Credit Bubble Bulletin : November 2016

“Why is the United States, with the world's largest economy, borrowing heavily on international capital markets--rather than lending, as would seem more natural? What implications do the U.S. current account deficit and our consequent reliance on foreign credit have for economic performance in the United States and in our trading partners? What policies, if any, should be used to address this situation? In my remarks today I will offer some tentative answers to these questions. My answers will be somewhat unconventional in that I will take issue with the common view that the recent deterioration in the U.S. current account primarily reflects economic policies and other economic developments within the United States itself. Although domestic developments have certainly played a role, I will argue that a satisfying explanation of the recent upward climb of the U.S. current account deficit requires a global perspective that more fully takes into account events outside the United States. To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. …As I will discuss, an important source of the global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders. To be clear, in locating the principal causes of the U.S. current account deficit outside the country's borders, I am not making a value judgment about the behavior of either U.S. or foreign residents or their governments.” Federal Reserve governor Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” April 14, 2005

I was flabbergasted back in 2005 with Dr. Bernanke’s “global savings glut” thesis. At that time mortgage Credit was in the process of expanding a still all-time annual record $1.436 TN. National home prices (Case-Shiller) were up better than 14% year-over-year. The California housing Bubble was coming completely unhinged. Nationally, household mortgage Credit was expanding at double-digit rates for the fifth straight year, as a powerful inflationary psychology took hold in U.S. housing markets and throughout mortgage finance. Moreover, overall system Credit continued to expand rapidly following 2004’s 9.2% growth (strongest since 1988). At 2.75%, the Fed funds rate was ridiculously low in comparison to rapidly inflating home prices and generally rising securities and asset prices.

I had a difficult time accepting that Bernanke actually believed that emerging markets were playing such a primary financing role in the U.S. markets and economy. The Fed was in the midst of experimental reflationary policies, and I just assumed the “global savings glut” thesis was sophisticated rationalization and justification (reminiscent of Greenspan’s new paradigm productivity and rising speed limit rationale). Clearly, the Fed was headstrong to avoid tightening Credit even in the face of conspicuous mortgage excess, fearing that it might pull the rug out from under system reflation.

For a long time now, I’ve viewed the unique backdrop in the context of a historic multifaceted Experiment in: 1) Unconstrained global “money” and (market-based) Credit; 2) Unconventional economic structure; and 3) Activist/inflationist monetary management on a coordinated global basis.

There was no doubt in my mind that unfettered finance would foment market and economic instability. Indeed, evidence of global financial dysfunction has been on full display now for well over two decades. As custodian of the world’s reserve currency and champion of financial innovation, the U.S. has all along been the global leader with respect to Credit excess, speculation and monetary management. The financialization of the global economy has been integral to the U.S.’s unique capacity to run persistently large trade and Current Account Deficits.

Why not de-industrialize and instead use new financial claims in exchange for imported manufactured goods? The experiment in a services and consumption economic structure then took on a life of its own, fueled first by Wall Street finance and then by government debt and central bank Credit.

Unfettered global “money” and Credit coupled with a world flooded with U.S. financial claims (largely IOUs) was a recipe for extreme financial instability. Never did I imagine such an experiment could be sustained for so long. I simply did not contemplate the extent to which central bankers would be willing to underpin unsound global finance.

It’s not as if this great Experiment hasn’t been at the brink a few times: 1997, 1998, 2002, 2008, 2012 and early-2016. At this point, markets are understandably convinced that central bankers have no alternative than to always come immediately to the rescue.

Granted, QE retains the capacity to incite speculation and levitate markets. Yet monetary inflation’s myriad effects on societies and democracies are at this point progressively – and openly - corrosive. Rising anti-establishment sentiment and anti-globalization movements reflect mounting frustration with the existing world order. I believe the Brexit and Trump movements are indicative of the unfolding failure of this Global Experiment. I had assumed that the Experiment’s downfall would be marked by a crisis of unstable markets. At this time, the world is at monumental crossroads in terms of social, political, market and economic instability.

November 21 – Wall Street Journal (William Mauldin and David Luhnow): “Rather than kill Nafta, Donald Trump and his advisers appear set to push for substantial changes to the treaty governing U.S. trade with Mexico and Canada, an effort that could prove difficult to negotiate and perilous to the regional economy. The president-elect vilified the North American Free Trade Agreement during the campaign and threatened to pull the U.S. out of the trade deal—but only if Mexico doesn’t agree to substantial modifications. The U.S. trade deficit with Mexico rose 9.5% in 2015 to $60.7 billion, while the deficit with Canada fell 57% to $15.5 billion. Mr. Trump hasn’t released a blueprint for his new vision of Nafta, but his comments and those of his advisers suggest they want big changes. Among the likeliest would be special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes that would hit U.S. firms that moved production there, according to Trump advisers.”

The Trump campaign was built upon a platform of economic nationalism and the imperative of major change. Trade deals must be canceled or significantly revamped. Jobs and manufacturing must be brought back to the U.S. America must come first to be great again. In the view of Trump and his advisors, The Experiment has clearly failed. Donald Trump often referred to the “Bubble.” He lashed out at Federal Reserve policymaking and the massive U.S. debt. With indices sprinting to record highs, it’s the nature of markets to forget why the Trump campaign received scant support from the business community and was viewed with contempt by Wall Street (and global markets).

James Carville famously quipped back in 1993: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

In his acceptance speech, President-elect Trump avoided slamming Yellen, the Federal Reserve or deficit spending. Bypassing confrontation, he chose instead to trumpet a revitalizing $1.0 TN infrastructure spending program. Such a priority undertaking would require close cooperation, both from the Federal Reserve and the financial markets. Détente. Wasting no time, markets immediately relegated Trump’s focus on trade and the displaced American worker to the realm of campaign bluster. No need for antipathy or fear – not with markets retaining firm control. Better yet, if the Trump administration seeks a successful Presidency, all roads must pass through all-powerful Wall Street. Incredibly, surging U.S. markets stirred the imagery of Ronald Reagan.

The general election presented an epic battle between deeply conflicting perceptions of reality. One sect held a more constructive view of a generally sound economic backdrop. With Washington’s assistance and commanding oversight, things were under control and on a definite uptrend. The opposing view held that it was all largely a mirage: the economy and markets were a Bubble illusion. Underpinnings (financial, economic, social and geopolitical) were disturbingly unsound, a product of years of gross Washington mismanagement. Only radical change would reverse our nation’s accelerating downfall.

U.S. markets have thus far been content to focus on prospects for financial deregulation, lower corporate taxes and infrastructure spending. Comforting and not so radical, no doubt. Yet the bedrock of the Trump movement is about putting American jobs and manufacturing first. And only radical change in trade relationships (and global finance?) will reverse the (experimental) course that has placed our economy, finances and society in peril. Begin immediately with TPP and NAFTA – then move on to China and Asia.

There’s a huge issue: The world – economy as well as financial “system” – is addicted to enormous U.S. Current Account Deficits. America has for two decades simultaneously flooded the global economy with purchasing power and international markets with cheap liquidity. Over years the upshot has been massive overinvestment in manufacturing capacity and incessant global financial instability. Central banks then moved to mitigate this troubling backdrop with a now protracted period of unprecedented reflationary measures. This only accommodated greater economic maladjustment and financial excess – while deepening global addictions.

From my analytical framework, it was never “the chicken or the egg” issue. It was loose monetary policies, financial excesses and associated U.S. Current Account Deficits that were the core of the so-called “global savings glut.” U.S. trade deficits ensured massive financial flows abroad, especially to rapidly growing China, Asia and EM. These dollar balances were then recycled right back to U.S. securities markets, in large part through EM central bank purchases of Treasuries and agency securities.

Moreover, EM, flush with dollar reserves and booming economies, enjoyed a self-reinforcing and destabilizing boom in “hot money” inflows (which could also be recycled into U.S. securities). This dynamic went into overdrive after the 2008 crisis and the introduction of QE. Virtually unlimited cheap liquidity on a global basis incentivized “carry trades” and all varieties of leveraged speculation. So long as yields continued their historic decline, central banker, the leveraged hedge fund operator, sovereign wealth fund manager, derivative player and Joe Public could all just keep buying debt and relishing the spectacular windfall.

A rapidly changing trade backdrop now risks significantly altering the global financial landscape. A focus on making America great again will ensure a radically different view of trade and “globalization.” I’ve always believed in the important distinction of trading goods for goods– as opposed to creating endless quantities of new financial claims to pay for boundless cheap imports. Fiat for goods may have appeared miraculous – with central bankers happy to Credit themselves for whipping inflation. But at the end of the day the world is left with destabilizing economic imbalances and unstable finance. In short, too much finance, overcapacity and inequality. And, as we’ve witnessed of late, there’s an alarming amount of angst and social division, along with a democratic majority demanding an end to the status quo.

Understandably, global bond markets are on edge. Already beginning to percolate, the combination of trade frictions and fiscal stimulus potentially creates the most nurturing inflationary backdrop in years. EM is under pressure, with fears of shrinking trade surpluses, weaker currencies, declining reserves and the specter of self-reinforcing “hot money” outflows. Instead of reliable buyers of U.S. Treasuries and other securities, EM appears more likely persistent sellers. And a faltering EM only fuels a powerful self-reinforcing king dollar dynamic. If EM central bankers are no longer backstopping Treasuries and bonds more generally, these instruments become a lot less attractive instruments for leveraged speculation. So will central bankers – and others – keep buying even as previous windfalls morph into mounting losses?

The S&P500 gained 1.4% this week to join the small caps, midcaps and DJIA at all-time highs. How is it possible that U.S. equities surge to record highs in the face of such a troubling unfolding backdrop? Right now, the U.S. “Core” is winning big at the expense of the faltering “periphery.” And with global QE continuing at an astounding $2.0 TN annualized pace, today’s prevailing market worry is missing out on “Risk On” flows rather than fretting some nebulous brewing “Risk Off.” Moreover, markets by now have become well-conditioned to see heightened risk as ensuring that central banks keep liquidity spigots wide open.

The “fiat for goods”, services/consumption economic structure, activist central banking, and accommodate financial innovation/leveraged speculation experimental regime created the illusion of a golden era of low inflation, booming securities markets and unending economic growth. Central bankers enjoyed the luxury of easy decisions. Inflation was trending down, while bond prices trended up – seemingly forever. Central banks saw no pressing reason to tighten policies, irrespective of booming securities markets and/or Bubbles.

