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Saturday, October 22, 2016
Weekly Commentary: The Latest on China's Mortgage Finance Bubble
It’s been a full seven days since a CBB focused on China… Important – confirmation of the thesis - data again this week.
October 21 – Reuters (Yawen Chen and Nicholas Heath): “China's new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. The boom in sales and prices was evident in mortgage lending, with new housing loans to individuals totaling 475.9 billion yuan in September alone, some 76% higher than the same month last year… Prices in China's 70 major cities rose 11.2% in September from a year earlier, accelerating from a 9.2% increase in August, as 64 of them saw year-on-year price gains…”
Year-on-year prices were up 34.1% in Shenzhen, 32.7% in Shanghai, and 27.8% in Beijing.
Also from Reuters: “The house-prices-to-household-disposable-income ratio in first-tier cities has risen to be around 18 to 20 times in this year's housing fever, putting housing affordability close to Hong Kong's and making it less affordable than London, UBS wrote…”
October 19 – Wall Street Journal (Lingling Wei): “Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of China’s capital. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing… Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The above noted WSJ article, "China’s Property Frenzy Spurs Risky Business" (Lingling Wei), included some insightful data and a particularly interesting chart. While briefly dipping below 10% in 2012, new mortgage loans as a share of the value of total new loans averaged around 20% for much of the period 2010 through 2015 – before spiking over recent quarters. “…medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The article also included a graphic, “Number of years of median household income needed to buy a property of median value.” Here, Chinese cities are compared to some of the more notoriously expensive markets in the world: London 29 years, Tokyo 23, New York 15 and Sydney 12. With China’s Credit Bubble now spurring rampant housing inflation, Shenzhen has shot to the top of the list at 41 years, followed by Beijing (34) and Shanghai (32). Guangzhou made the list at 25 years, followed by Nanjing (22) and Hangzhou (17).
Not a big surprise, China’s September loan growth was reported at a level double forecasts.
October 18 – AFP: “New loans by Chinese banks in September surged nearly 30% from the previous month…, deepening concern about risky credit expansion in the world’s second largest economy. New loans extended by banks jumped to 1.22 trillion yuan ($181.3bn) last month from 948.7 billion yuan in August… Beijing has relied on stimulus measures such as loose credit to boost the economy, which faces a tough structural transition and sluggish global demand. But the rapid rise in borrowing has sparked alarm.”
October 21 – Reuters (Yawen Chen and Nicholas Heath): “China's new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. The boom in sales and prices was evident in mortgage lending, with new housing loans to individuals totaling 475.9 billion yuan in September alone, some 76% higher than the same month last year… Prices in China's 70 major cities rose 11.2% in September from a year earlier, accelerating from a 9.2% increase in August, as 64 of them saw year-on-year price gains…”
Year-on-year prices were up 34.1% in Shenzhen, 32.7% in Shanghai, and 27.8% in Beijing.
Also from Reuters: “The house-prices-to-household-disposable-income ratio in first-tier cities has risen to be around 18 to 20 times in this year's housing fever, putting housing affordability close to Hong Kong's and making it less affordable than London, UBS wrote…”
October 19 – Wall Street Journal (Lingling Wei): “Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of China’s capital. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing… Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The above noted WSJ article, "China’s Property Frenzy Spurs Risky Business" (Lingling Wei), included some insightful data and a particularly interesting chart. While briefly dipping below 10% in 2012, new mortgage loans as a share of the value of total new loans averaged around 20% for much of the period 2010 through 2015 – before spiking over recent quarters. “…medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The article also included a graphic, “Number of years of median household income needed to buy a property of median value.” Here, Chinese cities are compared to some of the more notoriously expensive markets in the world: London 29 years, Tokyo 23, New York 15 and Sydney 12. With China’s Credit Bubble now spurring rampant housing inflation, Shenzhen has shot to the top of the list at 41 years, followed by Beijing (34) and Shanghai (32). Guangzhou made the list at 25 years, followed by Nanjing (22) and Hangzhou (17).
Not a big surprise, China’s September loan growth was reported at a level double forecasts.
October 18 – AFP: “New loans by Chinese banks in September surged nearly 30% from the previous month…, deepening concern about risky credit expansion in the world’s second largest economy. New loans extended by banks jumped to 1.22 trillion yuan ($181.3bn) last month from 948.7 billion yuan in August… Beijing has relied on stimulus measures such as loose credit to boost the economy, which faces a tough structural transition and sluggish global demand. But the rapid rise in borrowing has sparked alarm.”
