WorldoutofWhack

India spend writes…..

With 80% of districts in Karnataka and 72% in Maharashtra hit by drought and crop failure, 8.2 million farmers in these two states struggle to survive. More than 6,000 tankers supply water to 4,920 villages and 10,506 hamlets or settlements (bastis) in drought-hit Maharashtra daily, as a conflict brews between the two states over common water resources.

Further south, the Tamil Nadu government sanctioned Rs 233 crore for several emergency water projects, as the water supply in four reservoirs supplying water to Chennai dropped below 1% of their capacity, causing an acute water crisis, which shut down Chennai’s metro system. With piped water cut by 40%, people line up in queues for water tankers. They also complain of foul-smelling water, as if it were mixed with sewage.

Districts in Karnataka have shut schools for an extra week due to water scarcity. Short duration summer crops in Tamil Nadu and Maharashtra are taking a hit.  

The situation is similar across India as the country is currently experiencing an acute water crisis, as we explain later. There is no respite in sight anytime soon as the southwest monsoon this year, responsible for 80% of India’s rainfall, is projected to be delayed and below normal in north and south India.

As of May 30, 2019, more than 43.4% of the country was reeling under drought, according to the Drought Early Warning System (DEWS), a real-time drought monitoring platform. And failed monsoon rains are the primary reason for the current situation. India has been experiencing widespread drought every year since 2015, with the exception of 2017, IndiaSpend reported on April 3, 2019.

The north-east monsoon, also known as ‘post-monsoon rainfall’ (October-December) that provides 10-20% of India’s rainfall, was deficient by 44% in 2018 from the long-term normal of 127.2 mm, as per data from the India Meteorological Department (IMD). This compounded the rainfall deficit in the southwest monsoon (June-September), which fell short by 9.4% in 2018–close to the 10% deficit range when the IMD declares a drought, said the IndiaSpend report.

The pre-monsoon rainfall (March 1-May 31) in 2019 was the lowest in 65 years.

Read Full article below

https://www.indiaspend.com/worldenvironmentday-600-million-indians-face-acute-water-crisis/

via Almost Daily Grant

Change is afoot. Across venture capital, high-end real estate and the retail sector of the stock market, investor behavior has seen a notable shift recently.  A trio of sightings:   

The Wall Street Journal reports today that SoftBank Group Corp. (9984 on the Tokyo Stock Exchange) has been “met with a chilly reception” in efforts to raise capital for a sequel to the $100 billion Vision Fund.   

Contributing factors, per the Journal, include the fact that the larger investment firms generally have the capability to invest in start-ups directly and are thus reluctant to pay an additional round of fees, as well as concerns over the Vision Funds’ “lack of transparency.” Cantor Fitzgerald, L.P., tasked with raising funds for the project, approached would-be investors for commitments of as little as $50 million, a move which “tends to be a last resort for firms raising big investment pools. . . in part because of the cost of servicing multiple accounts.” Cantor scrapped the strategy “after [SoftBank] objected.”   

Not just for SoftBank (termed “the epitome of the cycle in the Dec. 15, 2017 edition of Grant’s Interest Rate Observer) does the environment appear less hospitable.  Last week, The Real Deal reported that Secured Capital Partners LLC., which owns a 157-acre land parcel in Beverly Hills, filed for Chapter 11 bankruptcy protection in Los Angeles federal court. Secured Capital listed the property for a record-breaking $1 billion last summer. Finding no takers, the list price was dropped to $650 million in February.   

In its bankruptcy filing, Secured Capital listed $50 million to $100 million in liabilities, and assets of between $500 million to $1 billion (that was revised from less than $500,000 initially, an apparent typo). Ronald Richards, the fund’s lawyer, asserted in the filing that “the property will be sold or refinanced utilizing the best value the market or lending environment will bear.”  The inability of this asset-rich, cash-poor borrower to extend terms on its debts may be a new development in this cycle.   

While the winds seem to be shifting in the V.C. and real estate realms, a key corridor of the economy has fallen into deep freeze, if the stock market is any guide.  Thus, independent retail analyst Mitch Nolen notes on Twitter today that apparel retailers have logged a brutal recent stretch, with each of the 24 clothing store stocks he tracks falling last month, with all but three absorbing double-digit declines in May.   

More broadly, trouble in the apparel sector has spared neither the established players nor high-flying newcomers. Last week, industry mainstays Gap, Inc. and Abercrombie & Fitch Co. shares plunged 10% and 27%, respectively, after reporting weaker than expected sales in the most recent quarters. At the luxury end of the spectrum, Canada Goose Holdings, Inc. absorbed a 27% selloff last Wednesday after missing revenue expectations for the first time since its 2015 IPO. Since ripping higher by 450% from March 2017 to November of last year, GOOS shares have since lost more than 50%

Doug Noland writes…..