Going forward, the world could experience a new paradigm of inflation trending higher and bond prices lower. This would entail great uncertainty, including who will step up and fund rising deficits in a new era of declining bond prices. There is today as well great uncertainty as to how U.S. economic nationalism will play out globally. Trade and currency wars are a very real possibility.

In the near-term, central banking is about to turn a lot more difficult. All this QE in the face of rising bond yields and general uncertainty will stoke inflation fears. Already, the surge of liquidity into equities is drawing funds from fixed income, while exacerbating general flow instability. Liquidity flooding into king dollar exacerbates EM fragilities. Increasingly apparent EM trouble then spurs more flows into hot “Core” securities. “Melt-up” stuff. Do central banks come to view QE as destabilizing for inflation expectations and overall market speculation and flows? Or do they see the backdrop as too risky to begin reining in global monetary stimulus, again turning their backs on increasingly dangerous speculative excess? Might views begin to diverge, a likely scenario that would usher in a less straightforward – and less market-comforting - policymaking paradigm.

A few weeks back I argued the case for Peak Monetary Stimulus. This week it’s Past Peak “Global Savings Glut.” I suspect liquidity conditions worldwide will react poorly to any retreat from global QE.

For the Week:

The S&P500 gained 1.4% (up 8.3% y-t-d), and the Dow rose 1.5% (up 9.9%). The Utilities rallied 2.0% (up 9.0%). The Banks increased 1.4% (up 18.9%), and the Broker/Dealers added 1.1% (up 14.4%). The Transports advanced 2.1% (up 20.4%). The broader market outperformed again. The S&P 400 Midcaps jumped 2.2% (up 17.3%), and the small cap Russell 2000 rose 2.4% (up 18.6%). The Nasdaq100 gained 1.3% (up 6.0%), and the Morgan Stanley High Tech index increased 1.0% (up 13.1%). The Semiconductors rose 2.1% (up 34.3%). The Biotechs were little changed (down 11.7%). With bullion down $24, the HUI gold index dropped 3.5% (up 58.1%).

Three-month Treasury bill rates ended the week at 49 bps. Two-year government yields rose five bps to 1.12% (up 7bps y-t-d). Five-year T-note yields gained four bps to 1.84% (up 9bps). Ten-year Treasury yields added a basis point to 2.36% (up 11bps). Long bond yields declined three bps to 3.00% (down 2bps).

Greek 10-year yields fell 12 bps to 6.81% (down 51bps y-t-d). Ten-year Portuguese yields dropped 25 bps to 3.57% (up 105bps). Italian 10-year yields declined a basis point to 2.08% (up 49bps). Spain's 10-year yields slipped two bps to 1.57% (down 20bps). German bund yields declined three bps to 0.24% (down 38bps). French yields added two bps to 0.77% (down 22bps). The French to German 10-year bond spread widened five to 53 bps. U.K. 10-year gilt yields fell four bps to 1.41% (down 55bps). U.K.'s FTSE equities index added 1.0% (up 9.6%).

Japan's Nikkei 225 equities index jumped 2.2% (down 3.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.03% (down 23bps y-t-d). The German DAX equities index increased 0.3% (down 0.4%). Spain's IBEX 35 equities index rose 0.6% (down 9.1%). Italy's FTSE MIB index rallied 1.5% (down 22.9%). EM equities were mixed. Brazil's Bovespa index rallied 2.7% (up 42%). Mexico's Bolsa recovered 2.2% (up 5.5%). South Korea's Kospi was unchanged (up 0.7%). India’s Sensex equities index increased 0.6% (up 0.8%). China’s Shanghai Exchange advanced 2.2% (down 7.8%). Turkey's Borsa Istanbul National 100 index fell 1.7% (up 3.7%). Russia's MICEX equities index surged 2.9% (up 19.1%).

Junk bond mutual funds saw inflows of $598 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped nine bps to a 16-month high 4.03% (up 8bps y-o-y). Fifteen-year rates rose 11 bps to 3.25% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.08% (up 14bps).

Federal Reserve Credit last week expanded $2.4bn to $4.422 TN. Over the past year, Fed Credit contracted $29.4bn (down 0.7%). Fed Credit inflated $1.611 TN, or 57%, over the past 211 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.0bn last week to near a six-year low $3.120 TN. "Custody holdings" were down $199bn y-o-y, or 6.0%.

M2 (narrow) "money" supply last week surged $51.1bn to a record $13.214 TN. "Narrow money" expanded $955bn, or 7.8%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits surged $93.5bn, while Savings Deposits fell $53.2bn. Small Time Deposits declined $1.2bn. Retail Money Funds jumped $10.4bn.

Total money market fund assets rose $18.8bn to a 12-week high $2.705 TN. Money Funds declined $18.3bn y-o-y (0.7%).

Total Commercial Paper jumped $9.6bn to $922bn. CP declined $135bn y-o-y, or 12.8%.

Currency Watch:

November 24 – Financial Times: “The relentless rise of the dollar scorched emerging market currencies on Thursday, sending China’s renminbi to its weakest level in eight years, while India’s rupee plumbed a record low. Broad currency weakness against the dollar came as the bond market fully expects policy tightening by the Federal Reserve at its December meeting.”

November 24 – Financial Times (Peter Wells): “The Philippine peso has hit 50 per dollar for the first time since the financial crisis… It was the first time the currency traded through the 50 level since November 24, 2008, precisely eight years ago.”

November 24 – Financial Times (Peter Wells): “Malaysia’s ringgit has hit its weakest point since the Asian financial crisis, as the US dollar continues to strengthen and push down on currencies the world over… Yesterday, Malaysia’s central bank kept benchmark lending rates unchanged. Many analysts expected the decision, reasoning the weakening currency would prompt Bank Negara Malaysia to stand pat.”

The U.S. dollar index added 0.3% to 101.21 (up 2.6% y-t-d). For the week on the upside, the South African rand increased 2.2%, the Australian dollar 1.4%, the British pound 1.1%, the Swedish krona 0.5%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Taiwanese dollar 0.2%, and the Norwegian krone 0.2%. For the week on the downside, the Japanese yen declined 2.0%, the Brazilian real 0.9%, the Swiss franc 0.4%, and the Singapore dollar 0.1%. The Chinese yuan declined 0.5% versus the dollar (down 6.15%).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.5% (up 17.2% y-t-d). Spot Gold fell 2.0% to $1,184 (up 11.5%). Silver slipped 0.6% to $1 (up 20%). Crude added 37 cents to $46.06 (up 24%). Gasoline rose 2.5% (up 8%), and Natural Gas jumped 7.8% (up 31%). Copper surged 8.2% (up 26%). Wheat declined 1.4% (down 11%). Corn gained 1.3% (unchanged).

China Bubble Watch:

November 25 – Wall Street Journal (Lingling Wei): “China plans to clamp tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook. The State Council, China’s cabinet, will soon announce new measures that subject many overseas deals to reviews of “strict control,” according to people with direct knowledge… Targeted for particular scrutiny by the pending measure are ‘extra-large’ foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.”

November 21 – Bloomberg: “Dollar strength and rising U.S. interest rates under President-elect Donald Trump would intensify pressure on capital outflows from China, forcing its policy makers to choose between tightening capital controls or a drastic floating of the currency in coming months. That’s according to Victor Shih, a University of California at San Diego professor who studies China’s government and finance and specializes in tracking politics at the most elite level. ‘Given the Chinese government’s consistent preference for control, we may see much more Draconian capital controls before a decision to float the currency can be made,’ Shih said… ‘The main objective is to avoid a panicky float.’”

November 21 – Bloomberg (Pooja Thakur Mahrotri and En Han Choong): “The landscaped lawns and flowering shrubs of Country Garden Holdings Co.’s huge property showroom in southern Malaysia end abruptly at a small wire fence. Beyond, a desert of dirt stretches into the distance, filled with cranes and piling towers that the Chinese developer is using to build a $100 billion city in the sea. While Chinese home buyers have sent prices soaring from Vancouver to Sydney, in this corner of Southeast Asia it’s China’s developers that are swamping the market, pushing prices lower with a glut of hundreds of thousands of new homes. They’re betting that the city of Johor Bahru, bordering Singapore, will eventually become the next Shenzhen. ‘These Chinese players build by the thousands at one go, and they scare the hell out of everybody,’ said Siva Shanker, head of investments at Axis-REIT Managers Bhd… ‘God only knows who is going to buy all these units, and when it’s completed, the bigger question is, who is going to stay in them?’”

Europe Watch:

November 21 – Reuters (Andreas Rinke and Madeline Chambers): “Angela Merkel announced… she wants to run for a fourth term as German chancellor in next year's election… The 62-year old conservative, facing a voter backlash over her open-door migrant policy, said she had thought long and hard before eventually deciding to stand again in the September election, ending months of speculation over her decision.”

November 24 – Reuters (Michael Nienaber): “Growth in leading euro zone economies slowed over the summer months and an expected German-led rebound at the end of the year may prove too short-lived for the European Central Bank to unwind its monetary stimulus. Germany's quarterly growth rate halved to 0.2% in the three months to September even though private consumption and state spending rose, as weak foreign trade slowed overall activity in Europe's biggest economy.”

November 24 – Financial Times (Claire Jones, Dan McCrum, Thomas Hale and Elaine Moore): “Hopes of a fix to the collateral squeeze facing the eurozone’s €5tn short-term funding markets were boosted this week after reports emerged the European Central Bank will consider ways to ease rules on how it lends its stockpile of sovereign debt. A lack of good quality collateral, which market participants use to secure loans, has crippled the single currency area’s short-term funding (‘repo’) markets. One big reason for the shortage is that the eurozone’s central bankers have spent the past year-and-a-half buying €1.1tn in government bonds… as part of their quantitative easing programme to boost growth.”

ECB Watch:

November 21 – Reuters (Gernot Heller and Joseph Nasr): “German Finance Minister Wolfgang Schaeuble called on the European Central Bank… to start unwinding it expansive monetary policy, adding that such a reversal should be done cautiously. ‘I will not get tired of saying that I would prefer it if we started as soon as possible,’ Schaeuble said. ‘Exiting this unusual monetary policy should be done with immense caution,’ he added, warning of possible shock reactions to such steps.”

November 24 – Bloomberg (Alessandro Speciale, Piotr Skolimowski and Catherine Bosley): “The European Central Bank is confident it will be able to continue shielding the euro area from the risk of a sudden correction in asset prices, after political events such as the election of Donald Trump threaten to increase volatility in coming months. ‘We are certainly seeing a correction coming from the U.S.,’ ECB Vice President Vitor Constancio said… ‘The ECB will continue to exert its stabilizing role, so I don’t think there will be significant contagion to Europe.’”