Fueled by a surge in housing-related finance, September Total Social Finance (total Credit excluding govt bonds) surged to almost $250 billion, about a third larger than forecast. This was the strongest Credit expansion since (“off the charts”) March ($360bn).
October 18 – Bloomberg: “The value of China’s new home sales rose 61% in September from a year earlier, defying policymakers’ moves earlier this year to cool the property market. The value of homes sold rose to 1.2 trillion yuan ($178bn) last month from a year earlier… The increase compares with a 33% gain the previous month.”
“CTV.” During the U.S. mortgage finance Bubble heyday period, I regularly highlighted a “Calculated Transaction Value” that I pulled from my spreadsheet of National Association of Realtors data (sales volumes by average prices). A Bubble’s manic phase sees a powerful surge in the number of transactions - at rapidly inflating prices. This explains how the value of China’s September home sales inflated 61% from September 2015, with “new housing loans to individuals” up 76% y-o-y.
I viewed CTV as the leading indicator of systemic risk associated with mortgage Bubble excess. For one, it provided a timely barometer of the general tenor of Credit growth. It was clearly the best gauge of the “inflationary bias” at work throughout housing. Parabolic growth in CTV also accurately reflected the commencement of “Terminal Phase” excess. Moreover, the historic surge of (borrowed) “money” into housing was indicative of destabilizing speculative excess, loose Credit conditions and, more generally, the degree to which financial stimulus was fueling economic imbalances.
It’s my view that the world is at the critical late-stage of a historic multi-decade Credit Bubble. China has become integral to the global Bubble – the marginal source of Credit and global finance. And in the face of a faltering Bubble Economy and increasingly vulnerable Chinese financial system, China’s mortgage finance Bubble has evolved into the predominant source of stimulus. Record Chinese Credit growth is the biggest global financial and economic story of 2016.
There’s a fundamental problem with speculative melt-ups and Credit Bubble “Terminal Phases:” They are invariably unsustainable. A torrent of Credit-driven liquidity inflates prices to unsustainable levels. Mortgage finance Bubbles are especially dangerous. They tend to be powerfully self-reinforcing, with Credit expanding exponentially during the precarious “Terminal Phase.” Fear and panic, as we’ve witnessed, can rather quickly see massive Credit expansion transformed into collapse.
It’s now been years of Chinese officials tinkering with an increasingly impervious Credit Bubble. They remain too timid, and I’d be surprised if current measures to slow housing markets have a dramatic impact. More likely, Chinese Credit continues to grow rapidly over the coming months. The much higher interest rates needed to slow rampant mortgage Credit excess are viewed as completely incompatible with a struggling general economy. Instead, it appears China will tolerate booming mortgage Credit as it systematically devalues its currency.
October 18 – Bloomberg: “The value of China’s new home sales rose 61% in September from a year earlier, defying policymakers’ moves earlier this year to cool the property market. The value of homes sold rose to 1.2 trillion yuan ($178bn) last month from a year earlier… The increase compares with a 33% gain the previous month.”
“CTV.” During the U.S. mortgage finance Bubble heyday period, I regularly highlighted a “Calculated Transaction Value” that I pulled from my spreadsheet of National Association of Realtors data (sales volumes by average prices). A Bubble’s manic phase sees a powerful surge in the number of transactions - at rapidly inflating prices. This explains how the value of China’s September home sales inflated 61% from September 2015, with “new housing loans to individuals” up 76% y-o-y.
I viewed CTV as the leading indicator of systemic risk associated with mortgage Bubble excess. For one, it provided a timely barometer of the general tenor of Credit growth. It was clearly the best gauge of the “inflationary bias” at work throughout housing. Parabolic growth in CTV also accurately reflected the commencement of “Terminal Phase” excess. Moreover, the historic surge of (borrowed) “money” into housing was indicative of destabilizing speculative excess, loose Credit conditions and, more generally, the degree to which financial stimulus was fueling economic imbalances.
It’s my view that the world is at the critical late-stage of a historic multi-decade Credit Bubble. China has become integral to the global Bubble – the marginal source of Credit and global finance. And in the face of a faltering Bubble Economy and increasingly vulnerable Chinese financial system, China’s mortgage finance Bubble has evolved into the predominant source of stimulus. Record Chinese Credit growth is the biggest global financial and economic story of 2016.