May 31 – Bloomberg (Felice Maranz): “President Trump’s promise to impose tariffs on goods until Mexico halts a flow of undocumented immigrants is being panned by analysts and economists… Here’s a sample of the latest commentary: MUFG, Chris Rupkey: ‘If you are going to turn the world upside down with these America First trade sanctions against imports from China, car imports from Europe, and now immigration from Mexico, you risk turning the economy upside down… Keep your eye trained on stock market valuations as the magnitude of the decline will tell you when investors have had enough and are rushing to the safety of cash in an increasingly dangerous and uncertain world.’ Cowen, Chris Krueger: ‘In the space of a few hours last night, Trump overturned all we thought we understood about the near term direction of the Administration’s trade strategy’… The president ‘unveiled a one-two punch that we believe will make USMCA extremely hard to pass in both Mexico and the U.S.’ ‘When Tariff Man returned on a rainy Sunday (May 4) to announce tariff escalations on China, we detected a consensus that this was merely a negotiating tactic… In the 27 days that have followed, no public talks have been held and the tariff escalation for goods in-transit along with China’s escalation on $60 billion in U.S. exports is hours away.’ AGF Investments, Greg Valliere: ‘These tariffs break new ground’ …because ‘they’re political, a punishment to Mexico for not stopping the surge of immigrants from Central America.’ He listed five ‘enormous implications’: Damage to USMCA ratification process; potential that a ‘slumbering’ Congress may awaken; Trump may not be finished with new tariffs, triggering higher prices for products…; Trump doesn’t seem to be listening to advisers, appears unconcerned by market and economic damage; Federal Reserve may now be forced to cut rates, but that may not be enough to reverse the damage.’”

May 31 – Bloomberg (Michelle Jamrisko and Enda Curra): “Prospects for a U.S.-China trade deal just became even more remote after President Donald Trump whacked tariffs that could rise to 25% on Mexico until that country stops immigrants from entering the U.S. illegally. ‘A U.S.-China trade deal will be even less likely,’ said Khoon Goh, head of research at Australia & New Zealand Banking Group… ‘At the end of the day, what’s the point of doing a deal if the U.S. can just impose tariffs arbitrarily?’ Investors are already bracing for a prolonged economic stand-off between the world’s two biggest economies. One potential beneficiary of the impasse was likely to be Mexico as companies considered shifting supply chains away from China toward lower-cost markets closer to American consumers. The latest escalation of Trump tariffs threatens that process.”

May 31 – Bloomberg (Michael Sin): “‘Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent,’ U.S. Senate Finance Committee Chairman Chuck Grassley (R-Iowa) says… ‘Following through on this threat would seriously jeopardize passage of USMCA.’”

May 31 – Bloomberg (Michael R. Bloomberg): “President Donald Trump’s approach to trade policy had set new benchmarks of incoherence and irresponsibility even before his threat to impose escalating tariffs on imports from Mexico — but this latest maneuver takes the cake. The administration plans to harm businesses north and south of the border, and to impose additional new taxes on U.S. consumers, not to remedy a real or imagined trade grievance but to force Mexico to curb migration to the U.S. This is a radical and disturbing development. The administration is invoking a law that allows it to impose emergency economic sanctions. It’s safe to say that Congress never envisaged that those powers would be used in a case like this.”

According to CNBC reporting (Kayla Tausche and Tucker Higgins), the President’s Mexico tariff move was “spearheaded by advisor Stephen Miller.” That the decision was made despite opposition from both Treasury Secretary Mnuchin and Trade Representative Lighthizer is only more troubling to the markets (and the world more generally). Has the President “gone off the rails”? CNBC: “The surprise decision to announce the tariff plan came as Trump was ‘riled up’ by conservative radio commentary about the recent surge in border crossings… As the tariff plan was formulated, top advisors, including Vice President Mike Pence, who was traveling, and Larry Kudlow, who was undergoing surgery, were away.”

“‘Unreliable’ Trump Throws Markets Into Tizzy as Traders Scramble,” read a Friday afternoon Bloomberg headline. With the S&P500 index wobbling just above the key 200-day moving average, traders had been looking for a supportive tweet. Who would have expected it to be the President to nudge markets toward the cliff’s edge? Meanwhile, increasingly anxious currency traders hit a landmine, as the Mexican peso was slammed 2.4% in Friday trading (2.9% for the week). Mexico’s S&P IPC equities index dropped 1.4%. As if awakening to how incredibly uncertain the backdrop has become, gold surged $21 this week. Seemingly experiencing nightmares of global depression, WTI crude collapsed 8.7% for the week.