November 24 – CNBC (Silvia Amaro): “The increasing political uncertainty across advanced economies is risking the stability of the euro zone, the region's central bank warned in a new biannual report… The uncertainty surrounding upcoming key referendums and elections across the 19-member euro zone bloc, along with expected policy changes in the U.S. raise inflation and growth challenges for euro area countries, the European Central Bank (ECB) said. Such uncertainty could lead to a global asset market corrections, it stated. ‘The financial stability implications for the euro area stemming from changes in U.S. economic policies are highly uncertain at this point in time,’ the bank said.”

November 22 – Wall Street Journal (Christopher Whittall and Mike Bird): “The European Central Bank began buying billions of euros worth of corporate bonds earlier this year in a high-profile experiment aimed at spurring private investment. So far, the spending hasn’t materialized. Since June, the ECB has bought €44.3 billion (around $46.9bn) in corporate debt… The ECB buys bonds to stimulate tame growth with corporate spending. However, companies aren’t spending, executives say and data suggest, because they see few opportunities amid feeble growth and because credit was already cheap.”

Fixed-Income Bubble Watch:

November 23 – Financial Times (Thomas Hale): “Eurozone corporate bond risk premiums have jumped to their highest level since July, as Donald Trump’s victory in the US election effectively erases gains generated by the European Central Bank’s policy of buying companies’ debt. A sharp rise in global bond yields since Mr Trump’s triumph has also spurred an underperformance of European credit relative to the US corporate debt market. Higher corporate credit spreads in euros, which measure the risk of company debt compared to a benchmark rate, come despite ongoing purchases by the ECB… The ECB has purchased €44bn of corporate bonds so far.”

Global Bubble Watch:

November 21 – Reuters (Jamie McGeever): “Next year will be the first since 2006 that there will be no big monetary policy easing across the world's leading industrialized nations, signifying the end of the 35-year bull market in bonds, Bank of America Merrill Lynch said… Having driven interest rates to their lowest ever levels and lifted purchases of financial assets to over $25 trillion this year, central banks are finally maxed out, BAML said in its 2017 outlook. Any stimulus to the world economy will now come from governments, who will use fiscal policy to wage a ‘war on inequality’, according to BAML. ‘The era of excess central bank liquidity is ending. In 2017 markets likely will not benefit from a big monetary easing for the first time since 2006,’ BAML's investment strategy team led by Michael Hartnett… said…”

November 22 – Bloomberg (David Finnerty and Yumi Teso): “Global funds sold about $11 billion of equities and bonds in Asia’s emerging markets after Donald Trump’s victory in the U.S. presidential election as expectations for his economic policies sent Treasury yields higher and sparked the dollar’s strongest rally in eight years. India suffered the biggest outflows between Nov. 9 and Nov. 18, followed by Thailand… The capital flight trims the year-to-date inflow into India, Indonesia, the Philippines, South Korea, Taiwan and Thailand to around $55 billion.”

November 21 – Wall Street Journal (Rachel Rosenthal and Carol Chan): “Asian companies are starting to feel the ‘Trump effect,’ as a rise in global borrowing costs forces them to reconsider their debt-raising plans. Corporate-bond issuance in Asia has already slowed since the U.S. election, with companies from China to India pulling or postponing planned deals. The sudden stalling in debt markets could threaten a model of growth that has taken root in Asia in recent years. Firms across the region have taken advantage of low global interest rates to pile up trillions of dollars worth of debt, often denominated in greenbacks… Asian companies have already raised $1.1 trillion in bonds so far this year, compared with $260.8 billion for all of 2008, according to Dealogic.”

November 21 – Reuters (Abhinav Ramnarayan and Helen Reid): “Euro zone governments are increasingly relying on hedge funds to help them meet their borrowing needs, which risks leaving them vulnerable to a debt market sell-off driven by a class of investors dubbed ‘fast money’ for their speculative approach. With banks playing a less active part in the sovereign debt market because of pressures on their balance sheets, several countries have turned to hedge funds to sell their targeted amount of bonds… Hedge funds tend to look for quick returns on investments, which could increase the volatility of government bond markets as they face several tests of sentiment in coming months. A populist revolt that propelled Donald Trump and the Brexit vote is sweeping the developed world and threatens to unseat established leaders in an Italian referendum next month, and Dutch, French and German elections in 2017.”

November 19 – New York Times (Peter S. Goodman): “Among policy makers alert for signs of the next financial disaster, Italy's mountain of uncollectable bank debt is a subject discussed in tones ordinarily reserved for piles of plutonium. Its banks seem at once too big to fail and eminently capable of doing so… For years, Italian lenders have muddled through, hoping time would cure their afflictions. But Italy's economy has been terminally weak, not growing at all over a recent 13-year stretch… Nearly one-fifth of all loans in the Italian banking system are classified as troubled, a toll worth 360 billion euros, or nearly $400 billion, at the end of last represents roughly 40% of all the bad loans within the countries sharing the euro. In recent weeks, the world's focus has shifted to Germany's largest lender, Deutsche Bank... But if Deutsche has become the crisis of the moment, Italy is the perpetual threat that could, at any moment, present the world with an unpleasant surprise…”

November 21 – Financial Times (Alex Barker, Jim Brunsden and Martin Arnold): “Brussels is proposing to tighten its grip over overseas banks operating in the EU in a tit-for-tat step against the US that will raise costs for big foreign lenders and potentially hurt the City of London after Brexit. The European Commission will unveil provisions on Wednesday that mirror controversial US ‘intermediate holding company’ rules that ringfence foreign bank capital.”

November 21 – Reuters (Huw Jones): “Citi has joined JPMorgan at the top of global regulators' list of systemically important banks, replacing HSBC and meaning the U.S. bank will have to hold extra capital from 2019 to help preserve financial stability. The group of 20 economies (G20) agreed after the 2007-09 financial crisis that top banks, whose size and complexity mean a collapse could wreak havoc in markets, should hold extra capital, according to the level of risk they present.”

U.S. Bubble Watch:

November 23 – Wall Street Journal (Gunjan Banerji): “Sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations. The catalyst is the U.S. presidential election… Among the sharpest collapses is the link between financial stocks in the S&P 500 and the broader gauge. The correlation between the two over the last month has fallen to 0.59, compared with 0.89, where it was on Nov.7... Shares of banks, asset managers and insurance companies as a group have jumped 11% since election day as investors bet on lighter regulation for the sector under the Trump administration. The financial sector’s performance trounced other groups, such as utilities and consumer staples, each of which are down more than 3%.”

November 23 – Wall Street Journal (Chris Dieterich): “Money is pouring out of municipal bond funds at the fastest pace since the 2013 ‘taper tantrum’ as investors slash bond holdings and wonder about potential changes to the tax code. Investors pulled $3 billion from muni bond mutual and exchange-traded funds the week after the presidential election, the largest such withdrawal since June 2013… The $7.3 billion iShares National AMT-Free Muni Bond ETF, ticker MUB, has fallen 3.4% this month and is on pace for its sharpest monthly drop since Sept. 2008.”

November 20 – New York Times (Mary Williams Walsh): “Picture the next major American city to go bankrupt. What springs to mind? Probably not the swagger and sprawl of Dallas. But there was Dallas’s mayor, Michael S. Rawlings, testifying this month to a state oversight board that his city appeared to be ‘walking into the fan blades’ of municipal bankruptcy… But under its glittering surface, Dallas has a problem that could bring it to its knees, and that could be an early test of America’s postelection commitment to safe streets and tax relief: The city’s pension fund for its police officers and firefighters is near collapse and seeking an immense bailout.”

November 23 – New York Times (Patricia Cohen and Conor Dougherty): “When Jared Rutledge called his mortgage broker one morning last week after putting in an offer on a home in Glendale, Ariz…, he discovered that the 3.8% rate he had been quoted a couple of months ago had already gone up to 4.125%. That afternoon, it had inched up to 4.25, and by evening, when he finally called back to finalize the deal, it was 4.375%. ‘I was kind of frustrated,’ Mr. Rutledge said. But with a third child on the way, and a buyer for their current home, he and his wife felt they had little choice. ‘Instead of holding out and waiting, we locked it in,’ he said. Since the election, mortgage rates have climbed roughly half a percentage point to a 16-month high…

November 24 – Bloomberg (Joe Light and Prashant Gopal): “The definition of a jumbo mortgage is changing for the first time in more than a decade. Fannie Mae and Freddie Mac in 2017 will back mortgages of up to $424,100 in most of the U.S., an increase from $417,000… The change, which will increase the limit for areas with the most expensive homes to $636,150 from $625,500, comes after home prices in the third quarter pushed past their level of a decade ago.”

November 22 – Bloomberg (Sho Chandra): “Sales of previously owned U.S. homes unexpectedly climbed in October to the highest level since February 2007, a sign of momentum in the housing market a month before a jump in borrowing costs… Contract closings rose 2% to a 5.60 million annual rate (forecast was 5.44 million)… Median sales price rose 6% from October 2015 to $232,200. Inventory of available properties fell 4.3% from October 2015 to 2.02 million, marking the 17th straight year-over-year decline…”

Federal Reserve Watch:

November 23 – New York Times (Binyamin Appelbaum): “When Federal Reserve officials convened just before the presidential election, they talked like people who were ready to raise interest rates, although they decided to wait a little longer. They fretted about the growing risks of keeping borrowing costs at a historically low level… They also expressed confidence, albeit with some reservations, that the economy was ready for higher rates. The exuberant reaction of financial markets to Donald J. Trump’s victory has strengthened the case for higher rates, and solidified expectations that the Fed will act at its next meeting in December.”

November 22 – Bloomberg (Kevin Cirilli): “Donald Trump is looking to reshape the Federal Reserve -- very quickly. Two transition team sources said that the president-elect will move within his first three months in office to fill two vacant seats on the Fed’s Board of Governors in Washington, which have been vacant recently. Earlier Tuesday, Trump announced that Ralph Ferrara would lead the so-called ‘landing team’ designed at looking at the central bank to see ways it could be improved to Trump’s liking.”

