Saturday, November 5, 2016

Weekly Commentary: The Upshot of Inflationism

As a determined analyst, I’m as committed as ever to remaining “fiercely independent.” This must at least partially explain why I’ve tended to consider myself politically “independent.” Political party ideologies undoubtedly engender biases and compromise objectivity. With the two major parties now in such a muddle, an “independent” affiliation almost wins by default. I recall years ago when I was first introduced to the notion of “the evil party and the stupid party” in a discussion about our two-party system. That conversation doesn’t seem as deeply cynical these days.

I’m left to daydream of a party committed to a smaller and less obtrusive federal government, strong national defense, fiscal responsibility, social tolerance and attentiveness to the environment. It doesn’t seem all that outlandish. Yet there’s one more thing – perhaps the most vital of all: I aspire to be associated with a political movement committed to sound money and Credit. Why all the clamor over guns when unbridled finance is so much more destructive?

This election cycle has been a national disgrace. It finally comes to an end Tuesday, when a deeply divided nation heads to the polls. I recall having a tinge of hope eight years ago that there was a commitment to more inter-party cooperation and less partisan vitriol. There’s not even lip service this time around. As an optimist, I would like to believe that a period of healing commences Wednesday. The analyst inside knows things will continue to worsen before they get better.

Our nation and the world are paying a very heavy price for a failed experiment in Inflationism. At this point, economic stagnation, wealth redistribution and inequality, financial insecurity and corruption are rather obvious consequences. “Money” and Credit have inflated, right along with government, securities markets, financial institutions, corporate influence and greed.

Along the way, there have been many subtle effects. To this day the majority still cling to the view that central bankers are essential to the solution - rather than the problem. But they are at the very root of disturbing national and international, economic, financial, societal and geopolitical degeneration.

For close to 30 years now, central bank policies have nurtured serial inflationary booms and busts. It’s a backdrop that has repeatedly forced investors, homebuyers and others into serious harm’s way. Buy or you’ll be left behind. Get aboard before it’s too late. It’s a system that systematically targets the unsophisticated and less affluent to take on a tenuous debt position to buy homes, cars and things in the name of promoting economic growth. It’s a system that devalues the wealth of savers. Somehow it’s regressed into a system with a policy objective to coerce savers and the risk averse, to ensure their buying power instead inflates the value of risky securities market assets.

We’re witnessing the repercussions of a prolonged bad cycle of playing with society’s psyche: inflating untenable expectations, only to see them crushed by the fist of bursting Bubbles. Central bankers then simply press on to the more egregious extremes necessary to reflate expectations. Apparently, big corporate “media” has been fine with all of this. Indeed, the “media” have been instrumental to Washington and Wall Street propaganda campaigns.

Ironically, it was free market ideologue Alan Greenspan that set in motion dynamics that evolved into Washington assuming commanding roles throughout the economy and financial markets. Every boom turned bust justified an even more “activist” reflation – fueling even bigger and more vulnerable Bubbles. Each Bubble begot even deeper structural impairment. And with each boom and bust the cumulative toll of victims expanded: lost jobs and careers; lost wealth along with insecurity; shrinking real incomes; repossessed homes and cars; bankruptcies and all the accompanying personal and family hardship.

Meanwhile, the fortunate and well-connected became millionaires and some even billionaires (helped if one operated a hedge fund). Over time, it turned more obvious the system was unfair (at best). Our government and central bank assured the discontents that they would redistribute wealth more equitably. Good times were right around the corner. Rest assured, the crisis was an aberration.

Propaganda went into overdrive – and the BS took on a life of its own: The economy, policymaking and the markets were fundamentally sound. Contemporary central banking was “enlightened.” Yet year after year the situation only worsened. Even with the stated unemployment rate back to 5% and stocks returning to record highs, disenchantment with the “system” grew. Interestingly, the “average” person seemed to better grasp the true merits of zero rates and money printing than PhD economists.

Today a strong majority of Americans believe the country is “moving in the wrong direction.” A disturbingly large percentage no longer trust government, don’t trust “big business” or the media, and have little faith in the Federal Reserve or our institutions more generally. They fear our great nation is in terminal decline – and our leaders (govt, business, finance, academia, etc.) refuse to acknowledge there’s a serious problem, let alone do something about it. We fear an increasingly hostile world; we fear for the future. Insecurity – economic, financial and geopolitical – abounds. We worry our children won’t have same opportunities. And of course such a backdrop creates an incubator for anxiety, anger, racism and xenophobia. “When Money Dies.”