For a day, dramatic threats of Mexico tariffs almost took the spotlight off the rapidly escalating China-U.S. trade war. Almost.

May 31 – New York Times (Alexandra Stevenson and Paul Mozur): “The Chinese government said on Friday that it was putting together an ‘unreliable entities list’ of foreign companies and people, an apparent first step toward retaliating against the United States for denying vital American technology to Chinese companies. China’s Ministry of Commerce said the list would contain foreign companies, individuals and organizations that ‘do not follow market rules, violate the spirit of contracts, blockade and stop supplying Chinese companies for noncommercial reasons, and seriously damage the legitimate rights and interests of Chinese companies.’”

This is turning serious. The “Unreliably Entities List” follows reports earlier in the week that China is preparing to restrict the export of rare earth minerals. Friday from the New York Times: “As China Takes Aim, Silicon Valley Braces for Pain.” Another Friday headline, “U.S. is Dependent on China for Almost 80% of Its Medicine,” played into the narrative that the trade war is suddenly appearing much more complex and ominous than previously envisioned. China clearly has the capacity to play hardball; preparations have commenced.

May 29 – Reuters (Ben Blanchard, Michael Martina and Tom Daly): “China is ready to use rare earths to strike back in a trade war with the United States, Chinese newspapers warned… in strongly worded commentaries on a move that would escalate tensions between the world’s two largest economies… In a commentary headlined ‘United States, don’t underestimate China’s ability to strike back’, the official People’s Daily noted the United States’ ‘uncomfortable’ dependence on rare earths from China. ‘Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,’ it said. ‘Undoubtedly, the U.S. side wants to use the products made by China’s exported rare earths to counter and suppress China’s development. The Chinese people will never accept this!’ the ruling Communist Party newspaper added. ‘We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!’”

I’ll assume the Mexican tariff issue is resolved relatively soon, while the trade war with China appears poised to be a major and protracted problem. As I’ve highlighted in previous CBBs, this confrontation comes at a tenuous juncture for China’s financial system and economy. The assumption – for the markets and, apparently, within the administration – has been that fragilities would incentivize Beijing to play nice and succumb to a deal.

The Trump administration pushed aggressively, and the deal blew apart. And the longer conciliatory tones go missing from both sides, the more likely it is that the Rubicon has been crossed. This significantly increases the likelihood that China is heading into a crisis backdrop, with Beijing enjoying a larger-than-life “foreigner” “bully” to blame, berate and villainize before a population with expectations perhaps as great as the challenges they now confront.

What could be the most consequential story of the past week received little press attention in the U.S. – and maybe even less in China.

May 28 – Bloomberg: “Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers. The takeover of Baoshang Bank Co. — announced with scant explanation on Friday night — left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades. Regulators have said they’ll guarantee Baoshang’s smaller depositors, and while they’ve warned some creditors of potential losses, they haven’t said what the final payouts could be or given public guidance on whether the takeover will be a blueprint for other lenders. Complicating matters is the fact that Baoshang has been linked to a conglomerate under investigation by Chinese authorities.”

It’s a testament to the incredible growth of China’s banking system (from about $7 TN to $40 TN since the ’08 crisis) that Baoshang, with its mere $80 billion of assets, is one of a very large group of “small banks.” Along with most “small” Chinese banking institutions, Baoshang tapped the “money” markets for much of its gluttonous financing needs. It issued institutional negotiable certificates of deposit (NCD) and aggressively borrowed in the interbank lending market. The first Chinese government bank seizure in 20 years is further notable for Beijing’s decision to impose losses on some Baoshang creditors. While retail depositors are to receive 100% of their funds, corporate and financial creditors face painful haircuts.

May 29 – Reuters (Cheng Leng, Zheng Li and Andrew Galbraith): “Chinese regulators have issued instructions for the repayment of debts owed by China’s beleaguered Baoshang Bank that could see larger debts facing haircuts of as much as 30%, two sources with knowledge of the matter told Reuters. According to oral instructions detailed by the sources, regulators will guarantee the principal but not the interest on interbank debts between 50 million yuan and 100 million yuan. Debts of more than 5 billion yuan ($723.47 million) will have no less than 70% of their principal guaranteed, the sources said. For debts between 100 million and 2 billion yuan, regulators will guarantee no less than 90% of principal, and for debts of 2 billion yuan to 5 billion yuan, no less than 80% of principal will be guaranteed.”

