bps in Saudi Arabia to 3.78%, 21 bps in Indonesia to 4.39%, 19 bps in Mexico to 5.49%, 16 bps in Peru to 5.16%, 15 bps in the Philippines to 4.11%, and 14 bps in Chile to 4.89%. Ominously, dollar-denominated yields this week jumped to highs since at least 2009 in Chile, Peru, Panama and Mexico.

Key EM currencies suffered additional losses this week. The South African rand declined 2.4%, the South Korean won 2.3%, the Brazilian real 2.1%, the Thai baht 1.9%, and the Colombian peso 1.8%.

Commodities are in the grips of global “Risk Off” dynamics. The Bloomberg Commodities Index dropped 4.4% this week. Crude sank 6.7% ($6.19), Gasoline 13.6%, Copper 7.7%, Nickel 5.3%, Tin 13.0%, Zinc 11.6%, Iron Ore 9.4%, Aluminum 5.7%, Coffee 3.9%, Cotton 11.2%, and Soybeans 5.9%. I assume the global leveraged speculating community is running for cover.

The Shanghai Composite fell 1.5% to a one-month low, with the growth-oriented ChiNext Index sinking 4.1% to lows since mid-June. The Beijing-induced developer bond rally lost momentum this week. Chinese bank CDS surged higher, with China Construction Bank CDS jumping 11 to 101 bps, and Bank of China up 11 to 99 bps. China sovereign CDS rose seven to a three-week high 75 bps.

September 2 – New York Post (Thomas Barrabi): “Despite a summer rally, the US stock market is still an unprecedented ‘superbubble’ that will cause financial ‘tragedy’ for investors when it bursts, famed investor Jeremy Grantham predicted. The co-founder of the asset-management firm GMO… said the current superbubble was entering its ‘final act’ due to deteriorating economic conditions. A recent ‘bear-market rally’ that saw the S&P 500 recoup 58% of its losses from a June low follows the pattern of past stock-market crashes in 1929, 1973 and 2000… ‘The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing and stocks all critically overpriced and now rapidly losing momentum), commodity shock and Fed hawkishness,’ Grantham wrote… ‘Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come.'”

Jeremy Grantham has enjoyed a long and distinguished career. He accurately predicted bursting stock market Bubbles in Japan in the late-eighties, along with the U.S. equities Bubbles in the late-nineties and again in 2008. Grantham will surely only solidify Wall Street legend status with his latest “superbubble” call.

For years, I’ve referred to the “Granddaddy of All Bubbles.” “Super Bubble” has a more polished, conventional ring. A “superbubble” word search in Grantham’s excellent six-page shareholder letter nets 27 hits. “Bubble” receives an additional nine. I also appreciate Grantham’s attention to critical issues that somehow don’t garner deserved attention.

Grantham: “All that is to say: these long-term negative issues that I have kept at the back of my mind (and hopefully yours) for years – climate, human fertility, food, and other resources – are now becoming relevant short-term issues that bear on both inflation (upwards) and growth (downwards). Indeed, collectively, they pose a potential risk to our long-term viability.”

With “Credit” and “debt” combining for zero word search hits, there is room to differentiate my Bubble analysis from Mr. Grantham’s. Asset inflation and speculative Bubbles are always and everywhere monetary phenomena. The U.S. stock market “superbubble” is a manifestation of history’s greatest global Credit Bubble. Moreover, the post-2008 crisis “blow-off” finale saw unprecedented debt growth span the globe, with epic inflation at the very core of global finance – perceived safe central bank Credit and government debt.

Grantham: “Why are the historic superbubbles always followed by major economic setbacks? Perhaps because they occurred after a very extended build-up of market and economic forces – with a major surge of optimism thrown in at the end.”

Super Credit Bubbles are followed by acute instability and economic upheaval. Invariably, a crisis of confidence in Credit and the Credit system plays a profound role. Why was the post-mortgage finance Bubble economic downturn much deeper than the post-tech Bubble recession? Because Credit system impairment was significantly more severe. Importantly, a crisis of confidence in risky mortgage Credit poisoned the liabilities of highly levered financial institutions, fostering disruption and a dramatic slowdown in Credit growth (an actual contraction of mortgage Credit).

The Great Depression was more the fallout from a crisis of confidence in debt and banking systems than a direct consequence of the 1929 stock market crash. Supercycles – such as the one that gained momentum coming out of the First World War, only to succumb to “blow-off” extreme excesses during the “Roaring Twenties” – see an unsustainable buildup of speculative Credit (leverage) in asset markets (i.e. bonds, stocks, real estate…). As was certainly the case in October 1929, the bursting of a speculative Bubble in the securities markets can be the catalyst for a destabilizing contraction of speculative Credit. Market deleveraging then leads to illiquidity, general risk aversion, and an abrupt slowdown – or even contraction – of system Credit.

Super Credit Bubbles inevitably end in crisis. Boom periods ensure Credit excesses that fuel resource misallocation and mal-investment. Government and central bank market intervention and reflationary measures – as we’ve witnessed repeatedly – can thwart Credit impairment and tightening, but at the great cost of spurring only greater excess along with an extended cycle. Repeat this boom-bust-government reflation cycle a few times, and you’re witnessing a Supercycle. Supercycles culminate with a terminal confluence of reckless policymaking, dysfunctional markets and egregious financial excess.

The heart of the matter: an untenable mountain of debt is supported by a deeply maladjusted economic structure. The amount of perceived wealth tied up in speculative asset Bubbles becomes completely divorced from underlying wealth producing capacity within the real economy. The unavoidable bursting of speculative Bubbles unleashes forces that expose deep-seated system Credit, market and economic fragilities, along with policy impotency.