Japan Watch:

November 21 – Bloomberg (Connor Cislo): “Japan posted a trade surplus for a second straight month in October… Exports fell 10.3% in October from a year earlier… Shipments have also dropped in every month for more than a year. Imports decreased 16.5% during the same period…”

EM Watch:

November 24 – Bloomberg (Yumi Teso and Lilian Karunungan): “Asian currencies’ drop to the weakest this decade will probably deter regional central banks from easing monetary policies as the prospects of higher U.S. rates spurred capital outflows. Indeed, they are more likely to be stepping in to smooth declines in their currencies -- the rupee’s drop on Thursday reportedly prompted intervention from the Reserve Bank of India. The Bloomberg-JPMorgan Asia Dollar Index has tumbled to the weakest since 2009, the Philippine peso cracked 50 per dollar for the first time since the global financial crisis and forwards traders are expecting Malaysia’s ringgit will drop within a week to levels last seen in 1998.”

November 24 – Bloomberg (Selcan Hacaoglu and Onur Ant): “Turkey’s central bank unexpectedly raised its one-week repurchase and overnight lending rates for the first time in almost three years, after the lira’s plunge to a record low and its impact on inflation trumped political demands for lower borrowing costs. The bank raised the one-week repo and overnight lending rates by 50 and 25 basis points to 8% and 8.5%...”

November 21 – Reuters (Anthony Boadle): “Brazilian President Michel Temer warned… that the national debt could swell to the size of the country's gross domestic product within eight years should public spending not be brought under control and fiscal reforms not enacted… The nature of Brazil's crisis is fiscal. For too long, governments have spent more than they earned,’ said Temer…”

November 23 – Bloomberg (Jiyeun Lee): “South Korea’s household debt swelled to a record in the third quarter, prompting the government to release another set of measures to slow its rise. Household debt including credit purchases rose to 1,295.8 trillion won ($1.1 trillion) as of end-September, an 11% jump from the previous year… The financial regulator said Thursday that it will seek stricter loan screening by banks on some type of mortgages and lending from so-called mutual finance institutions that had been loosely scrutinized, adding to measures announced in August.”

Leveraged Speculator Watch:

November 21 – Opalesque: “The breadth of hedge fund asset outflows in October was the industries’ largest in 2016, with 61% of reporting funds seeing net outflows for the month, according to… eVestment… October’s -$14.2 billion outflow marked the fourth month of redemptions in the last five, with year to date (YTD) hedge fund assets down -$77 billion. Overall industry AUM is getting dangerously close to dropping below $3 trillion. Industry assets now stand at $3.03 trillion now following this string of disappointing months for hedge funds.”

November 22 – Bloomberg (Julie Verhage): “Those looking to explain what's set to be another bad year for hedge funds could do worse than blame their passion for tech stocks. The funds have averaged a 4% gain year-to-date, but that pales next to a 9% rally in the S&P 500. Barring a sharp turnaround before December 31, this will be the eighth year since 2008 that hedge funds have underperformed, according to Goldman Sachs Group… ‘Most hedge funds have improved performance following first quarter struggles but continue to lag the broad S&P 500 index as well as the average mutual fund,’ the analysts wrote…”

Geopolitical Watch:

November 24 – Bloomberg: “American military vessels and aircraft carried out more than 700 patrols in the South China Sea region during 2015, making China the U.S.’s No. 1 surveillance target, according to a report by China’s only state-backed institution dedicated to research of the waters. The patrols pose a threat to China’s sovereignty and security interests, said the report by the National Institute for South China Sea Studies, which is headquartered in Hainan island. The document, the first of its kind released by China, warned that continued targeted operations by U.S. patrols would lead to militarization of the waters.”

November 20 – Reuters (Daren Butler and Nick Tattersall): “President Tayyip Erdogan was quoted on Sunday as saying that Turkey did not need to join the European Union ‘at all costs’ and could instead become part of a security bloc dominated by China, Russia and Central Asian nations. NATO member Turkey's prospects of joining the EU look more remote than ever after 11 years of negotiations.”

November 25 – Reuters (Tulay Karadeniz and Nick Tattersall): “Turkish President Tayyip Erdogan threatened on Friday to unleash a new wave of migrants on Europe after lawmakers there voted for a temporary halt to Turkey's EU membership negotiations, but behind the fighting talk, neither side wants a collapse in ties. Europe's deteriorating relations with Turkey, a buffer against the conflicts in Syria and Iraq, are endangering a deal which has helped to significantly reduce a migrant influx which saw more than 1.3 million people arrive in Europe last year.”

Friday Evening Links

[Bloomberg] U.S. Stocks Rise to Record as Trump Rally Goes on for Third Week

[Reuters] Dollar weakens as U.S. bond yields slip from recent highs

Thursday, November 24, 2016

Friday's News Links

[Bloomberg] Dollar Pares Weekly Gain as Gold Rebounds; S&P 500 Futures Rise

[Bloomberg] Dollar’s 3-Week Rally Versus Yen Is the Biggest Since ’95

[Bloomberg] Slew of U-Turns Blight Modi’s Cash Ban, Leaving Indians Outraged

[Bloomberg] Tapes and Ethics Scandal Back in Brazil to Haunt Temer

[Bloomberg] ECB’s Stournaras Says ‘Far Too Early’ to Discuss QE Tapering

[Bloomberg] ‘Korea’s Trump’ Rises in Polls as Voter Anger Fuels Populism

[WSJ] Mortgage Lenders Struggle to Adapt to Rapidly Rising Interest Rates

[WSJ] China Issuing ‘Strict Controls’ on Overseas Investment

[WSJ] A Housing Frenzy Bedevils Beijing

[Bloomberg] U.S. Naval Patrols Threaten Sovereignty, Chinese Think Tank Warns

[Reuters] Erdogan warns Turkey could open gates for migrants if pushed by EU

Wednesday, November 23, 2016

Thursday's News LInks

[Bloomberg] Dollar Surge Weighs on Emerging Markets as Copper Extends Rally

[Bloomberg] Asia’s Accelerating Currency Rout Set to Sideline Central Banks

[Bloomberg] Rupee Sinks to Record as Foreign Funds Dump Indian Assets on Fed

[CNBC] ECB warns that risks of global market corrections have ‘intensified’

[Reuters] ECB's Praet warns euro zone's banking systems pulling dangerously apart

[Bloomberg] ECB Says It Can Shield Euro Area From Global Finance Instability

[Reuters] German growth halves on weak trade, uncertainty clouds euro zone outlook

[Bloomberg] Turkey Central Bank Unexpectedly Raises Rates on Lira Plunge

[Bloomberg] Korea Household Debt Hits Record as Repayment Burden Set to Rise

[NYT] Mortgage Rates’ Rise Catches Home Buyers — and Lenders — Off Guard

[NYT] Latest Fed Discussion Reflects More Confidence in Raising Rates

[FT] Hopes flicker of a central bank fix for eurozone funding market

[FT] Ringgit knocked to weakest level since Asian financial crisis

[FT] Spiller in Manila: Philippine peso hits 50 per dollar for first time since 2008

[FT] Renminbi touches 8-year low in EM currency rout

Wednesday Evening Links

[Bloomberg] Most on Fed Saw Rate Hike Relatively Soon With Less Labor Slack

[Bloomberg] Inside the Fed’s November Minutes: The Annotated Meeting

[Bloomberg] Treasuries Plunge Sends Yields to 16-Month High on Economic Data

[Bloomberg] Signs of Overheating Appear in a Big Chunk of the S&P 500's Membership

[Reuters] Big banks' relationship with Dodd-Frank: it's complicated

[Bloomberg] Fannie Mae, Freddie Mac Will Back Even Bigger Mortgages

[Reuters] Peaks, black swans and bonanzas: Market tips, bold calls and eyecatchers for 2017

[Bloomberg] Erdogan Unleashes Fury at Markets on Eve of Turkey Rate Decision

[WSJ] U.S. Government Bond Selloff Resumes

[WSJ] Bond Rout Pummels Muni Funds

[WSJ] Split Fed in November Signaled Rate Increase Could Come in December

[FT] Mrs Watanabe’s yen trade comes unstuck amid dollar surge

Tuesday, November 22, 2016

Wednesday's News Links

[Bloomberg] Dollar Gains as Data Bolster Rate Outlook; Treasuries Decline

[Reuters] Euro zone bond yields rise on report ECB will act to reduce scarcity

[Bloomberg] Gold Falls Below $1,200 as Stock Markets Boom, Fed Set to Raise

[Bloomberg] Sales of New U.S. Homes Declined to Four-Month Low in October

[Reuters] U.S. durable goods orders rebound, shipments rising

[Bloomberg] Mutual Funds See Massive Variations In Performance Following Trump's Win

[Bloomberg] Euro-Area Economic Growth Gathers Pace as Orders and Prices Rise

[Reuters] Cooling growth pulls China's yuan down to third place in global trade finance: SWIFT

[Bloomberg] How Apple Lost China to Two Unknown Local Smartphone Makers

[Reuters] Turkey's Erdogan rails against high interest rates on eve of central bank meeting

[Bloomberg, Gilbert] Bond Market Is Right to Worry About Italian Vote

[FT] Trump bond sell-off deals blow to ECB buying

[FT] Renminbi’s record weakness flies below the radar

[WSJ] Sectors Go Wild: S&P 500 Correlations Crumble

[WSJ] China Has Warned of Retaliation if U.S. Levies Tariffs, Commerce Secretary Says

[WSJ] Fed Minutes Will Offer Some Insight Despite Major Shifts

[Washington Post] These maps show how Russia has Europe spooked

Tuesday Evening Links

[Bloomberg] Asian Shares Set for More Gains With Japan Shut as Bonds Retreat

[Bloomberg] U.S. Stocks Climb to Record Highs as Dow Tops 19,000; Oil Falls

[Bloomberg] Trump Looks to Put Stamp on Fed in First Months of Presidency

[Bloomberg] Why Italy’s Bank Problem Challenges the Rule Book: QuickTake Q&A

[Bloomberg] Goldman: Hedge Funds Are Poised to Get Beaten for the Eighth Year Straight

[Reuters] Russia rejects U.S. criticism of Kaliningrad missile deployment

[Reuters] From soldiers to midwives, Turkey dismisses 15,000 more after coup bid

[NYT, Irwin] What Will Trump Trade Policy Actually Look Like? Three Possibilities

[FT] Virtu calls on US regulator to examine risks of ETFs

Monday, November 21, 2016

Tuesday's News Links

[Bloomberg] Stocks Rise Around the World as Crude Oil, Metals Extend Advance

[Bloomberg] U.S. Existing Home Sales Climb to Highest Since Early 2007

[Bloomberg] Asian Stocks Rise for Second Day as Commodities Rally With Won

[Bloomberg] PBOC Boosts Yuan Fixing After 12-Day Drop to Weakest Since 2008

[Bloomberg] Fed Hike Is Certainty for Bond Traders as Market Odds Reach 100%

[Bloomberg] Emerging Asia Sees $11 Billion Outflow on Dollar’s Rally

[Opalesque] Hedge funds continue to see asset outflows in October, YTD outflows at $77m

[Reuters] Japan PM says TPP trade pact meaningless without U.S.