May 31 – Bloomberg: “Holders of bankers’ acceptances worth more than 50m yuan ($7.2m) issued by Baoshang Bank will be repaid at least 80% of the principal, said people familiar with the matter. Investors were told on Friday that while they will be repaid 80% initially, they may still have recourse to the rest of the repayment as regulators progress in resolving Baoshang’s finances…”

Beijing has moved to invalidate the implicit 100% state guarantee of all large bank liabilities – deposits, NCDs, bankers’ acceptances, interbank loans, etc. Such a critical issue should have been decisively addressed years ago – certainly long before China’s Bubble inflated in “Terminal Phase” excess. Now, with the colossal sizes of China’s banking system and money market complex – coupled with rapidly expanding problem loans – a banking crisis would add Trillions (U.S. $) to the central government’s debt load. Bank losses will have to be shared by the marketplace, a prospect few to this point have been willing to contemplate. Going forward, investors will increasingly question the perceived “money-like” attributes of safety and liquidity for Chinese financial instruments.

Baoshang is part of an organization controlled by a Chinese tycoon under criminal investigation. While not a typical bank, its vulnerable financial structure is typical of scores of Chinese financial institutions whose breakneck growth was financed by cheap loans readily available for all from China’s booming (“shadow”) money market. Reminiscent of America’s GSE experience, it was all made possible by implied government guarantees Beijing was for too long content to empower. Beijing has now moved to adjust the rules of the game, with major ramifications for China’s fragile historic Bubble – right along with world markets and the global economy more generally.

May 28 – Bloomberg (Ina Zhou): “Pressure is building in a corner of Chinese lenders’ offshore debt after the nation’s first government seizure of a bank in about two decades. Loss-absorbing bonds, known at Additional Tier 1 instruments or AT1s, plunged across several small lenders on Tuesday after a sell-off on Monday. Huishang Bank Corp.’s 5.5% AT1s sank by a record 3 cents on the dollar Tuesday, while Bank of Jinzhou Co.’s 5.5% note fell most since July and China Zheshang Bank Co.’s 5.45% bond had the steepest drop in a year.”

The Shanghai Composite jumped 1.6% this week, while China’s currency was down only slightly (.07%). Superficially, it was easy to dismiss the Baoshang seizure as “no harm, no foul.” Thank the PBOC.

May 29 – Reuters (John Ruwitch and Simon Cameron-Moore): “China’s central bank made its biggest daily net fund injection into the banking system in more than four months on Wednesday, a move traders saw as an attempt to calm the money market after the rescue of a troubled bank. The government announced its takeover of Baoshang Bank on Friday… Worries that Baoshang’s plight might herald wider problems among China’s regional banks had driven money market rates higher, until the People’s Bank of China (PBOC) delivered a mighty infusion of cash on Wednesday.”

The PBOC’s $36 billion Wednesday injection raises a crucial question: What will be the scope of liquidity needs when a major bank finds itself in trouble – when escalating systemic stress begins fomenting a crisis of confidence? It’s worth noting that Chinese sovereign CDS jumped six bps this week to 59 bps, the high since January. Overnight repo and interbank lending rates rose, along with Chinese corporate bond yields. According to Bloomberg, issuance of negotiable certificates of deposit slowed sharply this week. Chinese finance is tightening, an ominous development for a fragile Bubble.

This is where the analysis turns absolutely fascinating – and becomes as important as it is chilling. The PBOC is at increasing risk of confronting the same predicament that other emerging central banks faced when their Bubbles succumbed: in the event of a mounting crisis of confidence in the stability of the financial system and the local currency, large central bank injections work to fan market fears while generating additional liquidity available to flow out of the system. “Everyone has a plan until they get punched in the mouth.”

Markets ended the week pricing in a 95% probability of a Federal Reserve rate cut by the December 11th meeting. Ten-year Treasury yields sank 20 bps this week to 2.12%, falling all the way back to the lows from September 2017 (2.57% 30-yr yield to pre-2016 election level). German bund yields dropped nine bps to a record low negative 0.20%. Swiss yields fell five bps to negative 0.51%, with Japanese JGB yields down two bps to negative 0.10%. I view the ongoing global yield collapse as powerful confirmation of the acute fragility of Chinese and global Bubbles.

If President Trump is determined to squeeze rate cuts out of the Federal Reserve, he made impressive headway this week. This CBB began with, “So Much for the Trump Put.” As for the “Beijing put,” a $36 billion PBOC liquidity injection was indiscernible beyond Chinese markets. Investors in U.S. securities would be wise to anticipate zero favors from China.