Each Supercycle has unique characteristics – shaped by technological innovation and innovations in financial, policymaking, market and economic structure. At some point, Bubble excess turns overtly perilous. Policymakers either no longer retain the capacity to prolong the Bubble, or view the costs of further extending the cycle as too prohibitive (i.e. Japan 1989).

I could not agree more with Jeremy Grantham. The worst is yet to come. While speculative market Bubbles have been pierced, the long and arduous process of structural economic adjustment has yet to commence. Credit Bubbles have begun to burst at the “Periphery,” yet the adjustment to the New Cycle begins in earnest when Credit growth falters at the “Core.”

With my analytical Bubble focus on Credit, a brief data overview:

I’ll refer to data from the IIF’s May Global Debt Monitor: “Total global debt rose by $3.3 trillion in Q1 2022 to a new record of over $305 trillion – mostly due to the U.S. and China.” Comparing Q1 2022 to pre-Covid Q3 2019 (10 quarters), total global debt surged $52.9 TN, or 20.9%. Over this period, emerging market (EM) debt expanded $26.2 TN, or 36.1%, led by a 47% surge in EM government debt and a 32.6% increase in EM non-financial corporate debt.

Additional detail behind the ongoing historic expansion of U.S. and Chinese Super Credit Bubbles:

U.S. Non-Financial Debt (NFD) growth averaged $530 billion during the nineties. This annual average inflated to $1.892 TN for the mortgage finance Bubble period 2000-2007, with a 2004 peak of $2.90 TN. Pandemic year 2020 saw NFD growth spike to $6.752 TN, with last year’s expansion slowing to a still enormous $3.797 TN. NFD then expanded a nominal $1.659 TN during 2022’s first quarter, a blistering 10.2% growth rate. Household Mortgage borrowings expanded at the fastest pace (8.62%) since 2006, while Consumer Credit (non-mortgage) grew at the strongest rate (8.73%) since 2001.

China’s metric for system Credit – Aggregate Financing – expanded $5.1 TN over the past year (through July). While Credit growth slowed slightly from 2020’s historic deluge ($5.2 TN), it still dwarfs 2019’s $3.8 TN and 2018’s $3.3 TN. As a macro analyst of Credit, it is both remarkable and ominous that China today confronts such instability even in the face of ongoing massive Credit inflation. Understandably, Beijing is reluctant to push system Credit to only more perilous extremes.

Policy discussions are not framed around Credit, and Central bankers certainly don’t discuss the necessity of significantly slowing debt growth to restrain inflationary forces. But that’s the reality.

August 29 – Reuters (Balazs Koranyi and Howard Schneider): “The message from the world’s top finance chiefs is loud and clear: rampant inflation is here to stay and taming it will take an extraordinary effort, most likely a recession with job losses and shockwaves through emerging markets. That price is still worth paying, however. Central banks spent decades building their credibility on inflation fighting skills and losing this battle could shake the foundations of modern monetary policy. ‘Regaining and preserving trust requires us to bring inflation back to target quickly,’ European Central Bank board member Isabel Schnabel said. ‘The longer inflation stays high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power.’ Banks should also keep going even if growth suffers and people start to lose their jobs. ‘Even if we enter a recession, we have basically little choice but to continue our policy path,’ Schnabel said. ‘If there were a deanchoring of inflation expectations, the effect on the economy would be even worse.'”

And for those hoping for some back-peddling after the market’s poor reception of Powell’s hawkish Jackson Hole talk, there was none.

August 29 – Bloomberg (Joe Weisenthal, Tracy Alloway and Jonnelle Marte): “Sharp stock-market losses show investors have got the message that Jerome Powell and his colleagues are serious about tackling inflation,” said Minneapolis Fed President Neel Kashkari. ‘I was actually happy to see how Chair Powell’s Jackson hole speech was received… People now understand the seriousness of our commitment to getting inflation back down to 2%.'”

The global central bank community is now in alignment. Their job is today so challenging specifically because they for much too long irresponsibly accommodated unbridled Credit growth. And certainly “globalization” played a major role in years of relatively quiescent consumer price inflation, despite massive monetary and asset inflation.

It’s now payback time. Inflation has become a global phenomenon. Global Credit excess, supply chain issues, and climate change are beyond the scope of individual central banks. Moreover, faltering global Bubbles certainly exacerbate acute geopolitical risks. Unfolding energy and food crises are compounding inflation risk and policy challenges.

Hopeful talk of Goldilocks returned after Friday’s report of stronger-than-expected labor force growth, along with weaker-than-expected Average Hourly Earnings. I can’t help but think that there’s currently too much focus on economic data. Credit growth must slow, and there is at this point sufficient momentum in general price inflation and lending to sustain the Credit boom. Central banks have signaled they are not backing down because of recession risk.

Following the eurozone’s 9.1% inflation report, the emboldened ECB hawks are ready to make their case next week for a big hike. Increasingly fragile global markets are on a collision course with concerted aggressive monetary tightening. And Fed QT (quantitative tightening) jumps to $95 billion this month. With $2.17 TN of reverse repos currently held at the Fed, the conventional view holds that this “excess cash” allows for a seamless shrinking of the Fed’s balance sheet.

Probably the more germane discussion would center around the impact of Fed liquidity withdrawals in a backdrop of de-risking/deleveraging and waning market liquidity. Moreover, it’s worth pondering potential market function issues for the global derivatives marketplace in the event of a serious bout of de-risking/deleveraging in conjunction with QT and central bank liquidity support (i.e. “Fed put”) ambiguity. Market liquidity and dislocation concerns make selling market protection an only riskier proposition.

Summing it up, there’s a strong case that global markets are at the cusp of succumbing to Crisis Dynamics, which will be especially difficult to shake this time around. The Super Credit Bubble is at the brink. Quoting Grantham: “If history repeats, the play will once again be a Tragedy. We must hope this time for a minor one.” I’m holding out hope, but nothing I see points to “a minor one.”