The two main candidates espouse two polarized views of the world. There’s the anti-establishment movement tapping into widespread frustration. The system is broken. And there’s the establishment candidate that takes a more promising view: “We are from the government and we’re here to help you.” One sees Washington as a corrupt swamp that needs draining. The other espouses the view that Washington must right the wrongs of an unjust world.

The fact of the matter is that “the establishment” has made an incredible mess of things – and that’s Republican and Democrat alike, (too often difficult to differentiate). Over the years the media has performed dismally, failing to hold our policymakers accountable. For too long the media has succumbed to historical revisionism, content to whitewash festering problems. Where were the tough questions for Greenspan, Bernanke and Yellen? Where was tenacious investigative journalism with regards to Fannie and Freddie? (Why did no one go to jail?) Why no vigorous scrutiny of all the Wall Street nonsense – until after the Bubble burst and it was too late?

Even after decades of one boom and bust cycle after another, the media retain a strong bias in support of central bank activism. History is clear: inflation is problematic and, in the end, unethical and terribly destructive. Yet, amazingly, to this day the vast majority of journalists remain pro-inflationism.

I argued that with “mad as hell…” having finally reached a majority, Brexit could be viewed as an important inflection point. Power had swung decisively away from the so-called “establishment” (government, media, securities markets, etc.). No matter Tuesday’s outcome, this dynamic is gathering momentum at home and abroad.

For the record, I have already voted for one of the two deeply flawed candidates. I cast my vote for change. As an analyst of Bubbles, I am absolutely convinced that the sooner problems are recognized and addressed the better. There’s never a convenient time to rein in monetary inflation, and it’s extremely unfortunate that this dangerous ideology has gone unchecked for so long. At this point, there will no easy way out of history’s greatest global financial Bubble. The inflationists will continue to claim that they just need additional time – and that the costs of staying the course are low. Nonsense. One can’t overstate the costs associated with more of the same.

This week’s trading seemed to confirm that markets have again entered a high-risk period. “Risk Off” has gained momentum, with global risk markets closely correlated on the downside. Stocks suffered almost across the board - the U.S., Asia, Europe and EM. Japan’s Nikkei fell 3.2%, as the yen rallied 1.6%. Notably, European equities came under heavy selling pressure. Italian stocks (MIB) were slammed 5.8%, and Spanish equities lost 4.5%. Germany’s DAX dropped 4.1% and France’s CAC 40 fell 3.8%. UK stocks were under pressure as well, with the FTSE 100 sinking 4.3%. European bank stocks sank 4.9%, led by the 8.9% decline in Italian banks.

Italian 10-year yields surged 17 bps to a 13-month high 1.75%. Moreover, the Italian to German 10-year bond spread widened 20 to a two-year high 162 bps. Heavily indebted and economically fragile Italy remains vulnerable to risk aversion and any tightening of global finance. With “Risk Off” taking hold, the last thing Italy needed was a group of earthquakes to go with heightened political uncertainty surrounding their December 4 referendum. Also, this week saw Italy’s jobless rate increase to a seven-month high 11.7%.

“Risk Off” heavily impacted EM this week. EEM (EM equities ETF) dropped 2.7% this week, trading to its lowest level since mid-September. Bloomberg: “Erdogan Crackdown Has Turkey on Edge as Kurd Leaders Jailed.” Turkish stocks were hit 5.2%, as the lira dropped 1.6% to another record low. Stocks fell 4.2% and 2.7% in Brazil and Mexico. Indian stocks were down 2.4%.

Bloomberg: “U.S. Stocks Post Longest Slide Since 1980…” A bit dramatic, but some fear (and a lot of hedging) has returned to U.S. equities. The VIX traded to the highs (22) since June. Selling was broad-based – big-, medium- and small-caps. And while Treasuries enjoyed a modest safe haven bid, it did not reverse selling pressure overhanging the beloved dividend stocks. The Nasdaq 100 (NDX) fell 2.9%, as the Crowded technology space begins to unravel.