As such, markets are left with the “Fed put.” For the most part, U.S. stocks, equities derivatives and corporate Credit have been comfortable banking on the Federal Reserve backstop. But with things turning dicey in China, risk aversion is gaining a foothold. Investment-grade funds saw outflows surge to $5.1 billion the past week (“most since 2015”). Corporate spreads and CDS prices have begun to indicate liquidity concerns. With the “Fed put” now in play, there are important questions to contemplate: Where’s the “strike price” – what degree of market weakness will it take to compel the Fed to move – and, then, to what effect? Markets, after all, have already priced in aggressive rate cuts. It could very well require some “shock and awe” central banking to reverse markets once panic has begun to set in. And it’s as if global safe haven bond markets are anticipating a bout of panic in the not too distant future.

http://creditbubblebulletin.blogspot.com/2019/06/weekly-commentary-so-much-for-trump-put.html

By Apra Sharma

The world is changing and consumers are becoming more powerful each passing day. They have the ability to throw a business in garbage or to sky rocket another.

Chobani founder Hamdi Ulukaya advocates a new way of doing business, unlike traditional breakdown of spreadsheet analysis or corporates hunting for profit or businesses trying to find a way to earn more money or as the CEO playbook says ‘shareholders’, the Anti – CEO Playbook, is as per him what we need today and in future.

As per CEO playbook communities, factories and jobs can be sacrificed but not the CEO. Their pay only goes up. “It’s time to admit that the playbook that guided businesses & CEOs for 40 years is broken”, says Hamdi.

There are people in movies who take a different path to do right things called anti – heroes, Anti – CEO playbook is what business need to do right and be right.

Hamdi was in need of a factory space for his yogurt business. In the upstate New York, he found a plant worthless being sold for minimum price, the people who were working there silently and gracefully surrendering their jobs and the CEO sitting in a tower on some goddamn floor with spreadsheets in his hand and making decisions purely in pursuit of profit.

Hamdi, by August 2005 had the keys of the factory and he decided to hire 4 of the 55 people working there before. Gradually, over the years, he hired all 55 back and they together created a business much better than they were employed for before and each had a financial stake in it too. He believed that as the number of his hires will grow from initial 55 to 100 more to 1000 more and another 1000 and so on, for every 1 job created in his factory, there were 10 new jobs in local businesses. In one year, he build a baseball field for children and 5 years later, they became the number one Greek yogurt brand in the country.

Today 30 percent of Chobani workforce are immigrants and refugees. In Idaho, their world’s largest yogurt plant, they were told by locals that they would find no trained workers there. Hamdi still built a factory space, partnered with local community college and trained people in advanced manufacturing.

He says, “Today’s playbook tells you all about business except how to be a noble leader. We need a new playbook. One that see people above and beyond profits.”

Anti – CEO playbook is about gratitude, asking communities ‘how can I help you?’, responsibility and accountability.

“Business exists to maximise profits for shareholders”, says today’s business books. Instead its time we take a reality check, businesses should take care of their employees first.

New way of business should be to search for communities you can be a part of and ask for their permission.

Businesses as citizens must pick a side because its them and not government in a position to change today’s world.

In businesses, CEO should report to consumers instead of corporate boards because that’s the reason they exist.

This new playbook would clearly highlight the difference between profit and true wealth. Anti CEO playbook is about “If you are right with your people, if you’re right with your community, if you’re right with your product, you’ll be more profitable, innovative and you would have more passionate people working for you with a community that supports you!”

Doug Noland writes…

After years of increasingly close cooperation and collaboration, the relationship has turned strained. Both sides are digging in their heels. Credibility is on the line. If one side doesn’t back down, things could really turn problematic. The Fed is asserting that it’s not about to lower the targeted Fed funds rate. Markets are strident: You will cut, and you will cut soon. Bonds are instructing the world to prepare for the Long March.

Market probability for a rate cut by the December 11th FOMC meeting jumped to 80% this week, up from last week’s 75% and the previous week’s 59%.

May 22 – Reuters (Howard Schneider and Jason Lange): “U.S. Federal Reserve officials at their last meeting agreed that their current patient approach to setting monetary policy could remain in place ‘for some time,’ a further sign policymakers see little need to change rates in either direction. ‘Members observed that a patient approach…would likely remain appropriate for some time,’ with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5%, the Fed… reported in the minutes of the central bank’s April 30-May 1 meeting. Recent weak inflation was viewed by ‘many participants…as likely to be transitory,’ while risks to financial markets and the global economy had appeared to ease – a judgment rendered before the Trump administration imposed higher tariffs on Chinese goods and took other steps that intensified trade tensions.”