For the Week:

The S&P500 dropped 3.3% (down 17.7% y-t-d), and the Dow fell 3.0% (down 13.8%). The Utilities declined 1.6% (up 2.9%). The Banks lost 2.5% (down 20.6%), and the Broker/Dealers slumped 2.7% (down 10.5%). The Transports sank 4.5% (down 16.6%). The S&P 400 Midcaps dropped 4.3% (down 15.8%), and the small cap Russell 2000 fell 4.7% (down 19.4%). The Nasdaq100 stumbled 4.0% (down 25.9%). The Semiconductors sank 7.1% (down 34.1%). The Biotechs slipped 0.6% (down 14.8%). With bullion down $26, the HUI gold equities index dropped 5.2% (down 27.6%).

Three-month Treasury bill rates ended the week at 2.8075%. Two-year government yields slipped a basis point to 3.39% (up 266bps y-t-d). Five-year T-note yields rose nine bps to 3.29% (up 203bps). Ten-year Treasury yields jumped 15 bps to 3.19% (up 168bps). Long bond yields rose 15 bps to 3.35% (up 144bps). Benchmark Fannie Mae MBS yields surged 19 bps to 4.68% (up 261bps).

Greek 10-year yields surged 23 bps to 4.18% (up 287bps). Spain’s 10-year yields rose 12 bps to 2.71% (up 215bps). German bund yields rose 14 bps to 1.53% (up 170bps). French yields gained 13 bps to 2.15% (up 195bps). The French to German 10-year bond spread narrowed one to 62 bps. U.K. 10-year gilt yields surged 32 bps to 2.92% (up 195bps). U.K.’s FTSE equities index fell 2.0% (down 1.4% y-t-d).

Japan’s Nikkei Equities Index sank 3.5% (down 4.0% y-t-d). Japanese 10-year “JGB” yields added two bps to 0.24% (up 17bps y-t-d). France’s CAC40 fell 1.7% (down 13.8%). The German DAX equities index recovered 0.6% (down 17.8%). Spain’s IBEX 35 equities index slumped 1.6% (down 9.0%). Italy’s FTSE MIB index was about unchanged (down 19.8%). EM equities were mostly lower. Brazil’s Bovespa index declined 1.3% (up 5.8%), and Mexico’s Bolsa index dropped 2.9% (down 13.9%). South Korea’s Kospi index dropped 2.9% (down 19.1%). India’s Sensex equities index was little changed (up 0.9%). China’s Shanghai Exchange Index lost 1.5% (down 12.5%). Turkey’s Borsa Istanbul National 100 index gained 2.4% (up 73.5%). Russia’s MICEX equities index rallied 8.9% (down 34.7%).

Investment-grade bond funds posted outflows of $4.641 billion, and junk bond funds reported negative flows of $5.043 billion (from Lipper).

Federal Reserve Credit last week declined $21.6bn to $8.797 TN. Fed Credit is down $92.7bn from the June 22nd peak. Over the past 155 weeks, Fed Credit expanded $5.070 TN, or 136%. Fed Credit inflated $5.986 Trillion, or 213%, over the past 512 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $4.5bn to a nine-week high $3.391 TN. “Custody holdings” were down $91bn, or 2.6%, y-o-y.

Total money market fund assets slipped $2.5bn to $4.568 TN. Total money funds were up $58bn, or 1.3%, y-o-y.

Total Commercial Paper added $2.2bn to $1.199 TN. CP was up $42bn, or 3.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose 11 bps to a nine-week high 5.66% (up 279bps y-o-y). Fifteen-year rates gained 13 bps to 4.98% (up 280bps). Five-year hybrid ARM rates jumped 15 bps to 4.51% (up 208bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 23 bps to 6.10% (up 306bps).

Currency Watch:

August 31 – Bloomberg: “China kept up its resistance against yuan weakness by setting a stronger-than-expected currency fixing for a seventh straight day, prompting speculation of a possible adjustment to the mechanism to prevent the yuan from further depreciation.”

For the week, the U.S. Dollar Index increased 0.7% to 109.53 (up 14.5% y-t-d). For the week on the upside, the Mexican peso increased 0.5%. On the downside, the Norwegian krone declined 2.6%, the South African rand 2.4%, the South Korean won 2.3%, the Brazilian real 2.1%, the British pound 2.0%, the Japanese yen 1.8%, the Swiss franc 1.6%, the Australian dollar 1.2%, the Swedish krona 1.1%, the Canadian dollar 0.8%, the Singapore dollar 0.6%, the New Zealand dollar 0.6%, and the euro 0.1%. The Chinese (onshore) renminbi declined 0.41% versus the dollar (down 7.88% y-t-d).

Commodities Watch:

August 28 – Bloomberg (Yongchang Chin): “Goldman Sachs… urged investors to pile into commodities as most recession risks coursing through global markets are overblown in the near term, arguing that raw materials stand to rebound amid a profound energy crisis and tight physical fundamentals. ‘Our economists view the risk of a recession outside Europe in the next 12 months as relatively low,’ analysts including Sabine Schels, Jeffrey Currie and Damien Courvalin wrote… ‘With oil the commodity of last resort in an era of severe energy shortages, we believe the pullback in the entire oil complex provides an attractive entry point for long-only investments.'”

The Bloomberg Commodities Index sank 4.4% (up 20.1% y-t-d). Spot Gold declined 1.5% to $1,712 (down 6.4%). Silver dropped 4.5% to $18.04 (down 22.6%). WTI crude sank $6.19 to $86.87 (up 16%). Gasoline fell 13.6% (up 11%), and Natural Gas dropped 5.5% to $8.79 (up 136%). Copper sank 7.7% (down 24%). Wheat increased 0.7% (up 5%), and Corn added 0.2% (up 12%). Bitcoin slumped $700, or 3.4%, this week to $19,960 (down 57%).

