Disorder Metastasis
Doug Nolan
“Stocks Extend Record-Breaking Run After Jobs Data.”
“Investors Pour $140bn into US Stock Funds After Trump Election Victory.”
“Cash Draws Biggest Weekly Inflow Since March 2023, BofA Says.”
“Market Frenzy Fuels $1 Trillion ETF Rush to Break Annual Records.”
“Jane Street Reaps $14.2 Billion in First Nine Months of Trading.”
“France Plunges Deeper Into Crisis After Macron’s Premier Ousted.”
“After Trying to Impose Martial Law, South Korea’s President Faces an Impeachment Vote.”
“Syrian Rebels Close in on Homs as Russia Tells its Citizens to Leave Country.”
“China Urges its Citizens to Leave Syria 'As Soon as Possible' as Fighting Rages.”
Another week’s developments confirm Disorder Metastasis has attained critical momentum – monetary, speculative Bubble, political and geopolitical.
Might as well start with the monetary.
December 6 – Reuters (Lucy Raitano):
“Investors ploughed $136.4 billion into cash in the week to Wednesday, the biggest weekly inflow since March 2023, when markets were rattled by a regional banking crisis, according to a report from Bank of America… citing data from EPFR.”
According to ICI data, Money Market Fund Assets (MMFA) surged $95.9 billion last week to a record $6.771 TN.
MMFA were up $637 billion, or 30% annualized, over the past 18 weeks – with y-t-d growth of $885 billion, or 15.9% annualized.
In one of history’s spectacular monetary inflations, MMFA inflated $2.212 TN, or 49%, since the Fed commenced “tightening” in March 2022, and $3.137 TN, or 86%, since the start of the pandemic (Feb. ’20).
As noted in the above Reuters article, last week’s MMFA expansion was the largest since the March 2023 banking crisis – the week ended March 15th to be exact.
That bout of MMFA ballooning was associated with major liquidity injections from the Fed and FHLB.
Instead of Fed and GSE balance sheet leveraging, this year’s incredible MMFA expansion correlates to an extraordinary expansion of speculative leverage.
It’s worth noting that 78% ($74.5bn) of last week’s expansion – and 75% ($474bn) of the 18-week surge – are explained by growth in institutional money funds (as opposed to retail).
I believe these flows have been greatly impacted by repo market “basis trade” leveraging and securities finance more generally (intermediated through institutional funds).
Leveraged speculation accelerated last year after the Fed signaled the end to rate increases, only to intensify when the Fed communicated imminent rate cuts.
Things then went haywire heading into the election and following the decisive Trump win and Republican sweep.
Importantly, the boom in speculative leverage and attendant liquidity abundance has been a global phenomenon.
French yields declined two bps this week to 2.88%, with spreads to German yields narrowing four to 77 bps.
French sovereign CDS declined four to 36 bps.
French banks SocGen and BNP Paribas CDS dropped four, with European Bank (subordinated) CDS sinking seven to 104 bps – right at the low back to September 2021.
France’s CAC40 Equities Index rallied 2.7% (Germany’s DAX up 3.9% and Italy’s MIB 4.0%).
How to square the week’s stellar market performance with “France Plunges Deeper Into Crisis After Macron’s Premier Ousted”?
“Britain’s ‘Truss moment’ involved a political initiative to worsen a bad budgetary situation.
It coincided with a period of global financial instability, and Britain had no access to external backing.
By contrast, Barnier was attempting to improve a bad budgetary situation.
His fall coincides with a period of global financial euphoria.
France has access to the ‘pooled insurance” that is an integral part of the euro-zone setup."
Mohamed A. El-Erian, Bloomberg, December 5, 2024.
Mr. El-Erian’s cogent insight is worthy of brief exploration.
Today’s “financial euphoria” has its roots in wild excess, speculative leverage and resulting liquidity overabundance, and upside market dislocation.
In contrast, the “Truss Moment” erupted after an 11-week surge in UK yields from 1.86% to 4.34%, a destabilizing deleveraging-induced yield spike.
Deleveraging and liquidity issues were quickly taking hold globally.
Over this period, 10-year Treasury yields surged from 2.65% to 4.22%.
The Fed was only seven months into a potentially problematic tightening cycle, with markets fretting about de-risking/deleveraging and a less certain Fed liquidity backstop.
Well, the Fed’s response to the March 2023 banking crisis clarified any Fed backstop ambiguity.
Between the unprecedented multi-trillion pandemic monetary inflation and a “tightening” cycle calibrated to avoid “breaking” anything, market faith in central bank liquidity operations reached a new level.
And now the world is into a global easing cycle.
As for the Eurozone's “pooled insurance,” the ECB has dabbled with a plethora of liquidity-providing facilities, including the Transmission Protection Instrument (TPI), “to counter unwarranted, disorderly market developments if these pose a serious threat to the smooth transmission of monetary policy across the euro area.”