Analysts have been quick to point out that additional tariffs along with the breakdown in trade negotiations unfolded post the latest FOMC meeting. True, yet several Fed officials have recently reiterated the message of no urgency to lower rates. This week Atlanta Federal Reserve President Raphael Bostic said he doesn’t see the Fed reducing rates. In a Thursday Bloomberg interview, Federal Reserve Bank of Cleveland President Lorretta Mester went so far as to state that reducing rates (to boost inflation) would be “bad policy.” This followed New York Fed President John Williams’ Wednesday comment: “I don’t see any strong argument today, based on what we have seen in the data or other information, to move interest rates one way or the other.” On Thursday, Dallas Fed President Robert Kaplan stated he was “agnostic at this point about whether the next move is up or down.”

Agnostic the markets are not. Ten-year Treasury yields dropped another seven bps this week to the lows (2.32%) since December 15th, 2017. Two-year yields declined four bps to 2.17%, the low going back to February 2018. Sinking market yields are anything but a U.S. phenomenon. German 10-year bund yields declined another basis point to negative 0.11%, trading this week at low yields going all the way back to the summer of 2016. Swiss yields fell four bps this week to negative 0.45% (low since October 2016). Japanese JGB yields fell two bps to negative 0.07%.

Curiously, yields dropped 15 bps in Italy (2.55%), nine bps in Portugal (0.97%) and six bps in Spain (0.82%). Yields this week were down to 0.04% in Denmark, 0.07% in the Netherlands, 0.11% in Finland, 0.17% in Sweden, 0.19% in Austria, 0.37% in Belgium, 0.38% in Slovakia, 0.45% in Latvia and 0.54% in Slovenia. We have become numb to an incredible market spectacle.

Global “risk off” gathered some momentum this week. The Shanghai Composite declined 1.0%, trading back to around February lows. China’s growth/tech ChiNext index sank 2.4% to the lowest level since February 22nd. Hong Kong’s Hang Seng China Financials index dropped 1.5% to the low going back to January 21st. China’s renminbi mustered a 0.26% gain versus the dollar, a notably unimpressive recovery considering its recent walloping.

“Risk off” was pervasive throughout European equities. Germany’s DAX index fell 1.9%, with France’s CAC40 down 2.2%. Led by a 6.6% drubbing in Italian bank shares, Italy’s MIB index sank 3.5%. Europe’s STOXX 600 Bank index fell 3.0%.

The S&P500 declined 1.2%, with the tech-heavy Nasdaq100 down 2.7%. The Semiconductors were hammered 6.4%. The Dow Transports fell 3.4%.

The unfolding “risk off” backdrop became too much for some key commodities markets. WTI crude was hammered 6.6% this week (biggest decline of the year), trading to a two-month low. Copper declined 1.7%, approaching January lows. Aluminum fell 2.0%, Zinc 1.5%, and Tin 1.0%. The Bloomberg Commodities Index traded Thursday at the lows since “U-turn” January 4th.

May 22 – Reuters (Michael Martina and David Lawder): “China must prepare for difficult times as the international situation is increasingly complex, President Xi Jinping said in comments carried by state media…, as the U.S.-China trade war took a mounting toll on tech giant Huawei… During a three-day trip this week to the southern province of Jiangxi, a cradle of China’s Communist revolution, Xi urged people to learn the lessons of the hardships of the past. ‘Today, on the new Long March, we must overcome various major risks and challenges from home and abroad,’ state news agency Xinhua paraphrased Xi as saying, referring to the 1934-36 trek of Communist Party members fleeing a civil war to a remote rural base, from where they re-grouped and eventually took power in 1949.”

May 19 – Bloomberg (Karen Leigh): “President Donald Trump said he was ‘very happy’ with the trade war and that China wouldn’t become the world’s top superpower under his watch. ‘We’re taking in billions of dollars,’ Trump told Fox News Channel’s Steve Hilton when asked about the end game on the trade war. ‘China is obviously not doing well like us.’ Trump’s comments signal he’s in no rush to get back to negotiating with Beijing… The president also told Hilton he believed China wants to replace America as the world’s leading superpower, and it’s ‘not going to happen with me.’ ‘I think that’s their intention… Why wouldn’t it be? I mean they’re very ambitious people, they’re very smart.’”

If it is negotiation posturing, it’s a rather convincing effort from both sides. Hopes for de-escalation from rapidly deteriorating Chinese/U.S. relations were tempered to start the week. “China is in ‘no rush’ to restart trade talks,” read the headline. President Trump’s comments regarding China not attaining superpower status under his watch played right into Beijing’s narrative.