Market Instability Watch:

August 30 – Wall Street Journal (Eric Wallerstein): “As stocks rallied over the summer and sank in recent days, a common force exacerbated the moves: the options market. Federal Reserve Chairman Jerome Powell spooked investors Friday when he vowed the central bank would keep fighting inflation, even at the expense of economic growth. The S&P 500 suffered its biggest one-day loss in more than two months. The market’s summer rally, however, began fizzling a week earlier, coinciding with the Aug. 19 expiration of more than $2 trillion in options. Strategists say that left the market vulnerable to a spike in volatility-one that could feed upon itself if options market dynamics take hold. ‘Options are primarily an insurance market,’ said Cem Karsan, founder and senior managing partner of Kai Volatility Advisors. ‘But insurance providers do not like to take directional risk; when they sell stock to stay ‘neutral’ to the market, it can create a circular effect.’ ‘The days around options expiration are when markets are most vulnerable to macroeconomic events; they can be a tinderbox,’ he added.”

September 2 – Bloomberg (Garfield Reynolds and Finbarr Flynn): “Under pressure from central bankers determined to quash inflation even at the cost of a recession, global bonds slumped into their first bear market in a generation. The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has fallen more than 20% from its 2021 peak on an unhedged basis, the biggest drawdown since its inception in 1990.”

August 30 – Bloomberg (Jack Pitcher): “US corporate credit spreads were not adequately priced for Federal Reserve Chair Jerome Powell’s hawkish comments at Jackson Hole, and are significantly underpricing the risk of a recession, according to UBS Group AG strategists. Current credit spread levels imply a 25% chance of a recession, compared to UBS’s forecast of a 55% chance, strategists led by Matthew Mish wrote… UBS expects US corporate credit spreads to retest this year’s wide levels ‘on further Fed hikes and slowing growth.'”

Bursting Bubble and Mania Watch:

August 28 – Wall Street Journal (Will Parker and Nicole Friedman): “Jack Cronin found San Francisco-area homes too expensive or too far from the city center to buy when he lived there in 2020. The tech worker still wanted a piece of the hottest housing market of his lifetime, so he started looking farther afield. Last year, the 28-year-old used a website called Roofstock… to buy a three-bedroom home outside Jackson, Miss., for $265,000. Mr. Cronin… has never visited Jackson nor met the tenants in his home, lightly landscaped with bushes and crepe myrtle trees. It’s enough to know that a management company collects $2,300 a month in rent for him. ‘So far, so good,’ he said. Mr. Cronin is part of a new movement of laptop landlords, in which individual investors are buying homes, often in other states, to rent out. Many are well-paid professionals who view owning a rental as a core investment, alongside stock or bond funds.”

Ukraine War Watch:

September 1 – Financial Times (Max Seddon, Nastassia Astrasheuskaya and Roman Olearchyk): “Vladimir Putin has called Ukraine ‘an anti-Russian enclave’ as Moscow delivered a renewed threat to western efforts to curb surging energy prices. Speaking in the Russian exclave of Kaliningrad…, Putin said of Ukraine: ‘Our guys who are fighting there are defending both the residents of Donbas [the industrial area in the east largely occupied by Russia] and defending Russia itself,’ according to news agency Interfax. ‘They started creating an anti-Russian enclave on the territory of today’s Ukraine that is threatening our country,’ Putin said.”

August 29 – Reuters (Andrea Shalal and Max Hunder): “Ukrainian troops bolstered by stepped-up Western military aid launched a long-awaited counter-offensive to retake territory in the south on Monday as Russian forces shelled residential areas of the Black Sea port city of Mykolaiv. Moscow acknowledged a new offensive had been launched but said it had failed and the Ukrainians had suffered significant casualties.”

U.S./Russia/China Watch:

August 31 – Associated Press (Vladimir Isachenkov): “Russia on Thursday launched weeklong war games involving forces from China and other nations in a show of growing defense cooperation between Moscow and Beijing, as they both face tensions with the United States. The maneuvers are also intended to demonstrate that Moscow has sufficient military might for massive drills even as its troops are engaged in military action in Ukraine.”

August 28 – Financial Times (John Paul Rathbone): “Russia and China will embark on a series of military exercises this week, a sign of Moscow’s deepening ties with Beijing and of the Kremlin’s desire to project a ‘business as usual’ image despite the mounting costs of its war in Ukraine. The Vostok war games… are held every four years in Russia’s far east. A reported 300,000 of its troops drilled alongside those from China and Mongolia during the last exercises in 2018, with this year’s manoeuvres given added symbolism by the fighting in Ukraine… Western officials and defence analysts say they illustrate the ‘friendship without limits’ that was pledged just before war broke out by presidents Vladimir Putin and Xi Jinping. The war games also underline the Kremlin’s ability to maintain ties with other non-western allies including Belarus and India, which will join the exercises.”

September 1 – Financial Times (Kathrin Hille): “Taiwan shot down a drone over one of its outlying islands for the first time…, as Taipei begins to respond more forcefully to a sustained Chinese military pressure campaign. The Taiwanese army said an unidentified commercial drone equipped with cameras intruded into restricted airspace over the waters around Shihyu, a Taiwan-controlled islet less than 4km from Chinese territory.”

