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Out of Sight, Out of Mind
UK Budget: Peek-A-Boo
Soundbite: Japan is exporting more than cars to England. The British government took a page from Japan’s fiscal excess and adopted a budget that ramps up spending. Both fiscal stimulus proposals are in response to an increasingly populist electorate. Chancellor of the Exchequer Rachel Reeves’ budget contains significantly wider deficits thanks to outlays on politically popular issues. Taxes are deferred but will rise to new record levels by 2028. Reeves already raised taxes last year by the largest amount in thirty years, quickly breaking Labour’s promise not to raise taxes on workers. At the time, she promised it would be a one-time tax increase, but the new budget plan calls for an additional $34 billion in annual taxes that will dampen growth over the next few years. Conservatives are complaining that last year’s corporate tax burden curbed investment, slowed growth, and created the need for this year’s additional stimulus. As with Japan, the proof of the pudding for this expansionary fiscal policy is growth. If their respective economies do not respond, both countries will see their deficits widen further. In a negative outcome where growth turns down, deficits in Japan and the UK will exceed acceptable levels. In what would be a nightmare scenario for the LDP and Labour Party, markets could face a situation in which growth falters but sovereign yields rise.
Taking a step back makes us consider the concept of object permanence, often associated with infant development. It describes the understanding that even when something is out of sight, it still exists.
We believe that investors are suffering from what we would describe as “object impermanence.”
Today’s investors are oblivious to imprudence. Eventually, markets will realize that not reacting to this fiscal avalanche does not make the problem go away. The fact is, countries with high Debt/GDP ratios adding more fiscal jet fuel to bolster consumers’ deteriorating financial position make an economy more vulnerable, not less. The inherent problem is that if growth does not unfold as planned, Japan, England, France, and, yes, the U.S., will be forced to double down on spending because their electorates will demand further populist measures.
Once the market’s fixation on easy monetary and fiscal policies ends, long-term sovereign bond exposures will be cut, and much higher yields will be demanded. Households and corporations will be forced to cut consumption, investment, and jobs in a circular, destructive fashion. Managing investment portfolios in 2026 will require recognition that this potential exists, and at the first sign of trouble, taking defensive action.
Note: Last night, Japanese Government Bond prices fell over 2.5%, sending yields to their highest levels since 2008. We had mentioned this possibility, where yields continued to react to Japan’s 240% Debt/GDP ratio, pressuring equity longs to liquidate. Watch the Nikkei this week as the U.S. market fell in Asia last night in sympathy.
China Real Estate: The De-Energizer Bunny
Soundbite: China’s property problems keep on going. Real estate developer China Vanke announced it may miss its December 15 deadline to repay a $280 million loan. It was a shock. The defaults of Evergrande in 2021 and Country Garden in 2023 faded from investors’ memories, but this news made it seem like yesterday. Just a few weeks ago, the company received another $3 billion dollar loan from its major stockholder, state-owned Shenzen Metro. It was heralded as the boost Vanke needed to pay down its debt overload; yet last week, Vanke was asking bondholders for its first-ever debt extension. This highlights just how fragile the builder’s financial situation is. Unfortunately, the Chinese government signaled it may back away from assistance. Beijing suggested Vanke seek a restructuring of its $50 billion in public debt. We are unsure if officials are posturing before Vanke’s largest shareholder comes in again, although now with stricter loan terms and covenants. The hope is that Beijing continues its support through Shenzen Metro. Without thinly veiled government assistance, there is a risk that the property sector negatively affects Chinese risk assets once again. That possibility would raise risk premiums domestically and could spill over into our market.
Is Beijing bluffing?
The China Vanke announcement last week pushed some of its bonds down by 60% and its stock price to 2008 levels. The company hit liquidity problems in the past, but traders were relieved this year when state-owned Shenzen Metro Holdings injected capital to help pay for principal and interest payments. Events may not unfold as they did in Q1, when a similar steep selloff in Vanke bonds reversed hard when Shenzen Metro stepped in. A major hindrance is that home prices are falling at their fastest rate since 2024, and a poor selling environment is the reason China Vanke had to request additional assistance over recent months. China introduced market measures to prop up the real estate market last year, but there has been no follow through in 2025.
The local government in Shenzen, where China Vanke is located, was directed by Beijing this week to open debt restructuring discussions. The property sector will not be able to attract funds unless the government pushes Shenzen Metro to continue lending. Currently, we cannot rule out Beijing ignoring Vanke’s funding need. Our base case is that this issue will be resolved officially, helping investor sentiment throughout China, unless regulators want to send a message and leave Vanke stranded.