[Reuters] Euro zone nations turn to hedge funds to meet borrowing needs

[Bloomberg] $100 Billion Chinese-Made City Near Singapore 'Scares the Hell Out of Everybody'

[Bloomberg] Trump Outlines Top Plans Amid Business Scrutiny, Press Tension

[NYT] Investors Make Bullish Bet on Trump, and an Era of Tax Cuts and Spending

[WSJ] Donald Trump Poised to Pressure Mexico on Trade

[FT] European Central Bank faces a Trump quandary

[WSJ] European Companies Happily Take ECB’s Cheap Cash, but Don’t Spend It

Monday Evening Links

[Bloomberg] S&P 500, Dow, Nasdaq, Russell 2000 Hit Record Highs as Oil Jumps

[Bloomberg] China May Face Yuan Float if Capital Controls Fail

[Bloomberg] Three Charts Signal Dark December for Slumping China Bond Market

[Bloomberg] How India's Cash Chaos Is Shaking Everyone From Families to Banks

[Reuters] Top ECB officials pledge continued support to euro zone economy

[Bloomberg] 2017 is when a decade of global monetary easing ends, says BAML

[Reuters] Hedge funds slow to adjust champagne tastes to beer budgets

[FT] Tail risks wagging the dog with Wall Street fear gauge

[FT] EU to retaliate against US bank capital rules

Sunday, November 20, 2016

Monday's News Links

[Bloomberg] U.S. Stocks Climb to Record High as Crude Surges, Dollar Falls

[Bloomberg] Yuan Falls to Eight-Year Low as Central Bank Cuts Reference Rate

[Reuters] Germany's Schaeuble urges ECB to reverse policy

[CNBC] Washington can now help relieve 'only game in town' Fed, Fischer says

[Reuters] Citi and JPMorgan top list of globally systemic banks

[Bloomberg] Goldman: How Corporations Will Spend Their Huge Piles of Overseas Cash

[Bloomberg] Inside a Moneymaking Machine Like No Other

[Bloomberg] Paulson’s Big Long: A Bet on Trump Yields Power and Profit

[Bloomberg] Brexit Bulletin: Take Care, Cliff Edge Ahead

[Bloomberg] Merkel's Fourth Election Will Be Her Toughest

[Reuters] Brazil's Temer warns debt to swell to size of GDP if spending not curbed

[The Hill] Record number of Americans think nation is divided

[NYT] Dallas Stares Down a Texas-Size Threat of Bankruptcy

[FT] Malaysia asks foreign banks to stop ringgit trading

[WSJ] After Years of Turmoil, Republican Tax Overhaul Picks Up Speed

[WSJ] Asian Corporate Debt Plans Run Into ‘Trump Effect’

Sunday Evening Links

[Reuters] Asian shares on the defensive as U.S. yields, dollar rise

[Bloomberg] Japanese Shares Extend Rally to Eighth Day as Yen Holds Decline

[Bloomberg] Japan Imports Continue Decline, Exports Fall More Than Forecast

[Bloomberg] Dollar Is King as Fed Hike Bets Mount While Putin Bolsters Crude

[Bloomberg] Schumer Says He Can Block Trump’s Efforts to Repeal Dodd-Frank

[Bloomberg] Currency Vigilantes Ready to Strike Again as Italian Vote Looms

[Bloomberg] Negative Rates Are Failing to Halt Savings Obsession in Europe

[FT] Corporate debt returns lure investors back to bond market

[WSJ] Inside Donald Trump’s Economic Team, Two Very Different Views

[WSJ] Danger Ahead For ‘Hot Spot’ Markets?

[FT] Renminbi trading band weakened for record 12th day

Sunday's News Links

[Bloomberg] Abu Dhabi Stocks Drop Most in Month to Lead Decline Across Gulf

[Reuters] Merkel said she wants to run for fourth term as German chancellor: sources

[CNN] South Korea: President Park to be investigated as three others indicted

[Reuters] Fed up with EU, Erdogan says Turkey could join Shanghai bloc

Saturday, November 19, 2016

Saturday's News Links

[Spiegel] A Turning Point for Globalization - Inequality, Market Chaos and Angry Voters

[CNBC/NYT] Italy’s Banks Are in a Slow-Motion Crisis. And Europe May Pay.

[NYT] Showdown Looms as U.S. Questions Chinese Deal for Aixtron

Friday, November 18, 2016

Weekly Commentary: As Exciting as the 1930s

“One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics.” “The Memoirs of Herbert Hoover - The Great Depression 1929-1941”

There are few apt comparisons to today’s extraordinary backdrop. Late in the “Roaring Twenties” period offers the closest parallel – the global nature of vulnerabilities and faltering booms; policymaker confusion and increasing ineffectiveness; fundamental deterioration in the face of impenetrable speculative impulses. It was by 1929 deeply embedded in speculator psyche that the enlightened Federal Reserve would never allow a market or economic collapse.

Top Federal Reserve officials (Yellen, Dudley, Bullard) this week suggested that Trump policies specifically target productivity. It must be a tough pill to swallow for the Fed to admit that their policies have succeeded in stimulating Credit growth and record securities prices, while coming up dreadfully short with respect to productivity gains.

By the late 1920s it had become an objective of the Federal Reserve to stimulate productive Credit. While there was deepening concern for market speculation, the weakened economic backdrop had the Fed determined to support ongoing Credit expansion.

An increasingly entrenched speculative Bubble had over years fomented financial and economic fragilities. Meanwhile, the Federal Reserve’s focus on the increasingly vulnerable economy worked to underpin speculator enthusiasm. Even as the fundamental backdrop turned alarming, a manic inflationary psychology grew only more powerfully entrenched in the marketplace. In the end, efforts to promote productive Credit fatefully prolonged the life of “Terminal Phase” Bubble excess.

November 13 – Bloomberg: “China’s new home sales growth slowed in October from a year earlier, suggesting the push by policy makers to rein in runaway prices is getting traction. The value of homes sold rose 38% to 941 billion yuan ($138bn) last month from a year earlier… The increase compares with a 61% gain the previous month. Slower home sales have helped moderate credit growth. New medium- and long-term household loans, mostly residential mortgages, stood at 489.1 billion yuan in October, down from 571.3 billion yuan in September…”

Chinese policymaking – confronting the Fed’s late-twenties (and Japan’s late-eighties) dilemma – badly flounders. Timid efforts to rein in its apartment Bubble were ineffective. This led to bolder moves to tighten mortgage Credit, which ironically spurred a speculative rotation and resulting equities Bubble. When the stock market Bubble burst, reflationary efforts then stoked spectacular real estate (mortgage Credit and prices) inflation. More recent efforts to cool the housing Bubble fueled major blow-off speculative excess throughout the Chinese bond market. Efforts to bolster a waning economic boom will see record Credit expansion this year approaching $3.0 TN.

It’s this global perspective of ongoing rapid Credit and unwieldy liquidity expansion in the face of waning economic prospects that helps explain the Trump Market Phenomenon. Only time will tell if President Trump is the second coming of Ronald Reagan. It’s worth noting that 10-year Treasury yields were around 12% for the Reagan inauguration (on the way to almost 16% by Sept. ’81). While starting to trend lower, CPI was still running about 10%. The S&P500 was trading at 135, just starting to crawl out of a prolonged bear market.

I’m all for responsible deregulation in the real economy. The financial sector is a different story. Count me skeptical that there will be some incredible wave of financial deregulation that will spur the golden age of financial stocks and a prosperity renaissance. The Reagan era of deregulation coincided with momentous financial innovation.

We’re now into the third decade of what has been a period of monumental financial innovation. It’s worth noting some key sector metrics from the now multi-decade financial transformation. When President Reagan came into office, the Fed’s balance sheet (from Z.1) was at $174 billion – compared to Q2 2016’s $4.524 TN. Money Market fund assets were only $76 billion (vs. $2.703 TN); Mutual Funds $656 billion (vs. $13.209 TN); Closed-End & Exchange-Trade Funds $7 billion (vs. $2.491 TN); GSE’s assets $175 billion (vs. $6.568 TN); Agency- & GSE-Backed Mortgage Pools $100 billion (vs. $1.844 TN); Asset-backed Securities $0 (vs. $1.285 TN); REITs $3 billion (vs. $1.021 TN); Security Brokers/Dealers $78 billion (vs. $3.117 TN); Funding Corps $3 billion (vs. $1.618 TN); Fed Funds & Security Repos $152 billion (vs. $3.769 TN).

Even more amazingly, Total Debt Securities have inflated from $2.0 TN to $40.581 TN. Outstanding Treasury Securities have grown from $736 billion to $15.385 TN. Agency- and GSE-Backed Securities from $191 billion to $8.324 TN. Total Mortgages have increased from $1.458 TN to $13.974 TN. Corporate & Foreign Bonds have expanded from $511 billion to $12.030 TN, with Corporate Equities ballooning from $1.495 TN to $36.112 TN.

Notably, Household Net Worth stood at $8.9 TN, or about 300% of GDP, to end 1980. By the end of Q2 2016, Household Net Worth had inflated to $85.3 TN, or near a record 463% of GDP. While continued craziness can be expected to dominate the prolonged Terminal Phase of this multi-decade Bubble, I highly doubt we’re at the cusp of some deregulation-induced financial resurgence. Been there; done that.

When analyzing today’s markets, we need to keep a few things in perspective. One, global central bankers continue to provide market liquidity (QE) to the tune of about $2.0 TN annualized. Second, Chinese Credit is expanding at a record pace of about $3.0 TN annualized, with significant ongoing “capital” flight. Years of this unprecedented liquidity backdrop have fundamentally altered the way markets function (as we’ve again been reminded).

Over the past three months, 10-year Treasury yields have surged 82 bps (to 2.36%). UK yields have jumped 90 bps, and Canadian yields have advanced 54 bps (1.57%). German yields have risen 35 bps (27 bps), while French yield have jumped 62 bps (75bps). Italian yields have surged 102 bps (2.09%).