When Prime Minister Michel Barnier warned of an impending financial “storm”, leaders on the far right and far left scoffed and readily submitted their no confidence votes.
In France and elsewhere, necessary structural reform will have to wait until it is imposed by financial market “storms” currently suppressed due to omnipresent central bank liquidity backstops.
With the U.S. at the epicenter, global markets are generally over-liquefied and dysfunctional.
Years of “whatever it takes” ensure powerful Bubble dynamics, including extremely loose financial conditions and speculative markets conditioned to revel in aggressive risk-taking.
After all, high-risk developments ensure shorting, hedging, and tantalizing squeeze opportunities.
Those that had hedged French risk this week found themselves with the same bullseye on their backs as hedgers in U.S. markets and globally.
And nowhere are excessively loose conditions more conspicuous than with “core” U.S. markets.
The Fed sees things differently.
Fed Governor Christopher Waller:
“I believe the evidence is strong that policy continues to be significantly restrictive, and that cutting again will only mean that we aren’t pressing on the brake pedal quite as hard.”
Federal Reserve Bank of New York President John Williams:
“I expect it will be appropriate to continue to move to a more neutral policy setting over time.”
Federal Reserve Bank of San Francisco President Mary Daly:
“Whether it’ll be in December or some time later, that’s a question we’ll have a chance to debate and discuss in our next meeting, but the point is we have to keep policy moving down to accommodate the economy.”
Additional accommodation risks overheating.
November Nonfarm Payrolls were somewhat above forecast at 227,000, with a notable 0.4% gain in Average Hourly Earnings (4.0% y-o-y).
Job Openings (JOLTS) jumped about 370k to 7.519 million.
University of Michigan Consumer Confidence (current conditions) surged a much stronger-than-expected 15 points to an eight-month high of 77.7.
November auto sales were stronger-than-expected at the highest level (16.5 million annualized) since June 2021.
October Consumer Credit was almost double forecasts at $19.2 billion, the strongest reading since July.
And early data point to a robust holiday shopping season.
December 6 – Bloomberg (Andrea Felsted):
“Here’s a holiday riddle for retailers: Can Black Friday ever be too good?
Americans pulled out their credit cards en masse during what is now a multi-day shopping bonanza stretching from Thanksgiving to Cyber Monday.
Some 197 million US consumers shopped over the five days, according to the National Retail Federation and Prosper Insights & Analytics, ahead of initial expectations of 183.4 million…
While in-store spending on Black Friday was broadly flat compared with last year, online was up 14.6%, according to Mastercard SpendingPulse.
The strong digital trend continued over the weekend, with spending from Nov. 26 to Dec. 2 up 7% in the US, according to Salesforce.”
The Atlanta Fed GDPNow Forecast has increased to 3.29%.
This is up from Q3’s 2.8% GDP print, continuing an acceleration from Q1’s 1.6% - and would be the strongest growth since Q3 23’s 4.4%.
Fed officials asserting “significantly restrictive” surely realize it’s a weak argument.
They want to cut rates, and I’ll assume they’re increasingly uncomfortable with wide international interest differentials.
Markets are pricing 28 bps of additional ECB rate reduction next week to 2.89%.
The euro traded last week to a two-year low, with vulnerability and disorder at the periphery (i.e., Europe, China, and EM) risking a destabilizing dollar spike.
On the subject of disorder, one of the more interesting articles of the week comes from the Financial Times’ Leo Lewis:
“South Korea’s Tumult is a Symptom of China-US strife - As the Globalisation-Friendly World Order Fades, its New Geoeconomic Course is Fraught with Risk.”
“Korea is also a concentrated illustration of the often zero-sum impact of China’s rise, and of its capacity to rapidly and savagely destabilise the certainties of earlier times.
If Tuesday’s madness was, via the process that installed the outsider Yoon in the first place, a pathology of deepening public despair at the capacity of politics to solve the big issues, China is among the reasons that many of those issues seem so intractable.
In economic terms, Chinese companies and their steady ascent up the value chain now mount a formidable challenge in areas such as semiconductors, white goods, consumer electronics and automotive.
This is tough for everyone, but these are sectors that have been disproportionately responsible for Korea’s industrial miracle, and thus disproportionately pain-inducing.”
“Public despair at the capacity of politics to solve the big issues.”
It’s a world of metastasizing big issues beyond the capacity of even the most competent government officials.
President Trump campaigned on the premise that there wasn’t an issue he couldn’t solve in short order.
He’ll have his hands full with today’s rapidly deteriorating geopolitical landscape.