May 20 – Bloomberg (Ian King, Mark Bergen, and Ben Brody): “The impact of the Trump administration’s threats to choke Huawei Technologies Co. reverberated across the global supply chain on Monday, hitting some of the biggest component-makers. Chipmakers including Intel Corp., Qualcomm Inc., Xilinx Inc. and Broadcom Inc. have told their employees they will not supply Huawei until further notice, according to people familiar with their actions. Alphabet Inc.’s Google cut off the supply of hardware and some software services to the Chinese mobile phone equipment giant, another person familiar said, asking not to be identified discussing private matters. The Trump administration on Friday blacklisted Huawei — which it accuses of aiding Beijing in espionage — and threatened to cut it off from the U.S. software and semiconductors it needs to make its products.”

With technology stocks in the crosshairs, equities were under heavy selling pressure in Monday trading (S&P500 down 2.4%, with the Dow sinking 617 points). In an effort to contain market and supply chain fallout, the administration after Monday’s close moved to grant tech firms a three-month license (with stipulations) to do business with Huawei. Tuesday’s rally suffered a short half-life.

By Tuesday evening, concerns were mounting after reports the Trump administration was considering adding Chinese surveillance firms to the blacklisted companies to be cut off from U.S. technology suppliers. It was the opposite of de-escalation.

Ten-year Treasury yields fell four bps Wednesday and another six on Thursday (to 2.32%). The Shanghai Composite dropped 1.4% in Thursday trading. In U.S. markets, the VIX popped to 18, as a whiff of vulnerability emerged in U.S. corporate credit. Junk bond spreads increased to near the widest – and investment-grade CDS prices near the highest – level since late-March. U.S. bank stocks dropped 1.8% in Thursday trading, as bank CDS prices widened moderately. For the week, investment-grade corporate bond funds suffered their first outflow ($756 million) in 17 weeks.

May 24 – Bloomberg (Brian Smith): “Like a punch-drunk boxer saved by the bell, the Memorial Day weekend couldn’t have come at a better time for the high-grade credit market. Credit spreads have blown out to the widest levels since March, the new issue market screeched to a halt mid-week… Total high-grade new issue volume (including EM) totaled just shy of $17 billion, well below projections of $20b-$25b, as at least three potential borrowers were said to have punted until next week… Three of this week’s new issue tranches failed to price at the tight end of the guidance range, a rare occurrence and clear signal of investor pushback… Nearly 75% of this week’s deals are trading wide to their new issue pricing levels.”

A Wall Street Journal article (James Mackintosh) headline resonated: “Investors Slowly Wake Up to Fears of a New Cold War – The U.S.-China Trade Conflict Might be a Repeat of a Pattern All-Too Common in Markets When it Comes to Geopolitical Risks: Ignore Them, Then Panic.”

It’s worth generally examining The “Ignore Them, Then Panic” Dynamic. At this point, perpetual monetary stimulus has become deeply imbedded within inflated securities prices across asset classes around the globe. One can disagree on potential catalysts and circumstances, but the most extreme global bond pricing dynamics clearly incorporate prospective rate cuts and additional QE. Meanwhile, risk markets are bolstered by collapsing market yields along with the perception of multiple market backstops (Fed/global central banks, Chinese stimulus, Trump/2020 elections, corporate buybacks, etc.).

Early on in the global government finance Bubble, I advanced the concept of the “Moneyness of Risk Assets.” This was an evolution from the mortgage finance Bubble period’s “Moneyness of Credit” market distortion. The aggressive use of rate policy and central bank balance sheets/Credit to promote stock and bond price inflation nurtured the (central bank backstop-induced) perception of risk assets as safe and liquid stores of value (i.e. money-like). Over time, this had momentous effects throughout the markets, certainly including the booming ETF and derivatives complexes.

When it comes to various risks, over years it became increasingly easy to simply “Ignore Them.” Central banks have repeatedly stepped up to backstop vulnerable risk markets. At the same time, the central bank “put” has ensured readily available inexpensive market insurance (i.e. put options). Why not write flood insurance when the authorities control the weather? And with market protection so cheap, is it not rational to partake in rewarding risk-taking activities? Moreover, with QE having become the principal instrument in the central banking toolkit, prices for Treasury, Bund, JGB and other “safe haven” bonds are essentially guaranteed to rise in the event of heightened systemic risk. Superior to even cheap derivative protection, can’t lose holdings of safe haven bonds offer protection while also inflating in value.

As I’m fond of discussing, crises typically erupt in the money markets. It is when the perception of safety and liquidity is suddenly questioned that all hell breaks loose. And never before have risk markets so harbored the misperception of money-like attributes. This explains the “Then Panic” Dynamic.