August 31 – Reuters (Yimou Lee): “Taiwan said… it would exercise its right to self-defence and counter-attack if Chinese armed forces entered its territory, as Beijing increased military activities near the democratically governed island. Taiwanese defence officials said China’s ‘high intensity’ military patrols near Taiwan continued and Beijing’s intention to make the Taiwan Strait separating the two sides its ‘inner sea’ would become the main source of instability in the region. ‘For aircraft and ships that entered our sea and air territory of 12 nautical miles, the national army will exercise right to self-defence and counter-attack without exception,’ Lin Wen-Huang, Taiwan’s deputy chief of the general staff for operations and planning, told reporters.”

Economic War/Iron Curtain Watch:

September 2 – Bloomberg: “Russia’s Gazprom… said its key gas pipeline to Europe won’t reopen as planned, moving the region a step closer to blackouts, rationing and a severe recession. The pipeline was due to reopen on Saturday after maintenance. But in a last-minute move late Friday, the company said a technical issue had been found and the pipe can’t operate again until it’s fixed. The European Union said Gazprom was acting on ‘fallacious pretenses,’ and Siemens Energy, which makes the pipeline’s turbines, said what Gazprom had found didn’t justify cutting the gas. It’s a massive blow to Europe, which is scrambling to cut its dependency on Russian gas before winter and has been waiting for Moscow’s next steps in the energy war.”

August 31 – Reuters (Christoph Steitz and Nina Chestney): “Russia halted gas supplies via Europe’s key supply route on Wednesday, intensifying an economic battle between Moscow and Brussels and raising the prospects of recession and energy rationing in some of the region’s richest countries. European governments fear Moscow could extend the outage in retaliation for Western sanctions imposed after it invaded Ukraine and have accused Russia of using energy supplies as a ‘weapon of war’. Moscow denies doing this and has cited technical reasons for supply cuts.”

September 2 – Reuters: “The Kremlin said… that Russia would stop selling oil to countries that impose price caps on Russia’s energy resources – caps that Moscow said would lead to significant destabilisation of the global oil market. ‘Companies that impose a price cap will not be among the recipients of Russian oil,’ Kremlin spokesman Dmitry Peskov told reporters…”

August 29 – Reuters (Christoph Steitz and Tom Käckenhoff): “Uniper requested more financial help from the German government…, raising the bill for bailing out the utility group to an eye-watering 19 billion euros ($19bn), as soaring gas and power prices burn up its cash reserves. Dramatic price increases in recent days have exacerbated the situation for Germany’s largest importer of Russian gas, prompting it to seek more cash even as the details of last month’s bailout deal with Germany’s government have yet to be hammered out.”

August 30 – Financial Times (Sarah White and David Sheppard): “Gazprom is set to halt all gas deliveries to French utility Engie from Thursday, citing a payment dispute, adding to concerns over Russian supplies to Europe over the coming weeks as France and its neighbours search for alternatives. The Russian state-owned gas group said… it would suspend Engie’s deliveries in full from September 1 until the row had been resolved… Engie, which is France’s biggest supplier of gas to households and companies, had earlier warned its Russian deliveries would be reduced, citing a disagreement ‘on the application of some contracts’.”

September 1 – Reuters (Jorgelina Do Rosario): “Europe’s wealthiest nations face rising risks of civil unrest over the winter, including street protests and demonstrations, due to high energy prices and mounting costs of living, according to a risk consultancy firm. Both Germany and Norway are some of the developed economies experiencing disruptions to everyday life because of labour actions, a trend already seen in the United Kingdom, Verisk Maplecroft’s principal analyst Torbjorn Soltvedt told Reuters.”

August 29 – Reuters (Supantha Mukherjee and Alexander Marrow): “Western technology companies, including Ericsson and Nokia, announced plans for complete exits from Russia on Monday, following Dell last week, as the pace of withdrawals accelerates. Ericsson said it will gradually withdraw from Russia over the coming months, while its Finnish rival Nokia said it also plans to exit its Russian business by the end of the year. Switzerland-based Logitech International also said it would wind down its remaining activities in Russia… More western companies are selling or withdrawing from their Russian businesses, having initially halted operations after Moscow sent tens of thousands of troops into Ukraine on Feb. 24.”

August 31 – Reuters (Stephen Nellis and Jane Lanhee Lee): “Chip designer Nvidia Corp said… that U.S. officials told it to stop exporting two top computing chips for artificial intelligence work to China, a move that could cripple Chinese firms’ ability to carry out advanced work like image recognition and hamper Nvidia’s business in the country. The announcement signals a major escalation of the U.S. crackdown on China’s technological capabilities as tensions bubble over the fate of Taiwan, where chips for Nvidia and almost every other major chip firm are manufactured.”

September 1 – Reuters (Ben Blanchard): “Taiwan looks forward to producing ‘democracy chips’ with the United States, President Tsai Ing-wen told the visiting governor of the U.S. state of Arizona, Doug Ducey…, the latest in a string of senior officials from the county to visit. Taiwan has been keen to show the United States, its most important international backer and arms supplier despite the lack of formal diplomatic ties, that it is a reliable friend as a global chip crunch impacts auto production and consumer electronics… ‘In the face of authoritarian expansionism and the challenges of the post-pandemic era, Taiwan seeks to bolster cooperation with the United States in the semiconductor and other high-tech industries,’ Tsai said…”

Inflation Watch:

September 1 – Bloomberg (Elizabeth Elkin): “The cost to grow food is soaring according to a new US report, a sign that inflation and its worst effects, such as hunger, aren’t over. Everything that farmers use to cultivate crops from fertilizer to feed and labor are skyrocketing in price. Production costs are estimated to rise by $66.2 billion or 18% in 2022, the most ever, according to the US Department of Agriculture.”