There’s a fundamental problem with speculative melt-ups and Credit Bubble “Terminal Phases:” They are invariably unsustainable. A torrent of Credit-driven liquidity inflates prices to unsustainable levels. Mortgage finance Bubbles are especially dangerous. They tend to be powerfully self-reinforcing, with Credit expanding exponentially during the precarious “Terminal Phase.” Fear and panic, as we’ve witnessed, can rather quickly see massive Credit expansion transformed into collapse.
It’s now been years of Chinese officials tinkering with an increasingly impervious Credit Bubble. They remain too timid, and I’d be surprised if current measures to slow housing markets have a dramatic impact. More likely, Chinese Credit continues to grow rapidly over the coming months. The much higher interest rates needed to slow rampant mortgage Credit excess are viewed as completely incompatible with a struggling general economy. Instead, it appears China will tolerate booming mortgage Credit as it systematically devalues its currency.
According to Zerohedge, a Goldman analyst (MK Tang) estimated that flows out of China surged to $78 billion during September, up from August’s estimated $32 billion. This would be the highest outflows since January. The Chinese currency weakened another 60 bps versus the dollar this week, putting the year-to-date devaluation to a not insignificant 4.2%.
Perhaps booming Chinese Credit and strong financial outflows are behind a growing inflationary bias taking hold in global markets. Crude traded near 15-month highs this week. This week in the currencies, the South African rand jumped 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6% and the Russian ruble 0.9%. Brazilian stocks surged 3.8%, and Mexican stocks jumped 1.5%.
Along with EM, markets are looking at bank stocks through more rose-colored glasses. European banks jumped 5.1% this week, with Italian bank surging 7.3%. U.S. bank stocks rose 3.5%. The European periphery also rallied strongly this week, with Spanish and Italian stocks up 3.8% and 3.5%.
And while global yields have risen over the past month, bonds don’t seem all that fearful of an inflation resurgence. Recall 2007, and how the bond market had smelled out the loaming mortgage bust. Yields dropped, basically ignoring stocks (and crude) as equities went to all-time highs. What I remember most from that period was how monetary disorder created heightened instability across the markets right up until the crisis.
Perhaps booming Chinese Credit and strong financial outflows are behind a growing inflationary bias taking hold in global markets. Crude traded near 15-month highs this week. This week in the currencies, the South African rand jumped 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6% and the Russian ruble 0.9%. Brazilian stocks surged 3.8%, and Mexican stocks jumped 1.5%.
Along with EM, markets are looking at bank stocks through more rose-colored glasses. European banks jumped 5.1% this week, with Italian bank surging 7.3%. U.S. bank stocks rose 3.5%. The European periphery also rallied strongly this week, with Spanish and Italian stocks up 3.8% and 3.5%.
And while global yields have risen over the past month, bonds don’t seem all that fearful of an inflation resurgence. Recall 2007, and how the bond market had smelled out the loaming mortgage bust. Yields dropped, basically ignoring stocks (and crude) as equities went to all-time highs. What I remember most from that period was how monetary disorder created heightened instability across the markets right up until the crisis.
For the Week:
The S&P500 added 0.4% (up 4.8% y-t-d), while the Dow was about unchanged (up 4.1%). The Utilities gained 0.5% (up 11.7%). The Banks surged 3.5% (up 0.8%), and the Broker/Dealers increased 0.2% (down 2.4%). The Transports slipped 0.2% (up 6.9%). The S&P 400 Midcaps gained 0.5% (up 9.2%), and the small cap Russell 2000 rose 0.5% (up 7.2%). The Nasdaq100 gained 0.9% (up 5.6%), and the Morgan Stanley High Tech index advanced 1.1% (up 10%). The Semiconductors recovered 0.6% (up 22.8%). The Biotechs rallied 0.8% (down 19.8%). With bullion up $15, the HUI gold index surged 8.2% (up 94%).
Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields slipped a basis point to 0.82% (down 23bps y-t-d). Five-year T-note yields fell five bps to 1.24% (down 51bps). Ten-year Treasury yields dropped seven bps to 1.73% (down 52bps). Long bond yields fell eight bps to 2.48% (down 54bps).