In the face of surging yields, U.S. stocks have run to record highs. Most global equities indices rallied as bond prices sank. However, without the $2.0 TN of ongoing QE the world would be much less hospitable. Instead of the typical bond-induced de-risking/de-leveraging episode pressuring stocks and risk assets more generally, a very different dynamic has evolved: Rising bond yields instead spur a frantic rotation into equities. QE has numbed fear, while impelling speculation.

Let’s take this one step further. When it became apparent that a Trump win would not trigger the anticipated intense bout of “Risk Off,” markets immediately erupted into a speculative melee. Where were the shorts trapped? What stocks, sectors and markets? Where were the hedge funds over- and underweight? How were the long/short funds positioned? What about the quants and CTAs? Risk parity? What ETFs would be liquidated? Most importantly, how to quickly get in front of the wave of (self-reinforcing) finance that would be rotating out of the old favorites and into newly fashionable sector ETFs?

November 14 – CNBC (Jeff Cox): “On the day Donald Trump won the presidency and the two days after last week, investors poured the most money into stock-based exchange-traded funds that they have in nine years… In the week leading up to the election, short-term money was scrambling to hedge for a Trump victory, and the momentum hit a crescendo after the election and in the immediate aftermath. Equity-based ETFs took in $22.6 billion, or about 1.6% of total assets, from Tuesday through Thursday, according to… TrimTabs.”

November 16 – Bloomberg (Luke Kawa): “In the week following the election, the Financial Select Sector SPDR exchange-traded fund amassed $4.9 billion of inflows — a record, and more than it accumulated in the past three years. This ETF has stakes in major U.S. financial institutions… President-elect Donald Trump's victory has spurred a steepening of the yield curve fueled by rising term and inflation premiums, as investors move to price-in both his fiscal policies and the vast amount of uncertainty surrounding them.”

There’s an astounding amount of “money” on the move throughout the now colossal ETF complex. Inflows of $22.6 billion in three days? Three years of flows into a popular financial ETF in a single week? And the bull story holds that after Trillions flowed into bond funds (and bond proxies), the great rotation will now see at least a Trillion flow into popular equity ETFs. Buy now to ensure one gets ahead of the great wall of liquidity about to inundate the market.

Incredibly, weak bond prices have become key to the equities bull story. And with equities bubbling, monetary policy now arouses little angst. The market almost celebrates that the Fed will raise rates next month. Fears of a Fed-rate hike induced EM tantrum are these days nonexistent.

With $2.0 Trillion of QE greasing the wheels of speculation, market participants glare at faltering EM bonds and see a more terrific rotation to “core” (king dollar) equities. Yields are recently up more than 100 bps in Mexico and Brazil, and only somewhat less in Turkey, Malaysia, Indonesia, Poland, Hungary and elsewhere. Yields were up another 20 bps this week in Malaysia, 28 bps in the Philippines and 13 bps in Mexico. EM currencies have been under intense pressure. This week saw the Colombian peso drop 4.7%, the Turkish lira 3.6%, the Polish zloty 2.9%, the Malaysian ringgit 2.8%, the Czech Koruna 2.5%, the Hungarian forint 2.5%, the Bulgarian lev 2.5% and the Romanian leu 2.4%. And few these days see any reason not to pile into U.S. financial and industrial stocks.

Not only have U.S. equities become firmly detached from reality, market participants are clearly in the mood to disregard risk. Look beyond the near-term and one sees a very different world upon the conclusion of the QE experiment. At the minimum, it’s a highly uncertain global financial and economic backdrop. Not only will bubbling equities be pulling “money” from faltering bond funds. Booming stocks would also likely accelerate what has been a slow-motion “tightening” cycle. In the meantime, king dollar will spur the next phase of the EM bursting Bubble. There is simply way too much complacency with regard to troubling developments unfolding in global bond markets, China, Japan, Europe and EM.

November 18 – CNBC (Berkeley Lovelace Jr.): “Donald Trump's controversial top advisor Steve Bannon said the Trump administration would build an entirely new political movement, one greater than the ‘Reagan revolution’… ‘The conservatives are going to go crazy,’ Bannon said. ‘I'm the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it's the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We're just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement

If “negative interest rates throughout the world” is the key to the new Administration’s economic plans, they’d better not waste any time. Many would surely like to call a mulligan on the previous eight years of experimental QE. There’s endless things to spend near-zero interest borrowings on – new infrastructure among them. Just rebuild everything – like China.

But too much was borrowed and spent on stock buybacks, M&A and all varieties of financial engineering. The experiment has left the global economy maladjusted and vulnerable. Bonds have been the centerpiece of a historic speculative Bubble throughout global securities markets. It would be comforting to believe that inflation is dead and buried, and that global QE can expand $2.0 TN annually forever, and that Chinese Credit expansion can grow year-after-year to eternity.

Yet that’s just not the way unsound finance works. We’ve experienced a multi-decade Credit inflation of epic proportions. At this juncture, I would bet on consequences coming home to roost - rather than unending free money (to finance economic renaissance) as far as the eye can see. And, while we’re pondering the future, let’s hope for something other than “As Exciting as the 1930s.”

For the Week:

The S&P500 gained 0.8% (up 6.7% y-t-d), and the Dow added 0.1% (up 8.3%). The Utilities were unchanged (up 6.8%). The Banks rose another 3.7% (up 17.3%), and the Broker/Dealers surged 5.1% (up 13.2%). The Transports jumped 3.2% (up 17.9%). The broader market again outperformed. The S&P 400 Midcaps advanced 2.7% (up 14.8%), and the small cap Russell 2000 jumped 2.6% (up 15.8%). The Nasdaq100 gained 1.2% (up 4.7%), and the Morgan Stanley High Tech index rose 1.7% (up 12%). The Semiconductors surged 4.2% (up 31.5%). The Biotechs slipped 0.2% (down 11.6%). Though bullion was down $20, the HUI gold index recovered 1.1% (up 63.8%).

Three-month Treasury bill rates ended the week at 43 bps. Two-year government yields jumped 15 bps to 1.07% (up 2bps y-t-d). Five-year T-note yields surged 24 bps to 1.80% (up 5bps). Ten-year Treasury yields rose 20 bps to 2.35% (up 10bps). Long bond yields increased nine bps to 3.03% (up one basis point).

Greek 10-year yields declined 10 bps to 6.93% (down 39bps y-t-d). Ten-year Portuguese yields surged 37 bps to 3.82% (up 130bps). Italian 10-year yields gained another seven bps to 2.09% (up 50bps). Spain's 10-year yields jumped 12 bps to 1.59% (down 18bps). German bund yields declined four bps to 0.27% (down 35bps). French yields added a basis point to 0.75% (down 24bps). The French to German 10-year bond spread widened another five to 48 bps. U.K. 10-year gilt yields rose nine bps to 1.45% (down 51bps). U.K.'s FTSE equities index gained 0.7% (up 8.5%).

Japan's Nikkei 225 equities index jumped 3.4% (down 5.6% y-t-d). Japanese 10-year "JGB" yields gained six bps to 0.02% (down 24bps y-t-d). The German DAX equities index was little changed (down 0.7%). Spain's IBEX 35 equities index slipped 0.2% (down 9.7%). Italy's FTSE MIB index dropped 3.3% (down 24.1%). EM equities were mixed. Brazil's Bovespa index rallied 1.3% (up 38.3%). Mexico's Bolsa dropped 1.4% (up 3.2%). South Korea's Kospi dipped 0.5% (up 0.7%). India’s Sensex equities index fell 2.5% (up 0.1%). China’s Shanghai Exchange was little changed (down 9.8%). Turkey's Borsa Istanbul National 100 index increased 0.6% (up 5.5%). Russia's MICEX equities index added 0.3% (up 15.7%).

Junk bond mutual funds saw outflows surge to $2.28 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates surged 37 bps to a near 2016 high 3.94% (down 3bps y-o-y). Fifteen-year rates rose 25 bps to 3.14% (down 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 28 bps to 4.01% (up 4bps).

Federal Reserve Credit last week expanded $5.1bn to $4.420 TN. Over the past year, Fed Credit contracted $41bn (0.9%). Fed Credit inflated $1.609 TN, or 57%, over the past 210 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $8.0bn last week to close to a six-year low $3.119 TN. "Custody holdings" were down $189bn y-o-y, or 5.7%.

M2 (narrow) "money" supply last week fell $20.6bn to $13.163 TN. "Narrow money" expanded $926bn, or 7.6%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits declined $47.4bn, while Savings Deposits jumped rose $17.7bn. Small Time Deposits were little changed. Retail Money Funds expanded $9.0bn.

Total money market fund assets added $3.3bn to a 10-week high $2.686 TN. Money Funds declined $25bn y-o-y (0.9%).

Total Commercial Paper gained $4.7bn to $912bn. CP declined $153bn y-o-y, or 14.4%.

Currency Watch:

November 16 – Bloomberg (Jessica Brice and Isabella Cota): “At the beginning of the year, most currency forecasters agreed: The peso was grossly undervalued. Estimates compiled by Bloomberg at the time put it on course for the biggest gain among major currencies… Yet as 2016 draws to a close, the peso isn’t an emerging-market standout. Instead it’s the world’s worst performer. Battered by events far beyond its borders—such as the U.K.’s Brexit referendum—the currency tumbled 6% against the U.S. dollar this year through Nov. 8. And then Donald Trump was elected president of the U.S. Overnight, the peso plunged more than 13%, surpassing 20 per dollar for the first time. Mexico’s peso was worth less than a nickel. It will likely end the year posting its fourth annual decline.”

The U.S. dollar index jumped 2.2% to 101.21 (up 2.6% y-t-d). For the week on the upside, the Mexican peso increased 1.0%, the Brazilian real 0.6% and the Canadian dollar 0.3%. For the week on the downside, the Japanese yen declined 3.8%, the Australian dollar 2.8%, the euro 2.5%, the Danish krone 2.4%, the Norwegian krone 2.4%, the Swiss franc 2.2%, the Swedish krona 2.2%, the British pound 2.0%, the New Zealand dollar 1.7%, the South Korean won 1.7%, the Singapore dollar 1.0%, and the South African rand 0.6%. The Chinese yuan declined 1.1% versus the dollar (down 5.7%).

Commodities Watch:

The Goldman Sachs Commodities Index gained 2.4% (up 15.4% y-t-d). Spot Gold declined 1.6% to $1,208 (up 13.8%). Silver sank 4.1% to $16.65 (up 21%). Crude rallied $2.28 to $45.69 (up 23%). Gasoline rose 2.6% (up 5%), and Natural Gas rallied 8.3% (up 22%). Copper gave back 1.2% (up 16%). Wheat jumped 5.5% (down 10%). Corn rose 3.9% (down 2%).