August 30 – Financial Times (Martin Arnold): “German inflation accelerated to a 40-year high of 8.8% in the year to August, bolstering calls for the European Central Bank to accelerate the pace of interest rate rises when its policymakers meet next week. Consumer prices in Europe’s largest economy were mostly driven by the soaring cost of energy and food, lifting inflation 0.4 percentage points from July despite recent government measures to cushion the blow for households. The figures supported calls by ECB governing council members for the bank to be more aggressive in its policy response to the surge in inflation, which has hit its highest level since the euro was created 23 years ago and is expected to have accelerated further in August.”

August 29 – Financial Times (Valentina Romei): “Eurozone inflation will hit a double-digit rate in the autumn and remain higher for longer as a result of the surge in gas prices, economists have warned. The higher inflation expectations are putting pressure on the European Central Bank to consider a bigger rise in interest rates despite many economists forecasting an increasingly deeper recession as soaring energy prices hit business and consumer activity. ECB policymakers warned at last weekend’s gathering of central bankers at Jackson Hole, Wyoming, that greater sacrifices in terms of lost growth and jobs will be needed to bring inflation back under control. The European gas price last week hit a record of €343 a megawatt hour, more than double the figure at the end of July and seven times the price in the same period last year.”

September 1 – Reuters (David Milliken): “British businesses have increasingly high expectations for inflation and wage costs over the coming year, according to a Bank of England survey which is likely to boost policymakers’ concerns that it will be hard to get inflation back to target. Last month the Bank of England raised interest rates by half a percentage point – its biggest increase since 1995 – and said it would ‘act forcefully’ if it saw risks that inflation pressures were becoming persistent. Consumer price inflation hit a 40-year high of 10.1% in July and the BoE forecast it will peak above 13% in October.”

Biden Administration Watch:

September 1 – Politico (Nahal Toosi and Stephanie Liechtenstein): “Tehran has submitted its latest response in the ongoing negotiations to restore the Iran nuclear deal – and the United States is slamming it as a ‘not at all encouraging’ step ‘backwards.’ The negative reaction from the Biden administration – as well as European sources – suggests that a revival of the 2015 nuclear agreement is not imminent as some supporters of the deal had hoped, despite roughly a year and a half of talks. ‘We are studying Iran’s response, but the bottom line is that it is not at all encouraging,’ a senior Biden administration official told POLITICO…”

Federal Reserve Watch:

August 29 – Bloomberg (Alexandra Harris): “The Federal Reserve’s balance-sheet unwind is set to ramp up this week, which means the central bank will finally begin unloading the Treasury bills it started amassing almost three years ago. As part of its broader plan to reduce its $9 trillion portfolio, the Fed will boost its monthly caps for the amount of Treasuries and holdings of mortgage-backed securities that it will let mature to $60 billion and $35 billion, respectively, while using its $326 billion stash of T-bills as filler when coupons run below the monthly level. September will be the first month that bills will be redeemed since coupons will fall below the monetary authority’s new cap. The Fed’s portfolio has $43.6 billion of Treasury coupons maturing in September, which means that officials will need to let go of $16.4 billion of bills as well.”

August 30 – Reuters (Lindsay Dunsmuir and Dan Burns): “The head of the New York Federal Reserve… brushed aside concerns that the central bank may once again have to call an early end to reductions of its large-scale asset holdings because of a drop in reserves in the banking system. ‘I don’t agree with that concern,’ New York Fed President John Williams said… He had been asked if the decline in bank reserves held at the Fed over the last year augured for a repeat of the market trouble seen in 2019 as its balance sheet reduction program known as quantitative tightening, or QT, shifts into high gear.”

August 31 – Bloomberg (Rich Miller): “Forget about a soft landing. Federal Reserve Chair Jerome Powell is now aiming for something much more painful for the economy to put an end to elevated inflation. The trouble is, even that may not be enough. It’s known to economists by the paradoxical name of a ‘growth recession.’ Unlike a soft landing, it’s a protracted period of meager growth and rising unemployment. But it stops short of an outright contraction of the economy. Powell ‘buried the concept of a soft landing’ with his Aug. 26 speech in Jackson Hole, Wyoming, said Diane Swonk, chief economist at KPMG LLP. Now, ‘the Fed’s goal is to grind inflation down by slowing growth below its potential,’ which officials peg at 1.8%.”

August 31 – CNBC (Jeff Cox): “Cleveland Federal Reserve President Loretta Mester said… she sees interest rates rising considerably higher before the central bank can ease off in its fight against inflation. Mester… said she sees benchmark rates rising above 4% in the coming months. That’s well above the current target range of 2.25%-2.5% for the federal funds rate, which sets what banks charge each other for overnight borrowing but is tied to many consumer debt instruments… ‘My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there,” she said… ‘I do not anticipate the Fed cutting the fed funds rate target next year.'”

August 30 – Reuters (Ann Saphir and Lindsay Dunsmuir): “U.S. Federal Reserve officials… reiterated their support for further interest-rate hikes to quell inflation, with the influential chief of the New York Fed saying the central bank will likely need to get its policy rate ‘somewhat above’ 3.5% and keep it there through the end of 2023. ‘I see us needing to kind of hold a policy stance – pushing inflation down, bringing demand and supply into alignment – it’s going to take longer, will continue through next year,’ New York Fed chief John Williams told the Wall Street Journal. ‘Based on what I’m seeing in the inflation data, and what I’m seeing in the economy, it’s going to take some time before I would expect to see adjustments of rates downward.'”

August 30 – MarketWatch (Greg Robb): “The Federal Reserve knows it has ‘a fight ahead’ to bring inflation down but is committed to the task, said Atlanta Fed President Raphael Bostic… In a new essay…, Bostic said the Fed is committed to keeping the economy ‘as strong as possible.’ ‘With the harm that higher prices cause Americans, and the risk of slower economic growth that accompanies higher interest rates, I will be resolute, but purposeful, in my view of the appropriate pace of tightening monetary policy,’ he said.”