According to Lipper, junk bond funds suffered $4.1bn of outflows this past week (largest since August 2014). Credit spreads widened meaningfully this week. And while spreads are not yet at alarming levels, increasingly it appears a widening trend has taken hold.

Tuesday evening – and likely late into the night – will be fascinating history in the making. Odds remain firmly in favor of a Clinton victory (as they were against Brexit heading into the June 23 vote). Unless the Democrats surprise with a clean sweep, there will likely be a relief rally partially fueled by an unwind of bearish hedges. But the race is clearly tightening. A Trump win would stun the markets at home and abroad, perhaps with that problematic combination of sinking stocks, rising yields, widening spreads and currency market instability. That would spell serious liquidity issues.


For the Week:

The S&P500 fell 1.9% (up 2.0% y-t-d), and the Dow declined 1.5% (up 2.7%). The Utilities lost 1.1% (up 11.5%). The Banks declined 1.6% (up 0.4%), and the Broker/Dealers dropped 2.3% (down 6.1%). The Transports gained 0.7% (up 7.5%). The S&P 400 Midcaps fell 1.4% (up 5.7%), and the small cap Russell 2000 dropped 2.0% (up 2.4%). The Nasdaq100 sank 2.9% (up 1.6%), and the Morgan Stanley High Tech index dropped 2.2% (up 8.4%). The Semiconductors fell 2.0% (up 21%). The Biotechs lost another 2.6% (down 24.3%). With bullion jumping $30, the HUI gold index surged 5.0% (up 95.5%).

Three-month Treasury bill rates ended the week at 37 bps. Two-year government yields fell seven bps to 0.78% (down 27bps y-t-d). Five-year T-note yields dropped nine bps to 1.23% (down 52bps). Ten-year Treasury yields declined seven bps to 1.78% (down 47bps). Long bond yields fell six bps to 2.56% (down 46bps).

Greek 10-year yields sank 59 bps to 7.62% (up 30bps y-t-d). Ten-year Portuguese yields declined five bps to 3.26% (up 74bps). Italian 10-year yields surged 17 bps to 1.75% (up 16bps). Spain's 10-year yields added three bps to 1.26% (down 51bps). German bund yields declined three bps to 0.13% (down 49bps). French yields were unchanged at 0.46% (down 53bps). The French to German 10-year bond spread widened three to 33 bps. U.K. 10-year gilt yields fell 13 bps to 1.13% (down 83bps). U.K.'s FTSE equities index sank 4.3% (up 7.2%).

Japan's Nikkei 225 equities index fell 3.2% (down 11.2% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to negative 0.07% (down 26bps y-t-d). The German DAX equities index sank 4.1% (down 4.5%). Spain's IBEX 35 equities index dropped 4.5% (down 7.9%). Italy's FTSE MIB index was clobbered 5.8% (down 23.8%). EM equities were mostly under pressure. Brazil's Bovespa index sank 4.2% (up 42%). Mexico's Bolsa was hit 2.7% (up 8.6%). South Korea's Kospi declined 1.9% (up 1.1%). India’s Sensex equities dropped 2.4% (up 4.4%). China’s Shanghai Exchange increased 0.7% (down 11.7%). Turkey's Borsa Istanbul National 100 index was hammered 5.2% (up 3.5%). Russia's MICEX equities index declined 1.0% (up 11.4%).

Junk bond mutual funds saw outflows of a remarkable $4.1bn (from Lipper) - the "largest outflow since August 2014."

Freddie Mac 30-year fixed mortgage rates jumped seven bps last week to an almost five-month high 3.54% (down 33bps y-o-y). Fifteen-year rates rose six bps to 2.84% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 3.74% (down 13bps).

Federal Reserve Credit last week declined $17.3bn to $4.413 TN. Over the past year, Fed Credit contracted $39bn (0.9%). Fed Credit inflated $1.602 TN, or 57%, over the past 208 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.9bn last week to a six-year low $3.120 TN. "Custody holdings" were down $163bn y-o-y, or 5.0%.

M2 (narrow) "money" supply last week surged another $40.4bn to $13.156 TN. "Narrow money" expanded $941bn, or 7.7%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits jumped $48bn, while Savings Deposits fell $15bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $7.7bn.

Total money market fund assets jumped $26.2bn to a 10-week high $2.677 TN. Money Funds declined $25bn y-o-y (0.9%).