Greek 10-year yields rose six bps to 8.28% (up 96bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.16% (up 64bps). Italian 10-year yields slipped a basis point to 1.37% (down 22bps). Spain's 10-year yields declined one basis point to 1.11% (down 66bps). German bund yields dropped five bps to 0.00% (down 62bps). French yields fell five bps to 0.28% (down 71bps). The French to German 10-year bond spread was unchanged at 28 bps. U.K. 10-year gilt yields were unchanged at 1.09% (down 87bps). U.K.'s FTSE equities index was little changed (up 12.5%).
Japan's Nikkei 225 equities index rallied 1.9% (down 9.7% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.07% (down 33bps y-t-d). The German DAX equities index rose 1.2% (down 0.3%). Spain's IBEX 35 equities index surged 3.8% (down 4.6%). Italy's FTSE MIB index jumped 3.5% (down 19.9%). EM equities were mostly higher. Brazil's Bovespa index surged 3.8% (up 48%). Mexico's Bolsa gained 1.5% (up 12.7%). South Korea's Kospi increased 0.5% (up 3.7%). India’s Sensex equities jumped 1.5% (up 7.5%). China’s Shanghai Exchange rose 0.9% (down 12.7%). Turkey's Borsa Istanbul National 100 index jumped 1.7% (up 9.9%). Russia's MICEX equities index slipped 0.4% (up 11.1%).
Junk bond mutual funds saw outflows of $160 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose five bps last week to a four-month high 3.52% (down 27bps y-o-y). Fifteen-year rates added three bps to 2.79% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.63% (down 24bps).
Federal Reserve Credit last week jumped $17.3bn to $4.435 TN. Over the past year, Fed Credit contracted $22.7bn (0.5%). Fed Credit inflated $1.624 TN, or 58%, over the past 206 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $23.7bn last week to a new six-year low $3.122 TN. "Custody holdings" were down $179bn y-o-y, or 5.4%.
M2 (narrow) "money" supply last week surged $43.4bn to a record $13.123 TN. "Narrow money" expanded $955bn, or 7.9%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $5.5bn, while Savings Deposits surged $37.5bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $11.6bn.
Total money market fund assets dropped $14.1bn to a 16-month low $2.635 TN. Money Funds declined $64bn y-o-y (2.4%).
Total Commercial Paper increased $2.4bn to $905bn. CP declined $158bn y-o-y, or 14.8%.
Currency Watch:
The U.S. dollar index added 0.6% to 98.63 (down 0.1% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6%, the New Zealand dollar 1.0%, the British pound 0.4% and the Japanese yen 0.4%. For the week on the downside, the Canadian dollar declined 1.5%, the euro 0.8%, the Swedish krona 0.8%, the Swiss franc 0.3%, the Norwegian krone 0.3%, and the Australian dollar 0.1%. The Chinese yuan fell another 0.6% versus the dollar (down 4.2% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was unchanged (up 20.6% y-t-d). Spot Gold rallied 1.2% to $1,266 (up 19.4%). Silver increased 0.5% to $17.53 (up 27%). Crude gained 50 cents to $50.85 (up 37.3%). Gasoline rose 2.6% (up 21%), while Natural Gas sank 9.1% (up 28%). Copper fell 1.0% (down 2%). Wheat dropped 1.5% (down 12%). Corn declined 0.5% (down 2%).
China Bubble Watch:
October 18 – Bloomberg: “China’s economic growth remained stable in the third quarter, all but ensuring the government’s full-year growth target is met and opening a window for policy makers to deliver on vows to rein in excessive credit and surging property prices. Gross domestic product rose 6.7% in the third quarter from a year earlier, matching the median projection by economists…”
October 16 – Bloomberg (Narae Kim): “China has been issued another yellow card. In a report released last week, S&P Global Ratings warned that China is at risk of losing its AA-status if it doesn't rein in its debt-fueled economic growth. ‘Credit growth in China continues to outpace income growth, and much new lending appears to be financing public investment,’ S&P analysts Kim Eng Tan and Xin Liu wrote. ‘Consequently, we see support for the Chinese sovereign ratings gradually diminishing.’ A downgrade would be the latest blow to the world's second-largest economy, whose outlook was slashed to negative from stable by the ratings agency in March.”
October 20 – Reuters (Samuel Shen and Adam Jourdan): “China has uncovered over 1 trillion yuan (120.35 billion pounds) worth of illegal transactions by underground banks this year, the official Financial News reported… The State Administration of Foreign Exchange (SAFE) will step up investigations into capital outflows and intensify a crackdown on underground banks to foster healthy development of the country's foreign exchange market, Zhang Shenghui, a senior director at SAFE told the newspaper.”