I have argued that contemporary finance functions poorly in reverse. The market-based global financial apparatus seemingly performs wondrously so long as securities prices rise, the cost of market protection remains cheap and risk embracement holds sway. And it is almost as if the system has evolved to operate quite splendidly under moderate degrees of apprehension. Such a backdrop provides the Buy the Dip Crowd easy opportunities, while lavishing effortless profits upon the writers/sellers of market protection. To be sure, a hospitable marketplace of mild pullbacks and robust rallies further emboldens the prevailing view that markets always go up (so ignore risk!).

As we witnessed in December, things can start to unwind rather quickly when markets begin questioning the timeliness and scope of the central bank backstop. When the faithful dip buyers reverse course and turn urgent sellers, there’s an immediate market liquidity issue. Worse yet, when the protection sellers (i.e. put writers) suddenly fear they might end up on the hook for substantial market losses, it’s “Then Panic.” They must either buy protection for themselves or start shorting securities to offset their exposure to escalating losses. Any time writers of derivative protection are forced into aggressive selling, markets quickly face a major liquidity problem.

I have argued that the bursting of China’s historic Bubble presents a catalyst for the piercing of the global Bubble. And I posited as recently as last week that the breakdown in U.S. trade negotiations risks pushing China over the edge. I also suggested that acute Chinese fragility likely explains the extraordinary drop in global safe haven bond yields. While this is reasonable analysis, it is surely too simplistic.

Crisis unfolding in China has become a high probability catalyst for bursting the global Bubble. Yet it is structurally-impaired global financial and economic systems that explain virtual panic buying of safe haven bonds in the face of resilient risk markets. For decades now, risk markets have climbed the proverbial “wall of worry” – seemingly scaling new heights after overcoming one potential crisis after another (i.e. deep U.S. recession, European crisis, geopolitical flashpoints, Brexit, multiple China scares, “flash crashes,” the winding down of QE, etc.). It’s rational for risk markets to welcome risk as an opportunity to capitalize on additional central bank and Beijing stimulus measures.

Safe haven bond markets view the backdrop altogether differently. Current market structure is unsustainable. Treasuries, bunds, JGBs, etc. are zeroed in on the risk markets’ proclivity for Ignore Them, Then Panic. The safe havens are now preparing for the Panic Phase, with the presumption that dysfunctional speculative dynamics and deep structural maladjustment ensure the next bout of “risk off” (de-risking/deleveraging) deteriorates into illiquidity and market dislocation.

The assumption is that central bankers will have no alternative than to cut rates and aggressively resort to even greater marketplace liquidity injections (QE). Considering the scope of speculative leverage permeating global markets, along with structural dependency to unending liquidity abundance, I don’t disagree with the safe haven perspective.

Highly speculative risk markets, heartened by extremely low yields and prospects for monetary stimulus, confront a major timing issue. They envisage the Fed and global central banks moving quickly and forcefully to reverse “risk off” before it gains momentum – emboldened by the January U-turn and the belief that the Fed learned from its December blunder.

The Fed, however, is signaling it sees no justification for an itchy trigger finger. There is a contingent within the FOMC surely not overjoyed by the speculative melee incited by their January “pivot”. Believing the markets and economy are fundamentally sound, the Fed back in December was caught unprepared for the intensity of market instability. Many on the FOMC likely view the markets’ rapid recovery as confirming their confidence in underlying system soundness and resiliency. I’ll also assume that Chairman Powell and some committee members are uncomfortable with the view of a “Fed put” not far below current market prices.

The huge 2019 risk market rally has only exacerbated underlying market and economic fragilities. Safe haven bonds concur with this view, while the collapse in global market yields works to support the speculative Bubble raging in the risk markets. Corporate Credit, in particular, has been underpinned by sinking sovereign bond yields. It has made it especially easy to Ignore Them – myriad risks including collapsed trade talks, rising U.S./China tensions, a fragile Chinese Bubble, waning global growth, vulnerable EM, susceptible European finance and economies, and the rapidly deteriorating geopolitical backdrop.

Healthy markets would adjust and correct to reflect heightened uncertainties and deteriorating prospects. Speculative markets instead promote excess and the ongoing accumulation of imbalances, maladjustment and impairment. There’s no operable release valve. Pressure builds and builds – risks accumulate in all the wrong places – Then Panic.

The flaw in contemporary finance – especially within market psychology over recent years – is to believe central bankers have nullified market, economic and Credit cycles. They have certainly averted a number of market crises over recent years, in the process significantly extending cycles. Along the way risk market participants grew greatly overconfident in the capacity of central bankers to permanently forestall crisis. Moreover, they have turned completely blind to the historic crisis festering just below the surface of their delusional view of a “Permanently High Plateau” of global peace and prosperity.

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