Total Commercial Paper increased $4.3bn to $907bn. CP declined $150bn y-o-y, or 14.2%.

Currency Watch:

November 4 – Wall Street Journal (Alex Frangos): “Markets have grown more accustomed to the slow-motion decline in the value of the Chinese yuan. The currency’s next milestone, however, may usher in a more challenging period. China’s currency has fallen nearly 4% against the dollar this year, with a chunk of that move taking place over the past month… Beijing has spent more than $500 billion in reserves to manage the yuan’s slide over the past two years on a balance-of-payments basis. Still, the yuan has slipped from 6.06 a dollar to above 6.75. That is getting close to 6.82, the level around which the yuan was pegged for an extended period from 2008 until 2010… The two years in which the yuan was stuck around 6.82 was also the period of the largest inflows into the Chinese economy, to the tune of $764 billion, noted Kevin Lai of Daiwa Securities. Quantitative easing in the U.S. was in full effect and trillions flowed to emerging markets, especially China. Individuals and companies that borrowed in dollars or brought money in as a carry trade may have hung on until now…”

The U.S. dollar index dropped 1.5% to 96.9 (down 1.8% y-t-d). For the week on the upside, the British pound increased 2.7%, the New Zealand dollar 2.3%, the Swiss franc 2.0%, the South African rand 1.9%, the Japanese yen 1.6%, the euro 1.4%, the Danish krone 1.4%, the Norwegian krone 1.3%, the Australian dollar 1.0%, the Swedish krone 0.7%, the Singapore dollar 0.6% and the South Korean won 0.1%. For the week on the downside, the Brazilian real declined 1.1% and the Mexican peso slipped 0.2%. The Chinese yuan recovered 0.2% versus the dollar (down 3.9% y-t-d).

Commodities Watch:

November 1 – Reuters (Julie Verhage and Sid Verma): “There's one certain winner of next week's presidential election, according to HSBC…: investors in gold. Although they deem a Donald Trump victory more supportive for the price of the metal than a win by Hillary Clinton, the bank's Chief Precious Metals Analyst James Steel says it'll enjoy at least an 8% jump whoever wins the race. Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential ‘protection against protectionism,’ he says.”

The Goldman Sachs Commodities Index sank 5.7% (up 12% y-t-d). Spot Gold jumped 2.3% to $1,305 (up 23%). Silver rallied 3.8% to $18.43 (up 34%). Crude sank $4.59 to $44.07 (up 19%). Gasoline dropped 6.1% (up 9%), and Natural Gas slipped 0.4% (up 18%). Copper gained 3.1% (up 6%). Wheat increased 1.4% (down 12%). Corn fell 1.8% (down 3%).

China Bubble Watch:

November 2 – Reuters (Kevin Yao): “China's growing debt and property risks have touched off an internal debate over whether China should tolerate growth as low as 6% in 2017 to allow more room for painful reforms aimed at reducing industrial overcapacity and indebtedness. The government has said economic growth of at least 6.5% is needed each year through to 2020 to meet a previously stated goal of doubling GDP and per capita income by 2020 from 2010 levels. It aims for 6.5-7% growth this year. Many advisers expect the government to stick to this year's target in 2017, or at best change the wording to ‘around 6.5%’ to allow for a slightly lower expansion rate next year. But some advisers say maintaining growth above 6.5% is unrealistic because it will force the government to keep up costly economic stimulus measures that have stoked concerns about a sharp rise in credit and the property market.”

November 3 – Bloomberg (Sid Verma and Narae Kim): “Brace yourself. Beijing was embroiled in a spate of frenzied dollar-selling last month as capital outflows and a depreciating yuan saw foreign-exchange reserves tumble by $80 billion, resuming 2015's sharp declines in the country's monetary war chest after a period of relative stability between February and September this year. That's the prediction of analysts Khoon Goh of Australia & New Zealand Banking Group Ltd, and Jens Nordvig of Exante Data LLC…, who reckon markets have underestimated the likely scale of currency intervention by the People's Bank of China in light of the fall of the yuan relative to the dollar.”