October 18 – Bloomberg: “China’s financial hub Shanghai is stepping up a crackdown on property developers and the flow of funds into land transactions, part of broader government efforts to prevent a housing bubble. Shanghai’s commission of housing and urban-rural development said… it was investigating whether eight developers raised selling prices for residential projects without permission. The agency has already suspended transaction licenses for some properties…”
Europe Watch:
October 20 – Bloomberg (Jeff Black and Jana Randow): “In Germany, fretting about inflation is a political currency that never seems to lose its value. In the past week, for example, at least three national newspapers have run prominent articles telling the populace that their savings -- denied the magic of compound interest by the European Central Bank’s low-rate policies -- are in for a renewed onslaught from accelerating consumer prices. The Bundesbank forecasts average inflation of 1.5% next year, whereas rates will likely be around zero.”
October 16 – Bloomberg (Mark Whitehouse): “Will Italy follow the U.K.'s example and leave the European Union? Far-fetched as it may seem, capital flows suggest that some people aren’t waiting to find out. To keep the euro area's accounts in balance, Europe's central banks track flows of money among the members of the currency union. If, for example, a depositor moves 100 euros from Italy to Germany, the Bank of Italy records a liability to the Eurosystem and the Bundesbank records a credit. If a central bank starts building up liabilities rapidly, that tends to be a sign of capital flight. Lately, Italy's central bank has been building up a lot of liabilities to the Eurosystem. As of the end of September, they stood at about 354 billion euros, up 118 billion from a year earlier -- and up 78 billion since the end of May… The outflow isn't quite as large as during the sovereign-debt crisis of 2012, but it's still significant. The main beneficiary seems to be Germany, which has seen its credits to the Eurosystem increase by 160 billion over the past year.”
October 20 – Bloomberg (Carolynn Look): “Portugal’s debt would no longer be eligible for purchase under the European Central Bank’s quantitative-easing program if the country’s credit rating is downgraded on Friday, President Mario Draghi said. A decision by Canadian rating company DBRS Ltd. to take away the country’s only investment-grade rating would disqualify Portuguese sovereign bonds from asset purchases and use as collateral in refinancing operations, Draghi said…”
Brexit Watch:
October 21 – Bloomberg (Lukanyo Mnyanda and Stephen Spratt): “Money markets are zeroing in on Article 50 as the catalyst for increased risk in banks’ pound borrowing. A gauge of where bank borrowing costs will be in coming months, known as the FRA/OIS spread, shows a marked increase in traders’ perception of risk beyond March 2017. That’s the point by which U.K. Prime Minister Theresa May has pledged to formally invoke the article of the Lisbon Treaty that will formally put the nation on a path out of the European Union.”
Fixed-Income Bubble Watch:
October 18 – Bloomberg (Scott Lanman): “China’s holdings of U.S. Treasuries fell to the lowest level since November 2012, as the world’s second-largest economy draws down its foreign reserves to prop up the yuan. The biggest foreign holder of U.S. government debt had $1.19 trillion in bonds, notes and bills in August, down $33.7 billion from the prior month, the biggest drop since 2013… The portfolio of Japan, the largest holder after China, fell for the first time in three months, down $10.6 billion to $1.14 trillion. Saudi Arabia’s holdings of Treasuries declined for a seventh straight month, to $93 billion.”
October 20 – Reuters (Herbert Lash and Joy Wiltermuth): “The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit. Weak September core retail sales… provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales. Some $128 billion of commercial real estate loans - more than one-quarter of which went to finance malls a decade ago - are due to refinance between now and the end of 2017…”
Global Bubble Watch:
October 16 – Bloomberg (Phil Kuntz): “The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis… The 10 largest lenders now own assets totaling $21.4 trillion, a 10% increase from the end of last year… Their combined holdings grew by 3% or less in both 2015 and 2014. The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market… Almost 75% of the world’s central-bank assets are controlled by policy makers in four places: China, the U.S., Japan and the euro zone. The next six -- …Brazil, Switzerland, Saudi Arabia, the U.K., India and Russia -- each account for an average of 2.5%.”