August 30 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Richmond President Thomas Barkin vowed the US central bank would not flinch in its efforts to cool prices but cautioned it might not be a smooth process. ‘We’re committed to returning inflation to our 2% target and we’ll do what it takes to get there,” Barkin said… ‘I’d expect inflation to bounce around on the way back to our target,’ he told the Huntington Regional Chamber of Commerce…”

August 31 – Reuters (Ann Saphir): “Lorie Logan started her new job as president of the Federal Reserve Bank of Dallas just over a week ago, but on Wednesday lost no time making clear she is ready to jump in alongside her fellow U.S. central bankers to fight inflation. ‘Being president of the Dallas Fed and as a policymaker, our number one priority has to be to restore price stability,’ Logan said… Logan was reflecting on the several days she spent last week attending a global central bankers’ conference in Jackson Hole… ‘The theme was very clear… the clear priority was bringing inflation down, because it’s having significant implications and hardships for businesses and households,’ Logan said. ‘And that really lines up with my own priority.'”

U.S. Bubble Watch:

September 2 – CNBC (Jeff Cox): “Nonfarm payrolls rose solidly in August amid an otherwise slowing economy, while the unemployment rate ticked higher as more workers rejoined the labor force… The economy added 315,000 jobs for the month, just below the… estimate for 318,000 and well off the 526,000 in July… The unemployment rate rose to 3.7%, two-tenths of a percentage point higher than expectations largely due to a rising labor force participation rate… Wages continued to rise, though slightly less than expectations. Average hourly earnings increased 0.3% for the month and 5.2% from a year ago, both 0.1 percentage point below estimates. Professional and business services led payroll gains with 68,000, followed by health care with 48,000 and retail with 44,000. Leisure and hospitality… rose by just 31,000 for the month after averaging 90,000 in the previous seven months of 2022.”

September 1 – CNBC (Jeff Cox): “Initial filings for unemployment insurance fell to their lowest level since late June last week, a sign that the labor market is resilient amid a slowing economy. Claims totaled a seasonally adjusted 232,000 for the week ended Aug. 27, a decline of 5,000 from the previous period and the lowest since June 25… Economists… had been looking for 245,000. Continuing claims increased to 1.44 million, up 26,000 from the previous level in data that runs a week behind the headline number.”

August 31 – Financial Times (Alexandra Scaggs): “The US housing market is cooling faster than expected, as supply-chain issues continue to bite in that sector, according to Goldman Sachs. The bank expects US home-price increases to decelerate through the rest of this year and then flatline in 2023… This is not because the supply strains are getting better, but because demand is falling as US mortgage costs increase. The economists looked at the state of the market in a note this week, and found some interesting trends… First, the economists write, the housing market has slowed faster in areas that got a boost during Covid-19. Second, the supply issues keep getting worse, and it looks like the homeowner vacancy rate has reached an all-time low. This figure… includes homes that are open and for sale, so it could be driven by the proliferation of homes that aren’t exactly vacant (because they’re rented out for vacations), but aren’t exactly occupied, either.”

August 31 – CNBC (Jeff Cox): “Companies sharply slowed the pace of hiring in August amid growing fears of an economic slowdown, according to payroll processing company ADP. Private payrolls grew by just 132,000 for the month, a deceleration from the 268,000 gain in July… ‘Our data suggests a shift toward a more conservative pace of hiring, possibly as companies try to decipher the economy’s conflicting signals,’ said ADP’s chief economist, Nela Richardson. ‘We could be at an inflection point, from super-charged job gains to something more normal.’ August payroll numbers are notoriously volatile.”

August 31 – CNBC (Diana Olick): “After falling back earlier this month, mortgage rates began rising sharply again to the highest level since mid-July. That caused mortgage demand to pull back even further. Total mortgage application volume fell 3.7% last week compared with the previous week… Volume was 63% lower than the same week one year ago… Mortgage applications to purchase a home dropped 2% for the week and were 23% lower than the same week one year ago. ‘Purchase applications have declined in eight of the last nine weeks, as demand continues to shrink due to higher rates and a weaker economic outlook,’ Kan said.”

August 29 – CNBC (Stephanie Landsman): “Negative economic growth in the year’s first half may be a foreshock to a much deeper downturn that could last into 2024. Stephen Roach, who served as chair of Morgan Stanley Asia, warns the U.S. needs a ‘miracle’ to avoid a recession. ‘We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,’ Roach told CNBC… ‘They haven’t kicked in at all right now’… ‘Go back to the type of pain Paul Volcker had to impose on the U.S. economy to ring out inflation. He had to take the unemployment rate above 10%,’ said Roach. ‘The only way we’re not going to get there is if the Fed under Jerome Powell sticks to his word, stays focused on discipline, and gets that real Federal funds rate into the restrictive zone. And, the restrictive zone is a long ways away from where we are right now.'”

August 29 – Bloomberg (Martine Paris): “For cash-strapped renters, the situation is getting more dire in many US metro areas. The Zumper National Rent Index shows the median national one-bedroom rent for a newly listed one-bedroom now at $1,486, up 11.8% over August 2021 – beating last month’s record high. More than half of US cities are showing double-digit rent hikes, with some over 30%. New York City continues to be the priciest place to be a tenant, with median one-bedroom rent up 39.9% year-over-year; those with two-bedroom apartments are paying 46.7% more. Manhattan leads the boroughs, with monthly rent climbing to $4,212, up 27% over last year.”

Fixed Income Watch:

August 30 – Bloomberg (Garfield Reynolds and Finbarr Flynn): “Bonds are sliding toward the first bear market in a generation, burning investors who erred in bets that central banks would pivot away from rapid interest-rate hikes. The Bloomberg Global Aggregate Index, which tracks total returns from investment-grade government and corporate bonds, is within a percentage point of falling 20% from its peak after another bout of selling following the Federal Reserve’s Jackson Hole symposium.”