November 2 – Bloomberg (Tracy Alloway): “That's a statement published this week by the National Association of Financial Market Institutional Investors. It heralds the start of trading, in China, of credit-default swaps (CDS), or derivatives used by investors to protect against default by companies and other entities… Setting aside the question of whether these new instruments will be deployed in large enough sums to make a difference to investors, there are other looming problems. For instance, there is a thorny issue highlighted by a recent note from Goldman Sachs… Just who, asks Goldman Analyst Kenneth Ho, is selling CDS protection on Chinese corporates? Credit-default swaps represent a binary bet on a company's creditworthiness, with the buyer of protection paying premiums to a protection-seller in return for an insurance-like payout should the bonds sour… And while the Chinese government is clearly keen on transferring credit risk through the use of such instruments, one wonders just who they are transferring risk to. ‘Although such products will provide lenders with a tool to hedge their credit exposures by purchasing CDS protection, it is unclear who will be the seller of the protection, and if the sellers are other financial institutions, the credit risks are merely transferred to other parts of the financial sector,’ writes Ho.”

November 2 – Financial Times (Gabriel Wildau): “Chinese hedge funds are providing margin finance for leveraged bets on the country’s booming commodity futures market, in an echo of the practices that led to last year's stock market boom and bust. Futures prices for the so-called ferrous complex of steel, iron ore, coking coal and coke have risen sharply this year as Chinese fiscal and monetary stimulus has produced a revival of construction activity… Rising commodity prices have in turn fuelled speculation in the futures markets… Commodity trading has surged in China as retail investors, rich individuals and wealth managers use the sector as a quick and easy way to place leveraged bets… Some hedge funds are also using structured investment products to provide margin loans to investors looking to ride the futures boom. Hedge funds generally buy the senior tranche, which promises a fixed return. Others buy the subordinate tranche, putting up some of their money as margin and borrowing funds from the senior tranche to enlarge the investment.”

November 2 – Bloomberg: “China’s export growth to emerging markets that helped it weather the global financial crisis has fallen away, adding to the drag on manufacturers as demand from advanced economies fails to pick up the slack. Exports to developing nations fell 6% in the second quarter while those to fuel-exporting countries in the Middle East and beyond flat-lined after a 22% plunge in the first three months.”

November 4 – Wall Street Journal (Saumya Vaishampayan, Gregor Stuart Hunter and Chao Deng): “Chinese investors looking for a refuge from the weakening yuan are turning to bitcoin. Total trading in the virtual currency reached 47 million bitcoins last week, the highest-ever level based on data going back to 2011. Prices meanwhile hit a more-than four-month high of $742.46 on Wednesday, according to CoinDesk data. The vast majority of the action has been taking place in China, the world’s second-largest economy, with bitcoin trading on three Chinese exchanges accounting for 98% of global volume in the past month.”

Europe Watch:

November 3 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymaker Jens Weidmann called… for ‘patience’ with bank monetary policy, warning that extraordinary stimulus loses its effect over time while increasing stability risk. ‘All in all, the risks of ultra-loose monetary policy are becoming increasingly clear,’ he told a business forum… ‘It is important to give the measures taken enough time to have an impact on the inflation rate… This focus on the medium term – alongside the fact that the euro area is still struggling to overcome the longer-term economic implications of the biggest economic shock since World War II – underscores the merits of patience.’”

November 3 – Bloomberg (Rainer Buergin): “’Monetary policy has to the greatest possible extent reached the limits of its possibilities, with all the risks and side effects,” German Finance Minister Wolfgang Schaeuble says at a conference… ‘We have a common currency now, but this common currency mustn’t undermine incentives for necessary reforms’ in the euro area…”

November 3 – Bloomberg (Rainer Buergin): “German government’s council of economic advisers says ‘the extent of monetary easing in the euro area is no longer appropriate given the region’s economic recovery.” ECB policy ‘threatens financial stability’… ‘The ECB should slow down its bond purchases and end them earlier’…”

November 2 – Bloomberg (Jeff Black): “Grim mutterings about European Central Bank policy can probably be heard echoing around the skyscrapers of Frankfurt's financial district on any given day: Low interest rates, tough supervision, no bonds left out there to buy, etcetera. David Folkerts-Landau, chief economist of Deutsche Bank AG has taken those concerns to a whole new level, and has just published an excoriating attack on ECB policy. The research note is entitled ‘The Dark Sides of QE.’ Here’s a taste: ‘While European central bankers commend themselves for the scale and originality of monetary policy since 2012, this self-praise appears increasingly unwarranted,’ he writes, going on to conclude that the ‘ECB is stuck ... between an unfavorable equilibrium of low growth, high unemployment and zero reform momentum on the one hand and growing risks to core country balance sheets on the other.’ Folkerts-Landau lists a number of the dastardly deeds of the ECB’s 80 billion-euro ($89 billion) a month asset-purchase program, which, lest we forget, has so far achieved its aim of preventing a spiral of deflation in the euro area: Bond prices have lost their signaling function; national balance sheets risk being overburdened; savers are being penalized; asset bubbles are forming.”