October 19: “ETFGI… today reported assets invested in ETFs/ETPs listed globally reached a new record high US$3.408 trillion at the end of Q3 2016. Net flows gathered by ETFs/ETPs in September were strong with US$25.19 bn… marking the 32nd consecutive month of net inflows… Record levels of assets were also reached at the end of Q3 for ETFs/ETPs listed in the United States at US$2.415 trillion, in Europe at US$566.74 bn, and in Asia Pacific ex-Japan at US$131.88 bn. At the end of Q3 2016, the Global ETF/ETP industry had 6,526 ETFs/ETPs, with 12,386 listings, assets of US$3.408 trillion, from 284 providers listed on 65 exchanges in 53 countries.”
October 17 – Financial Times (Elaine Moore and Thomas Hale): “The European Central Bank’s mass bond-buying programme is escalating stress in a crucial short-term funding market that underpins the eurozone financial system, raising the risk of shocks in wider markets. Large-scale purchases of government bonds by the ECB has resulted in a squeeze on the availability of assets favoured for trillions of euros of repurchase agreements, or ‘repos’ — effectively short-term loans between institutions. Bankers and asset managers say the market’s dysfunction should be high on the list of topics discussed by the ECB’s governing council when it meets in Frankfurt this week to decide on the future of its €80bn a month quantitative easing programme.”
October 18 – Bloomberg (Luke Kawa and Andrea Wong): “It’s not hard to see the potential flash points on the horizon -- the U.S. presidential election; Deutsche Bank AG’s mounting legal charges; the day central banks stop buying bonds. Yet when it comes to gauging risks in the world’s financial markets, these days investors are flying more or less blind. That’s because the once-dependable indicators traders relied on for decades to send out warnings are no longer up to the task. The so-called yield curve isn’t the recession predictor it once was. Swap spreads are so distorted they can’t be trusted. Even the vaunted VIX -- sometimes referred to as the ‘fear gauge,’ is leading its followers astray, strategists say.”
October 18 – Bloomberg (Sid Verma and Luke Kawa): “Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area? There were a bevy of reasons for fund managers to push their cash balances to 5.8% of their portfolios in October, up from 5.5% last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn't been higher than that since November 2001, shortly after the terrorist attacks in the U.S…”
U.S. Bubble Watch:
October 21 – Bloomberg (Oliver Renick and Rebecca Spalding): “U.S. companies are on pace to spend a record $1 trillion on buybacks and dividends in 2016. It’ll be a tough record to top. A total $600 billion in share repurchases and $400 billion in dividends will be doled out by S&P 500 Index members by the end of the year, the biggest combined payout in history, according to… Barclays Plc. Gravy like that is getting tougher to sustain as corporate profits suffer a six-quarter slump and cash levels begin to dwindle. As a result, fewer companies in the third quarter upped their dividend -- and more are tapping the debt market to sustain their buyback programs, data from S&P Global Inc. and JPMorgan… show. For U.S. stock investors, it means a key pillar of the 7 1/2-year-old bull market may be tipping over.”
October 20 – Bloomberg (Michelle Jamrisko): “Sales of previously owned U.S. homes increased more than projected in September, showing residential real estate continues to contribute modestly to growth… Contract closings rose 3.2% to a 5.47 million annual rate… Sales climbed 2.8% from September 2015… Median sales price increased 5.6% from September 2015 to $234,200. Inventory of available properties dropped 6.8% from a year earlier to 2.04 million…”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Investors are giving up on stock picking. Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins. Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.”
October 20 – Financial Times (Robin Wigglesworth, Nicole Bullock and Joe Rennison): “The US Securities and Exchange Commission is gearing up for a root-and-branch review of the rapidly growing exchange traded fund industry amid concerns massive flows into ETFs may be exacerbating volatility in financial markets. In the US alone, ETF assets stand at $2.4tn, and globally they hold $3.3tn, according to ETFGI… They account for about 30% of the value of all US shares traded… ETFs were at the centre of wild equity trading in August 2015. In one session, more than 1,000 securities were suspended from trading for sharp moves and some ETFs veered sharply from their net asset values. The chaotic trading highlighted how interconnected ETFs are with the underlying stocks as well as the futures market.”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Picking stocks is at heart an arrogant act. It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts. Entire cities—notably New York and London—have been erected in service of this belief. And the image of the clever, dauntless stock maestro is embedded in the American ideal. Yet there is a simple, destructive idea taking over Wall Street: that stock pickers can’t pick stocks well—or at least well enough for the fees they charge. And even those who do can’t sustain it year after year. In short, the idea of the ‘active manager’ is rapidly losing its intellectual legitimacy to the primacy of the ‘passive investor’ who merely buys an index of shares.”