The Vanke bondholder meeting to vote on the principal repayment delay is scheduled for December 10, and the company has another bond maturing on December 28. If Vanke defaults or sees its bonds trade at an even bigger discount, it increases the potential for other developers to fail. Another builder, Longfor Group Holdings, fell almost 9% at one point in Thursday’s panic, and its stock has fallen over 30% since September. The property sector comprises one-fourth of the Chinese economy, so government inaction could jeopardize widespread financial well-being.
In the U.S., investors have systemic potential stemming from private credit loan defaults that result in commercial bank write-offs. In China, markets are dealing with systemic potential coming from the property sector…once again.
Beige Book: Uncertainty Extends Beyond the FOMC
Soundbite: The Beige Book was released last week and covered economic activity at each of the twelve regional Federal Reserve Banks. Investors were focusing on the report because it will carry increased significance considering the lack of current government economic releases. The report contains data through November 17, and it reflects weak consumption and poor labor conditions. There were consistent mentions from businesses about persistent inflation from tariffs aggravated by rising healthcare costs. Aside from higher-end retail, the report depicts a cautious consumer that supports the 90% market consensus for a 25-basis point cut. Despite the fact that the survey was taken a full month after the government shutdown, lasting residual effects may make some Federal Open Market Committee voters push back on the overall weak tone and call for no change in rates. Due to the uncertainty, we believe the FOMC result is not as certain as the market consensus, and this week’s JOLTS and ADP employment data, and the CPI release tentatively scheduled for the day of the rate decision will determine the decision.
Each bank summarizes data on Labor Markets, Prices, Retail, Manufacturing, Services, and Real Estate. While each district always displays a character of its own, it is rolled up to the national level to help voting members of the FOMC decide whether to cut rates.
There was irrefutable evidence of a retrenching consumer, but “economic activity was little changed since the previous report.” We believe the one key line that will continue to create divisions at the December 9-10 meeting reads:
“Looking ahead, contacts largely anticipate upward cost pressures to persist, but plans to raise prices in the near term were mixed.”
Their decision will be based on which mandate holds more significance at the moment: slowing labor markets or elevated inflation. Firms have been trying to pass on cost increases with varying success, with many absorbing them and taking a hit to their bottom line. It appears that outside of wealthy consumers, tighter household budgets have made it difficult to raise prices. The debate between voters looking at half the districts reporting diminished hiring and the potential for higher prices is what will swing the vote.
The market is leaning toward the part of the Beige Book describing stagnant wages, an increasing reliance on debt, low consumer confidence, an uncertain tariff outlook, and geopolitical tensions. However, there are two major complicating factors:
· First, if many undecided voters decide to look through the bad data and blame it on the shutdown, then the prudent move will be to keep policy unchanged at this meeting and collect more data before the January 27-28 meeting.
· Second, the prospect of the resilient part of the K-shaped economy generating solid aggregate demand that bolsters earnings and stock prices, leading to easy financial conditions, could convince the majority of the Committee to wait.
Strong initial signs of holiday trading support the last point and stand as a counterargument to the consensus. Fed voters and markets will be watching consumer data into the meeting and the role of discounts to attract consumers.
This decision will be contentious, and we are not convinced that it is a 90% certainty for a rate cut. Given the complacency, the possibility exists for concern weighing on the market coming into the meeting.
What to Look for This Week
(All times D.S.T.)
1. Tuesday, December 2 at 8:15 a.m. September Job Offerings and Labor Turnover Survey for September. The data is lagged, but we will be looking for any drop in the Hirings Rate or in the Quits Rate.
2. Wednesday, December 3: at 8:15 a.m. ADP National Employment Report for November. This will be a key release because updated federal Payroll data will not be out before the December 9-10 FOMC meeting.
3. Wednesday, December 3 at 8:30 a.m. Institute for Supply Management November Services PMI Prices Index. That is the key subcomponent of the Non-Manufacturing PMI report. It hit 70, reaching the high three years ago. It tends to have leading tendencies for the CPI and PCE inflation reports.
FOMC Voters Speaking: We are in the Blackout Period before the Dec 9-10 FOMC meeting. Chair Jerome Powell will speak on Monday, December 1 at 8:00 p.m. but is prohibited from discussing anything about the upcoming meeting. The same holds for Michele Bowman, Vice Chair of Supervision, who speaks in front of the House Financial Services Committee Tuesday, December 2 at 10:00 a.m. on Oversight of Financial Regulators. We wrote something about the regulatory changes last week, so this is of interest to us. She also speaks on Thursday, December 4 at noon, also on Bank Supervision and Regulation.
Earnings: Slim pickings. Wednesday, December 3 Salesforce (CRM) after market close. The CEO Mark Benioff said this week that he has been using ChatGPT since it was rolled out November 2022, tried Gemini 3 and he is never going back. Let us see if he has other interesting things to say. Dollar Tree (DDLTR) and Macys (M) out the same day before market on the consumer.
By Peter Corey
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