“‘It’s a tectonic shift,’ said Andrew Tabler, a senior fellow at the Washington Institute for Near East Policy... ‘Regional and international powers intervened in Syria over a decade ago, and now the conflicts of Ukraine, Gaza and Lebanon all come together and overlap in Aleppo.’”
(from WSJ’s Yaroslav Trofimov).
December 6 – Washington Post (Robyn Dixon):
“The lightning advance of rebels in Syria and their rapid capture of the cities of Aleppo and Hama are threatening one of Russian President Vladimir Putin's proudest achievements, his 2015 military intervention to prop up Bashar al-Assad's regime.
Almost a decade later, however, Moscow is embroiled in a massive land war in Europe and analysts question whether it has the resources to save Assad again…
‘We are in constant dialogue with our Syrian friends, with Damascus,’ Kremlin spokesman Dmitry Peskov said...
‘And depending on the assessment of the situation, it will be possible to talk about the degree of assistance that is necessary for the Syrian authorities to cope with the militants and eliminate this threat.’
At risk here is not just Russia's prestige but its prized military foothold in the eastern Mediterranean region:
The naval base of Tartus and, further north, the Hmeimim Air Base…”
The stunning rebel advance through Aleppo, on to Hama and to the outskirts of Homs.
“‘If Homs were to fall, Damascus would be cut off from the coast, effectively severing what would remain of regime rule into two,’ said Charles Lister, a senior fellow and director of the Syria program at the Middle East Institute.”
(From the Washington Post’s Bryan Pietsch)
December 6 – Financial Times (Malaika Kanaaneh Tapper and Polina Ivanova):
“Russia’s embassy in Damascus has warned its citizens they may need to leave Syria as rebel forces approach the strategic city of Homs, with the regime’s struggle to slow the militants’ rapid offensive spiraling into a deepening crisis for Bashar al-Assad.
Russia, which has been supporting Assad’s government by targeting the rebel forces with air strikes, said its citizens could leave the country on commercial airlines via accessible and functioning airports.”
For those of us who have pondered the risk of an Israeli/Iranian conflagration sparking a regional war, and perhaps even WWIII headway, there are alternative scenarios.
Does an Assad regime collapse unleash a power vacuum and absolute anarchy and violence for an already chaotic region?
Does Putin move to protect Assad and Russia’s interests in Syria?
How about Assad allies Iran, Iraq and their multifarious militant groups?
Meanwhile, Turkey’s Erdogan cheers on the rebels’ advance, while it’s quickly become open season for various militant groups to grab whatever territory they can control.
The Kurdish forces in the north are being opportunistic, while preparing for reprisals and confrontation.
The IDF is stepping up bombing raids on Hezbollah supply routes in Syria, while deploying additional troops to the Golan Heights. Jordan and Lebanon closed their borders with Syria.
The Assad, Iran, Hezbollah alliance is in tatters, while indispensable ally Russia’s “military operation” in Ukraine is a quagmire.
There is a power vacuum militant groups are determined to exploit.
If markets don’t care, it must not be important.
Ukraine, Russia, France, South Korea, China, Taiwan, Syria, the Middle East…
Bubble markets make things so comfortable.
Frog in the Pot Syndrome.
And “American Exceptionalism,” now that’s a luscious Bubble bath in a grand Jacuzzi tub.
If parabolic “blowoff” speculative excess wasn’t precarious enough.
Historic market Bubbles are these days on a collision course with metastasizing geopolitical disorder.
Russia claims Ukraine and the U.S. are behind the rebels’ breakneck advance on Damascus.
Putin was already increasingly unhinged.
If Bashar Assad falls, it’s one more embarrassment to feed vindictiveness and the urge for retribution. “American exceptionalism” must have Putin seething.
I imagine there’s nothing he would rather do than pop Bubbles.
December 5 – Financial Times (Nicholas Megaw):
“Investors have pumped almost $140bn into US equity funds since last month’s election as traders bet Donald Trump’s administration will unleash sweeping tax cuts and reforms in a boon to corporate America.
US equity funds have notched up inflows of $139.5bn since Trump’s victory on November 5…
The rush of buying made November the busiest month for inflows on records stretching to 2000.
The flood of new money has helped to drive the major US stock indices to a series of record highs…”
December 6 – Bloomberg (Isabelle Lee):
“The optimism sweeping Wall Street has spurred investors to plow a record $1 trillion into US exchange-traded funds so far in 2024, racking up yet another milestone for the industry.
With some 16 trading days left to go, this year’s net inflows have already surpassed the $903 billion high in 2021.
Investor appetite for assets ranging from staid fixed income to speculative leveraged bets in an easy-to-trade ETF wrapper has helped fuel the boom.
The market frenzy reached a fever pitch in November…
It marked the best month for the S&P 500 this year while ETFs of all stripes saw a record $155 billion pour in, averaging inflows of around a $7.3 billion a day…”
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