China Watch:

August 30 – Bloomberg: “China’s factory activity contracted in August for a second straight month, with the economy taking a hit from power shortages spurred by a historic drought, on top of a property market crisis and Covid outbreaks. The official manufacturing purchasing managers index rose to 49.4 from 49 in July… The non-manufacturing gauge, which measures activity in the construction and services sectors, fell to 52.6 from 53.8 in July… What Bloomberg’s Economists Say… ‘China’s August PMIs confirmed signals from high-frequency data — the economy continued to lose speed over the summer. Multiple shocks took a toll, ranging from Covid-19 outbreaks to power shortages, on top of pressures from the property slump.'”

August 29 – The Hill (Diane Francis): “Russia’s terrible war generates headlines, but China’s growing debt crisis is mostly ignored. And yet, it will have profound negative effects on the global economy. In just three generations, Beijing built a middle class bigger than America’s entire population. But now Chinese many face ruination. China’s domestic real estate bubble, due to deregulation, is so gargantuan that much of its middle class has been damaged. ‘China’s debt bomb looks ready to explode and many warning signs suggest that a debt reckoning is imminent,’ warns Nikkei Asia. A massive mortgage revolt is underway, and as banks fail, protests grow. Today, 50 million empty or unfinished units bought on ‘spec’ in hundreds of urban areas may never be completed or paid for, equivalent to one-third of all housing units in the United States. Besides that, Beijing itself is owed $1 trillion by struggling governments around the world that cannot afford to pay back loans for Belt and Road Initiative projects. The result of this domestic and foreign borrowing is that this year China’s debt is expected to reach the equivalent of 275 percent of its GDP…”

August 31 – CNN (Nectar Gan): “The countdown to Xi Jinping’s expected coronation has officially started. In 47 days, China’s ruling Communist Party will hold its 20th National Congress, at which Xi is widely expected to extend his hold on power for another five years – a move that would cement his status as the country’s most powerful leader in decades. The congress will begin in Beijing on October 16 at a ‘critical time’ for the country, the party’s 25-member Politburo announced…, adding that preparations were ‘progressing smoothly’… The highly choreographed affairs usually last about a week, bringing together some 2,000 delegates from across the country in a show of unity and legitimacy.”

August 30 – Reuters (Yew Lun Tian and Tony Munroe): “China’s ruling Communist Party opens its 20th congress on Oct. 16 that is likely to end with President Xi Jinping anointed for a third, five-year term as the supreme leader and a shuffle of personnel on the decision-making Politburo… About 2,300 party members from across the country will gather, mostly behind closed doors, at the cavernous Great Hall of the People on Beijing’s Tiananmen Square for a once-in-five-years congress that typically runs for about one week. Delegates will elect about 200 full members with voting rights to the party’s elite Central Committee, plus about 170 alternates, drawing from a pre-selected pool. The new Central Committee’s first plenum, held the day after the Congress ends, will select from its ranks 25 members for the Politburo. Most closely watched will be the unveiling of the new Politburo Standing Committee, the party’s top echelon that currently has seven members, after the plenum.”

August 29 – Bloomberg: “China has rolled out ‘more forceful’ economic policies this year than it did in 2020, Premier Li Keqiang said, as he warned the country faces an arduous task in ensuring its recovery. Li was speaking during a… meeting of the State Council, China’s cabinet, where he added that the size of stimulus in 2022 has been ‘reasonable’ and ‘appropriate,’ according to reports from state broadcaster CCTV and the official Xinhua News Agency.”

August 31 – Bloomberg: “The Chinese metropolis of Chengdu locked down its 21 million residents to contain a Covid-19 outbreak, a seismic move in the country’s vast Western region that has largely been untouched by the virus. The capital of Sichuan province, Chengdu is the biggest city to shut down since Shanghai’s bruising two-month lockdown earlier this year. The move… shows the country’s commitment to the Covid Zero approach espoused by President Xi Jinping, despite the disruption it’s causing.”

August 31 – Financial Times (Edward White): “In Shenzhen, one of the world’s most important technology and manufacturing centres, all it took was 35 coronavirus cases for officials to lock down swaths of the city of 17.5mn people. Officials in Chengdu.. on Thursday announced a citywide lockdown affecting 21mn people after 156 new local cases were reported. Since Sunday, partial lockdowns, mass testing campaigns, public transport suspensions and school closures have been imposed across a number of Chinese cities… Yet experts believe President Xi Jinping’s zero-Covid policy will continue into 2023, until Chinese scientists develop vaccine technology to stop coronavirus from spreading or for a dominant mutation to emerge with significantly less severe health consequences… ‘It will require some miracles,’ said Chen Long, a partner at Beijing-based consultancy Plenum.”

August 28 – Bloomberg: “Economists are turning more bearish about China’s economy, downgrading their growth forecasts further for 2022 and seeing lingering risks into next year as turmoil in the property market and Covid outbreaks persist. The economy is now projected to grow just 3.5% this year, down from a previous forecast of 3.9%, according to Bloomberg’s latest quarterly survey of economists… The downgrades suggest economists aren’t convinced Beijing’s recent stimulus measures — which more recently include 1 trillion yuan in funds largely for infrastructure projects, and central bank rate cuts — can help counter the slowdown.”

August 29 – Wall Street Journal (Cao Li): “Shares in China’s privately run banks have fallen sharply this year, as the country’s property slowdown starts to bite. The… shares of China Merchants Bank and Ping An Bank Co.-two of China’s biggest, most prominent privately run lenders-have fallen by 32% and 25%, respect