November 1 – Reuters (Abhinav Ramnarayan): “Italy's borrowing costs hit eight-month highs on Tuesday with investors focused on political risks and stuttering banking sector reforms there as anxiety about other lower-rated euro zone nations has eased… The gap between Italian and Spanish 10-year borrowing costs - viewed as a key indicator of political risk - rose on Monday to 41.4 basis points, its highest since 2012… Concern about Italy centres on a referendum on Dec. 4 in which voters will decide whether to approve Prime Minister Matteo Renzi's programme of constitutional reforms to reduce the role of the Senate and the powers of regional governments.”

November 1 – Reuters (Jan Strupczewski): “Italy's response to the European Commission's concerns regarding its 2017 draft budget assumptions has not been constructive, an EU official said…, as Rome tries to avoid belt-tightening measures ahead of a Dec. 4 referendum. Instead of cutting its structural budget deficit, Prime Minister Matteo Renzi's government plans to increase it, citing challenges like the migration crisis, post-earthquake reconstruction and lower-than-expected economic growth.”

Brexit Watch:

November 3 – Bloomberg (Michael Holden): “A British court ruled… that the government needs parliamentary approval to start the process of leaving the European Union, potentially delaying Prime Minister Theresa May's Brexit plans. The government said it would appeal against the ruling by England's High Court, and Britain's Supreme Court is expected to consider the appeal early next month. A spokeswoman for May said the prime minister still planned to launch talks on the terms of Brexit by the end of March and added: ‘We have no intention of letting this derail our timetable.’”

Fixed-Income Bubble Watch:

November 1 – Wall Street Journal (Chris Dieterich): “The bond market's October retreat fueled record withdrawals from some popular exchange-traded funds, the latest sign of investor anxiety over inflation. Investors pulled $998 million last Thursday from iShares iBoxx High Yield Corporate Bond ETF, the oldest and largest junk-bond ETF. That is the largest daily withdrawal on record… Investors also pulled $1.7 billion last week from the iShares iBoxx $ Investment Grade Corporate Bond ETF, the biggest weekly outflow since its inception in 2002… Some 46% of the U.S. investment-grade market, or $2.7 trillion, is controlled by funds and SMAs.”

November 4 – Wall Street Journal (Claire Boston, Sally Bakewell and Rachel Evans): “The worst debt-market slump in seven months is starting to disrupt bond sales by risky companies as investors retreat from funds that buy the debt. Construction company Tutor Perini Corp. pulled a $500 million speculative-grade bond offering because of ‘adverse market conditions’... That left Wall Street underwriters without a junk-rated sale for the second day this week… Yields on high-yield bonds jumped for six straight days to 6.5% on Thursday -- their highest in three months…”

November 3 – Bloomberg (Selcuk Gokoluk): “Companies are selling fewer bonds for capital expenditure even as European Central Bank stimulus measures designed to boost the economy spur record issuance, according to Fitch Ratings. Borrowers are using the proceeds to fund mergers and refinance debt instead of investing in factories and equipment, Fitch analysts Michael Larsson and Roelof Steenkamp wrote…”

Global Bubble Watch:

October 31 – Reuters (Eric Platt): “A surge of blockbuster takeovers and buyouts has provided renewed ammunition for the corporate bond market, supplying fresh kindling in what is already set to be a record year of debt issuance. Bankers and investors are eyeing a wave of potential bond offerings to finance mergers that will see the likes of telecom behemoth AT&T, chipmaker Qualcomm, fibre optic group CenturyLink and cigarette company British American Tobacco lever up… Companies and banks have already issued $1.4tn of debt in the US this year, a record pace, according to Dealogic. Acquisitions and share buybacks have been among the largest determinants of those borrowings over the last decade, with the former accounting for $241bn of 2016’s haul… Global bond offerings are up 9% from last year at $5.8tn, and bankers say a new all time high could be set before year end.”