China Bubble Watch:

November 15 – Bloomberg: “Add another credit indicator to the financial warning signs flashing in China. The adjusted loan-to-deposit ratio, which includes a range of off-balance sheet items and is an indicator of the banking system’s ability to weather stress, climbed to 80% as of June 30, according to S&P Global Ratings. For some smaller lenders, the ratio has already topped 100%... S&P’s adjusted measure is rising much faster than the official loan-to-deposit ratio as banks pile into off-balance sheet lending, sidestepping government efforts to rein in credit.”

November 13 – Dow Jones: “Growth in housing sales stayed steady in China in the first 10 months of year, but slowed for the month of October alone, after a slew of cities cracked down on their overheated property markets. Housing sales rose 42.6% in the first 10 months of the year from the same period a year earlier…”

Europe Watch:

November 18 – Financial Times (Mehreen Khan): “Italian government bonds are set to suffer their worst month since the height of the eurozone crisis as nerves build in the run up to crucial referendum next month. Italy’s 10-year bond yield has risen 49 bps this month, as most polls show prime minister Matteo Renzi is set to be on the losing side of a vote on constitutional reform in another sign of rising anti-establishment sentiment in the continent. It marks the biggest sell off in Italian benchmark debt since May 2012.”

November 18 – Bloomberg (Chiara Albanese and Giovanni Salzano): “The final rush of public opinion polls before Italy’s referendum next month showed voters are leaning toward turning down the constitutional reforms. Four polls published Friday showed the ‘No’ camp in the lead, in a trend that has been predominant for several weeks. As of Saturday, there will be a blackout period making it illegal to publish public opinion polls on the Dec. 4 vote.”

November 16 – Reuters (Jamie McGeever): “The euro zone has withstood several crises since 2008 that have thrown the 19-nation bloc's very existence into doubt, centered on its fractured economy, bond market, banking system and, of course, Greece. But for financial markets, the biggest test may be to come and some investors are dusting off strategies on how to navigate an unraveling of the euro zone - or even the European Union itself - and the turbulence that would unleash. Elections in France, Germany and The Netherlands next year, as well next month's Italian constitutional referendum, are flashpoints that could ignite brewing political discontent across the continent.”

November 17 – Reuters (Michelle Martin and Joseph Nasr): “The European Union is in danger of breaking apart unless France and Germany, in particular, work harder to stimulate growth and employment and heed citizens' concerns, French Prime Minister Manuel Valls said in the German capital… Valls said the two countries, for decades the axis around which the EU revolved, had to help refocus the bloc to tackle an immigration crisis, a lack of solidarity between member states, Britain's looming exit, and terrorism.”

November 18 – CNBC (Silvia Amaro): “The President of the European Central Bank has highlighted his concerns over how much the region's economies rely on accommodative monetary policy. Mario Draghi told the European Banking Congress… that the recent increase in prices is mainly driven by the low financing conditions, and as such, the ECB is ready to continue with the current monetary policy stance. ‘Despite the uplift to prices provided by the gradual closing of the output gap, a sustained adjustment in the path of inflation still relies on the continuation of the current, unprecedented financing conditions… It is for this reason that we remain committed to preserving the very substantial degree of monetary accommodation, which is necessary to secure a sustained convergence of inflation towards level below, but close to, 2% over the medium-term,’ Draghi said.”

November 18 – Bloomberg (Nicholas Comfort and Steven Arons): “The European Central Bank’s corporate bond purchases have sliced into debt-trading volumes and caused investors to misjudge the risk of some credit holdings, according to Deutsche Bank AG Chief Executive Officer John Cryan. ‘The impact of buying up corporate bonds is that we see, in our bank, bond-trading volumes down something like three-quarters,’ Cryan said... ‘And there has absolutely been no price discovery now in corporate bonds, so we don’t really know the price of credit, which is a dangerous situation.’”

November 14 – Reuters (Silvia Aloisi and Stephen Jewkes): “Ailing Italian lender Monte dei Paschi di Siena on Monday announced the terms of a planned debt-to-equity conversion, a key plank of a rescue scheme aimed at averting the bank being wound down. The bank said the voluntary debt swap offer would target 4.289 billion euros ($4.6bn) of subordinated bonds… The debt-to-equity swap is a crucial leg of a 5 billion euro ($5.4bn) rescue plan aimed at meeting regulators' concerns about the bank's capital position and bad loans.”

November 17 – Reuters (Marc Jones): “Italy will not bend its budget plans to meet European Commission demands, an economic adviser to the country's prime minister Matteo Renzi said... Italy and five other countries are at risk of breaking European Union budget discipline rules with their 2017 draft budgets…”

Brexit Watch:

November 15 – Reuters (Guy Faulconbridge): “Britain has no overall strategy for leaving the European Union and splits in Prime Minister Theresa May's cabinet could delay a clear negotiating position for six months, according to a leaked Deloitte memo… The document was written by consultants at Deloitte and leaked to The Times newspaper… It casts Britain's top team in a chaotic light: May is trying to control key Brexit questions herself while her senior ministers are divided and the civil service is in turmoil.”

Fixed-Income Bubble Watch:

November 18 – Bloomberg (Wes Goodman and Anchalee Worrachate): “Bonds around the world headed for their steepest two-week loss in at least 26 years as President-elect Donald Trump sends inflation expectations surging. The Bloomberg Barclays Global Aggregate Index has fallen 4% in the period through Thursday. It’s the biggest two-week rout in the data, which go back to 1990.”

November 16 – Financial Times (Mehreen Khan and Thomas Hale): “Global inflation expectations have soared to their highest level in 12 years according to a survey of fund managers, raising fears the world economy could be heading into a period of ‘stagflation’. In the wake of the election of Donald Trump as US president and a sell-off in sovereign bonds, investors surveyed by Bank of America Merrill Lynch reported their highest inflation expectations since 2004… With the new Republican president sent to splurge on tax cuts and higher government spending, 85% of money managers said they expected a pick up in inflation from the 70% reported last month.”

November 13 – Wall Street Journal (Timothy W. Martin, Georgi Kantchev and Kosaku Narioka): “Central bankers lowered interest rates to near zero or below to try to revive their gasping economies. In the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe. In Costa Mesa, Calif., Mayor Stephen Mensinger is worried retirement payments will soon eat up all the city’s cash. In Amsterdam, language teacher Frans van Leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. In Tokyo, ex-government worker Tadakazu Kobayashi no longer has enough income from pension checks to buy new clothes. Managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. Now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive.”

November 16 – Bloomberg (Sarah McGregor): “China’s holdings of U.S. Treasuries declined to the lowest level in four years, as the world’s second-largest economy runs down its reserves to support the yuan. The biggest foreign holder of U.S. government debt had $1.16 trillion in bonds, notes and bills in September, down $28.1 billion from the prior month… That’s the lowest level since September 2012. The portfolio of Japan, the largest holder after China, fell for a second straight month, down $7.6 billion to $1.14 trillion. The Treasury holdings of oil-producing Saudi Arabia declined for an eighth straight month, to $89.4 billion.”

November 16 – Wall Street Journal (Peter Grant): “Defaults are rising in a key corner of the commercial real-estate debt market just as borrowing costs are set to jump, raising the likelihood of a slowdown of the $11 trillion U.S. commercial property sector in 2017. A financial crisis-era regulation is about to take effect that is expected to make some commercial real-estate borrowing more expensive and complicated, analysts said… More than 5.6% of some $390 billion worth of commercial property mortgages that have been packaged into securities was more than 60 days late in payment in September, according to Moody’s… That was up from a 4.6% delinquency rate earlier this year.”

November 14 – Bloomberg (Phil Kuntz): “The market value of the world’s negative-yielding bonds plunged 14% last week to $8.7 trillion as investors dumped government debt at a record clip after Donald Trump’s upset win stoked speculation that his ambitious fiscal plan would flood the market with new Treasuries and boost inflation.”

November 17 – Financial Times (Eric Platt): “Global debt issuance surpassed $6tn this week, buoyed by a deluge of corporate bond sales after the US election, Dealogic data shows. Bond offerings stand roughly 9% below the record $6.6tn of debt sold over the course of 2006… Debt offerings are up 8% from a year earlier and stand at least 2% above of every year through November 16.”

Global Bubble Watch:

November 17 – Financial Times (Eric Platt): “The pace of global debt sales this year is running at a record level, surpassing $6tn this week, as companies from Pfizer to MasterCard rush to lock in borrowing costs on fears that a Donald Trump stimulus package will send interest rates even higher. A flurry of new sales this week caps a tumultuous period for bond investors, who are counting more than $1.5tn of losses, as yields have jumped on sovereign and corporate debt following Mr Trump’s victory last week.”

November 13 – Financial Times (Robin Wigglesworth): “The election of Donald Trump represents a ‘tectonic shift’ for global economics and politics, and will help kill the three-decade bond market rally, according to Henry Kaufman, the original ‘Dr Doom’. The former Salomon Brothers chief economist gained his gloomy moniker by correctly calling the last bond bear market in the 1970s, and is now predicting another one, as Mr Trump will probably fire a massive slug of inflationary government spending and reshape the Federal Reserve in a hawkish way in the coming years. ‘We have already seen a burst higher in long-term interest rates … I would say the secular trend is going to be upwards now,’ he told the FT. ‘Secular swings are hard to forecast, but the secular sweep downwards in interest rates is over, and we are about to have a gentle swing upwards.’”

November 13 – Financial Times (Nicholas Megaw): “Sluggish economic growth and a shift to fiscal stimulus measures such as those proposed by Donald Trump are bad for global creditworthiness, Moody’s has warned, as it reported that the proportion of countries with a ‘negative’ credit outlook has climbed to its highest level since 2012. Some 26% of countries rated by Moody’s now have a ‘negative’ outlook, up from 17% at the end of last year. In its annual Global Sovereign Outlook report, the ratings agency said the global outlook for sovereign ratings for the next 12 to 18 months is negative, blaming a combination of low growth, spending plans that will increase public debt, and ‘rising political and geopolitical risks’.”