November 2 – Financial Times (Emiko Terazono): “When Michael Farmer, founding partner of metals hedge fund Red Kite, this week blasted high-frequency traders who use powerful computers to execute orders at ultrafast speeds, he spoke for many in the commodities world. ‘High-frequency trading appears to have no other purpose than to make money from the trading of other participants by jumping ahead of them,’ said Mr Farmer, in his keynote address at the LME Week dinner. Unfortunately for Mr Farmer, commodities, like other areas of finance, face an era of digitally driven hyperliquid markets when data moves in terabytes and decisions are made in milliseconds. Call it the commoditisation of commodity trading.”

U.S. Bubble Watch:

November 2 – Wall Street Journal (AnnaMaria Andriotis): “Banks no longer reign over the mortgage market. They accounted for less than half of the mortgage dollars extended to borrowers during the third quarter—the first quarter banks, credit unions and other depository institutions have fallen below that threshold in more than 30 years, according to Inside Mortgage Finance. Taking their place are nonbank lenders more willing to make riskier loans banks now shun… Many of the loans these lenders are originating are effectively guaranteed by the U.S. government… Among the top 50 mortgage lenders, nonbanks extended 51.4% of loan dollars in the third quarter, up from 46% for all of last year, 19% in 2012 and 9% in 2009… The two biggest nonbank mortgage lenders are Quicken Loans Inc. and PennyMac… Many nonbanks are courting borrowers who can’t get approved by banks, which have favored customers with pristine credit.”

Federal Reserve Watch:

November 2 – Bloomberg (Christopher Condon): “Federal Reserve policy makers left interest rates unchanged while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month. ‘The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,’ the Federal Open Market Committee said… following a two-day meeting in Washington. The decision was 8-2. Fed officials revealed growing confidence that inflation is on track to reach their 2% target.”

Japan Watch:

November 1 – Wall Street Journal (Takashi Nakamichi and Megumi Fujikawa): “The Bank of Japan has given up its starring role in Abenomics, for now. After refitting its tool kit in September, the central bank opted Tuesday to leave policy unchanged, despite sharply cutting its inflation forecasts. And the bank doesn’t look likely to act in the coming months either as it backpedals to a less clear goal of maintaining ‘momentum’ toward its 2% inflation target. At its policy meeting, the central bank kept its new anchor for 10-year government bond yields at zero. It also left its target for a short-term interest rate on some commercial bank deposits at minus 0.1%. The BOJ acknowledged it had fallen further behind its schedule to generate 2% inflation. Its new forecast tips the annual inflation rate to reach 2% around fiscal 2018, which ends in March 2019… Mr. Kuroda’s BOJ has nearly tripled the amount of cash in the banking sector to over 400 trillion yen ($3.8 trillion) in addition to pushing the deposit rate below zero. But the latest inflation figures showed a seventh straight month of price falls…”

November 2 – Bloomberg (Yoshiaki Nohara): “The Bank of Japan is signaling that Prime Minister Shinzo Abe’s government needs to do more to help achieve 2% inflation and revive the economy, former BOJ board member Sayuri Shirai said… The central bank’s message was that it is now up to Abe’s government to do more, according to Shirai... ‘The BOJ sent a signal that the BOJ has done everything they could and already achieved very accommodative monetary environment and it’s now time for the government to do something to increase aggregate demand,’ Shirai, …professor of economics at Keio University, said…”

EM Watch:

November 3 – Reuters (Helen Reid): “Emerging markets will see net capital outflows in 2017 for the fourth year in a row but the projected outflows of $206 billion will be much less than the $373 billion expected this year, the Institute for International Finance said… The group, one of the most authoritative trackers of capital flows to and from the developing world, predicts $769 billion in private non-resident inflows into emerging markets in 2017, up from this year's $640 billion, a reflection of improving flows to banks, stocks and bonds. However, these inflows will be offset by money sent offshore by residents of developing countries, especially China which accounts for much of the $206 billion net capital flight, the IIF said. Net capital flight was as high as $739 billion last year.”