November 18 – Financial Times (Nathalie Thomas): “The number of companies that have defaulted on theirs bonds has notched up to 146 for the year so far, the highest level seen at this point in the calendar since the financial crisis, according to… Standard & Poor’s. The US oil and gas sector accounts for the largest number of defaults by industry, as they continue to struggle in a climate of weak oil prices…”

November 13 – Bloomberg (Alex Sherman and Jonathan Browning): “Chinese buyers keen to continue 2016’s rapid dealmaking under a Donald Trump presidency are being given one piece of advice: Wait and see. Bankers and lawyers are already counseling some Chinese clients to hit the pause button until Trump clarifies his stance on cross-border deals for U.S. targets, according to three advisers to Chinese clients… Acquisitive Chinese companies have led a blockbuster year of dealmaking in 2016, accounting for about $225 billion of overseas purchases this year…”

November 17 – Bloomberg (Katya Kazakina): “Claude Monet’s grain stack painting fetched a record $81.4 million for the artist on Wednesday after a 14-minute bidding war. The 1891 canvas, ‘Meule,’ lifted Christie’s Impressionist and modern art evening sale to $246.3 million, a 69% jump from the similar auction a year ago. Christie’s also held a special auction last year of 20th century art, ‘The Artist’s Muse,’ which hauled in almost half a billion dollars.”

U.S. Bubble Watch:

November 17 – Bloomberg (Kevin Buckland and Shigeki Nozawa): “U.S. mortgage rates skyrocketed to a 10-month high as investors reacted to Donald Trump’s presidential election win by pulling money out of the bond market, driving up yields that guide home loans. The average rate for a 30-year fixed mortgage was 3.94%, up from 3.57% last week and the highest since January…”

November 16 – Bloomberg (Vince Golle): “Mortgage applications in the U.S. slumped last week after the sharpest increase in borrowing costs since mid-2013, signaling tougher sledding for the housing market. The Mortgage Bankers Association’s index of purchase and refinancing applications dropped 9.2% in the period ended Nov. 11 to 436.3, the lowest level since January. The average rate on a 30-year fixed loan soared 18 bps, the most since June 2013, to 3.95%.”

November 17 – Bloomberg (Sho Chandra): “U.S. new-home construction jumped to a nine-year high in October as an outsized advance in the number of apartment projects accompanied a strong pickup for single-family housing. Residential starts surged 25.5% to a 1.32 million annualized rate, the fastest since August 2007 and exceeding the highest projection in a Bloomberg survey…”

November 14 – CNBC (Diana Olick): “More selling in U.S. bond markets Monday pushed mortgage rates to a psychological breaking point. The average contract rate on the popular 30-year fixed mortgage hit 4%, according to Mortgage News Daily… Rates have now moved nearly a half a percentage point higher since Donald Trump was elected president. ‘The situation on the ground is panicked. Damage control,’ said Matthew Graham, chief operating officer of Mortgage News Daily. ‘People were trying to lock loans quickly last week and are now facing a tough choice to lock today or hope for a bounce. Many hoped for a bounce last week heading into the long weekend and we obviously didn't get it.’”

November 15 – Bloomberg (Matt Scully): “A group of online consumer loans that were packaged into bonds is going bad faster than lenders and bond underwriters had expected, the latest sign that some startups that aimed to revolutionize the banking industry underestimated the risk they were taking. Delinquencies and defaults are reaching key levels known as ‘triggers’ for at least four different sets of bonds. Breaching those levels will force lenders or underwriters to start paying down the bonds early. Avant Inc. and its underwriters, for example, are going to have to begin to repay three of its asset-backed notes…”

November 16 – Reuters (Dave McKinney): “The financial condition of Illinois’ five state pension systems worsened during 2016 with unfunded liabilities growing to a record-setting $129.8 billion… The nearly 17% surge was the result of lowered long-range investment return assumptions by four of the five pension systems and poor investment returns during 2016… The combined funded ratio of the five pension systems dropped from 41% in fiscal 2015, a level that put Illinois in a tie with Kentucky for the lowest-funded state pension system in the country. Illinois’ new funded ratio now stands at 37.6%...”

November 14 – CNBC (Arjun Kharpal): “Apple iPhones and other U.S. goods could suffer sales hits in China if President-elect Donald Trump goes through with his ‘naïve’ plan of slapping a large import tariff on Chinese products, a state-backed newspaper warned… During his election campaign this year, Trump spoke of a 45% import tariff on all Chinese goods… Should any such policy come into effect, China will take a ‘tit-for-tat approach’, according to an opinion piece in the Global Times, a newspaper backed by the Communist party. ‘A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.,’ the Global Times article read.”

November 16 – Bloomberg (Elizabeth Dexheimer): “House Financial Services Committee Chairman Jeb Hensarling said he’s willing to tweak his plan to overhaul the Dodd-Frank Act before reintroducing it to Congress early next year. The committee is ‘interested in working on a 2.0 version,’ Hensarling said… ‘Advice and counsel is welcome.’ The Texas Republican’s comments come amid speculation that his Choice Act could serve as a blueprint for how Donald Trump overhauls financial reforms enacted after the 2008 economic crisis. During the event, Hensarling said the committee has been in ‘fairly constant dialogue’ with Trump’s transition team about his legislation…”

November 14 – New York Times (Matthew Goldstein): “The presidential campaign that just ended was notable for a lack of debate about housing — in particular the uneven state of the United States mortgage market nine years since the start of the financial crisis. Neither… Trump nor … Clinton spent much time discussing housing policy… And neither candidate laid out a plan for dealing with the two biggest engines in the mortgage market — Fannie Mae and Freddie Mac — which remain under a controversial federal government conservatorship. Laurie Goodman, a longtime housing industry guru on Wall Street and now with a Washington research organization, said she did not think federal legislators would make it a priority to address the fates of Fannie and Freddie — two government-sponsored entities that were rescued by the Treasury eight years ago with a $187 billion taxpayer bailout.”

Federal Reserve Watch:

November 17 – CNBC (Jeff Cox): “Fed Chair Janet Yellen on Thursday made her strongest comments to date in favor for a policy tightening in December, telling Congress an increase could be ‘appropriate relatively soon’… ‘Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals" on inflation and jobs, Yellen said. "Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.’”

Japan Watch:

November 17 – Bloomberg (Kevin Buckland and Shigeki Nozawa): “The Bank of Japan said no bids were placed at its first operations when it offered to buy bonds at a fixed rate, a tool it introduced when deciding in September it would seek to control the yield curve. Japanese government bonds advanced on Thursday as the central bank said it would carry out two operations… Each received zero bids… A selloff in Japanese bonds had threatened to test Governor Haruhiko Kuroda’s determination to keep yields stable with unlimited debt purchases -- a weapon he had so far kept in reserve.”

November 14 – Reuters (Leika Kihara): “Japanese policymakers are starting to see fiscal stimulus as the most likely next step to spark economic growth given the central bank's dwindling monetary ammunition and uncertainty over the agenda of U.S. president-elect Donald Trump. The market turbulence caused by Trump's victory has unnerved policymakers, and offers an opportunity for lawmakers favoring bigger fiscal spending to press their case, with another supplementary budget for this year a possible first step… ‘Fiscal reform is important, but it's true uncertainties surrounding Japan's economy are increasing. That's why it's very important to come up with an effective fiscal policy,’ said Masahiko Shibayama, an adviser to Prime Minister Shinzo Abe.”

EM Watch:

November 17 – Bloomberg (Nacha Cattan and Eric Martin): “Mexico’s central bank raised borrowing costs for the fourth time this year after Donald Trump’s election dragged the peso to never-before-seen levels of more than 20 per dollar, boosting the risk of faster inflation. Policy makers increased the key rate a half point to 5.25% Thursday, the highest level since 2009.”

November 17 – Bloomberg (Anirban Nag and Anto Antony): “From keeping Indian defense jets on the ready to transfer cash from mints, to banks knocking on the doors of religious institutions to access smaller change, Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation… Unaccounted money makes up nearly a fourth of the economy.”

November 17 – Reuters (Rodrigo Viga Gaier and Alonso Soto): “The former governor of Rio de Janeiro state was arrested… as part of a corruption investigation linked to a World Cup project and other works worth billions of dollars, in a blow to Brazil's ruling party that may fuel political instability. Federal prosecutors accused Sergio Cabral, 53, of leading a criminal organization that took 224 million reais ($66 million) in bribes from construction firms in exchange for infrastructure contracts from 2007 to 2014…”

Leveraged Speculator Watch:

November 15 – Bloomberg (Phil Kuntz): “About five years ago, Kentucky started investing some of its public-employee pension money with hedge funds. Sure, fees were high but the funds came with the lure of high returns and could serve as a buffer if the market tanked. By early November, Kentucky officials had had enough. They voted to start yanking $800 million from hedge funds… Disappointing returns were certainly a factor. But another reason was the public’s perception of hedge funds as highly risky and run by guys with penthouses and yachts, said David Peden, chief investment officer for Kentucky’s $16 billion portfolio. That was poison at a time when taxpayers were being asked to fork over more to close a 60% gap in pension liabilities… Kentucky is one of the latest among America’s biggest investors -- pensions, endowments and foundations -- that are souring on hedge funds after a 15-year romance.”

November 14 – New York Times (Alexandra Stevenson): “Every five minutes a satellite captures images of China’s biggest cities from space. Thousands of miles away in California, a computer looks at the shadows of the buildings in the images and draws a conclusion: China’s real estate boom is slowing. Traders at BlackRock, the money management giant, then use the data to help choose whether to buy or sell the stocks of Chinese developers. ‘The machine is able to deal with some of the very complex decisions,’ said Jeff Shen, co-chief investment officer at Scientific Active Equity, BlackRock’s quantitative trading, or quant, arm… The future star of the hedge fund industry is not the next William A. Ackman, Carl C. Icahn or George Soros. Rather, it is a computer like the one at Scientific Active Equity, which sifts through data like satellite images from China every day.”

Geopolitical Watch:

November 17 – Reuters (Greg Torode): “A U.S. congressional panel has warned of an ‘alarming’ rise in China's interference in Hong Kong, noting fears over the former British colony's continued role as a global financial hub. In its annual report to Congress on Wednesday, the bipartisan U.S.-China Economic and Security Review Commission highlights the ‘chilling’ abduction and detention of five booksellers based in Hong Kong as well as pressure on media and academic freedoms.”

November 16 – Reuters (Denny Thomas and David Lawder): “U.S. lawmakers should take action to ban China's state-owned firms from acquiring U.S. companies, a congressional panel charged with monitoring security and trade links between Washington and Beijing said… In its annual report to Congress, the U.S.-China Economic and Security Review Commission said the Chinese Communist Party has used state-backed enterprises as the primary economic tool to advance and achieve its national security objectives.”

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