November 1 – Wall Street Journal (Kwanwoo Jun and In-Soo Nam): “South Korea plans to spend $9.6 billion on ships from local yards to stave off the collapse of its shipbuilding industry, the latest evidence of the wrenching impact of a prolonged slump in global trade. For decades, shipbuilding has been a driving force of the South Korean economy. The country is home to the world’s three biggest shipbuilders measured by order volume, and last year ships accounted for 7.6% of South Korea’s exports… A glut of container ships in the water and not enough cargo to fill them in the past few years has led to record-low freight rates, hammering the industry and prompting owners to further cut or push back new ship orders.”

November 3 – Reuters (Lin Noueihed, Eric Knecht and Ahmed Aboulenein): “Egypt floated its currency on Thursday and said it would make a final push to secure a $12 billion IMF loan within days as it seeks to overhaul its dollar-starved economy and unlock foreign investment. Egypt initially devalued the pound by about a third early on Thursday, taking it from its previous peg of 8.8 to the dollar to an initial guidance rate of 13 before allowing the currency to drift down to about 14.65 at a special dollar auction.”

Leveraged Speculator Watch:

November 4 – Wall Street Journal (Gregory Zuckerman): “John Paulson’s subprime trade led to historic fortune. His drug-company investments? Big losses and plunging assets. Mr. Paulson’s hedge-fund firm, Paulson & Co., is suffering painful losses this year, extending a period of uneven performance that has left the firm managing about $12 billion, down from $38 billion in 2011. Behind the recent difficulties: A big, faulty bet on pharmaceutical companies, as well as excessive caution about the broader market, according to people close to the matter.”

November 2 – Bloomberg (Nishant Kumar): “Losses at Leda Braga’s computer-driven hedge fund this year are running at about twice the level suffered by a macro fund run by billionaire Alan Howard. Yet, while Braga has raised money, investors have pulled billions of dollars from Howard’s fund. The divergence is a sign of the sweeping changes underway in the $3 trillion global hedge fund industry, where investors are shunning flesh and blood traders and putting their faith, and hard cash, in algorithms to bet on macro economic trends. Star traders are losing clients after years of poor returns in a near-zero-rate environment, with managers finding it tough to read economic indicators, predict markets and get an edge in an era of widespread access to information. Investors are turning to model-driven funds in the hope that machines, detached from all emotional bias, are better placed to make money or protect their capital should markets turn volatile. ‘There is a general skepticism about the ability of discretionary macro managers to make money with rates at zero,’ said Michele Gesualdi, who oversees $3 billion as the chief investment officer at Kairos Investment Management… ‘Investors understand trend following and think this is more predictable.’ Funds that use mathematical models have raised $21 billion this year, according to… eVestment, while the rest of the industry suffered $60 billion of withdrawals.”

Geopolitical Watch:

November 1 – Reuters (Tulay Karadeniz, Can Sezer and Daren Butler): “Turkey's military has begun deploying tanks and other armored vehicles to the town of Silopi near the Iraqi border, in a move the defense minister said… was related to the fight against terrorism and developments across the border. Fikri Isik said Turkey had ‘no obligation’ to wait behind its borders and would do what was necessary if Kurdistan Workers Party (PKK) militants took a foothold in northwest Iraq's Sinjar region… ‘We will not allow the threat to Turkey to increase,’ he told broadcaster A Haber…”

November 3 – Reuters (Ece Toksabay, Tuvan Gumrukcu and Madeline Chambers): “Turkish President Tayyip Erdogan said… Germany had become a haven for terrorists and would be ‘judged by history’, accusing it of failing to root out supporters of a U.S.-based cleric Ankara blames for July's failed military coup. Erdogan said Germany had long harbored militants from the Kurdistan Workers Party (PKK), which has waged a three-decade insurgency for Kurdish autonomy, and far-leftists from the DHKP-C… ‘We don't have any expectations from Germany but you will be judged in history for abetting terrorism ... Germany has become an important haven for terrorists’…”

November 2 – NBC News (Cynthia McFadden, Tracy Connor and William M. Arkin): “In his battle with the United States, Vladimir Putin has a new target — Microsoft. The Kremlin is backing a plan to rid government offices and state-controlled companies of all foreign software, starting with Moscow city government replacing Microsoft products with Russian ones, according to a senior U.S. intelligence official. The Russians have also moved toward blocking LinkedIn, the U.S.-based networking site that Microsoft is in the process of buying.”