October 18 – Bloomberg (Michelle Jamrisko): “The cost of living in the U.S. rose at the fastest pace in five months on energy and shelter prices, a sign inflation is getting closer to the Federal Reserve’s goal. The consumer-price index increased 0.3% in September from the previous month… The year-on-year rise was 1.5%, the most since October 2014.”
October 16 – Wall Street Journal (Julie Jargon and Lillian Rizzo): “The U.S. is having one of its biggest restaurant shakeouts in years, as an oversupply of eateries and new rivals offering prepared meals to go claim what is expected to be a growing number of casualties. In one recent week alone, three restaurant companies filed for chapter 11 bankruptcy protection, including Così Inc.; Rita Restaurant Corp., parent of the Don Pablo chain, and Garden Fresh Corp... At least five other restaurant operators have filed for court protection this year, with restructuring plans that call for restaurant closures.”
Federal Reserve Watch:
October 20 – Bloomberg (Jeanna Smialek): “The U.S. economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a ‘mostly positive’ outlook, a report from the 12 Federal Reserve districts showed. ‘Most districts indicated a modest or moderate pace of expansion,’ according to the Fed’s latest Beige Book, an economic survey by reserve banks. ‘Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several districts.’”
October 18 – Bloomberg (Jeanna Smialek): “The boards of directors at nine of the 12 regional Federal Reserve banks last month sought an increase in the rate on direct loans from the Fed to 1.25% from 1%… The Atlanta Fed joined the calls for an increase in the discount rate, pushing the number of regional banks asking for a hike to its highest since December 2015.”
Japan Watch:
October 18 – Reuters (Malcolm Foster and Tetsushi Kajimoto): “Japan Inc has little faith in the central bank's latest shift in monetary policy, with companies saying it won't generate long-desired inflation, spur further business investment or have an impact on the economy. The findings of the Reuters Corporate Survey… suggest a long road ahead for Prime Minister Shinzo Abe… More than 80% of firms said last month's overhaul in policy - one that targets the bond market's yield curve instead of the amount of money pumped into the financial system - will not have an impact on prices or change their capital spending plans.”
Leveraged Speculator Watch:
October 20 – Bloomberg (Saijel Kishan): “Howard Fischer, wearing a white shirt and khakis, leans back into a window seat at a juice bar in Greenwich, Connecticut, sips a cold-brewed Mexican mocha and shares his angst. ‘It’s miserable, miserable,’ the 57-year-old manager of $1.1 billion Basso Capital Management says of hedge fund returns over the past few years. ‘If that’s the normal expectation, I don’t have a business.’ Fischer’s lament and ones like it are echoing through the industry. It’s an existential crisis for former masters of the universe who once prided themselves on their trading prowess. Now they’re questioning their wisdom and their ability to generate profits that made them among the richest in finance. The $2.9 trillion industry has posted average annual returns of 2% over the past three years, well below those of most index funds…”
October 20 – Bloomberg (Saijel Kishan and Simone Foxman): “Hedge fund investors pulled $28.2 billion from the industry in the third quarter, the most since the aftermath of the global financial crisis, according to Hedge Fund Research Inc. The net outflows, which amount to 0.9% of the industry, are the largest since the second quarter of 2009… Investors redeemed $51.5 billion in the first nine months of the year, even as industry assets rose to a record $2.97 trillion… The third quarter was the fourth consecutive quarter of redemptions for the industry, the longest since 2008 and 2009, HFR said. Redemptions were concentrated in the biggest funds…”
October 20 – Bloomberg (Sonali Basak): “Portfolio managers at hedge funds, facing an exodus of investors frustrated with high fees, are about to feel the pain from an estimated 34% reduction in their compensation. While fund managers may take the biggest pay cut in the industry, professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, recruiter Odyssey Search Partners said in a report…”
October 19 – Wall Street Journal (Justin Baer): “One junk-bond trader at Goldman Sachs Group Inc. earned more than $100 million in trading profits for the firm earlier this year, an unusual gain at a time when new regulations have pushed Wall Street to take fewer risks.”
The S&P500 added 0.4% (up 4.8% y-t-d), while the Dow was about unchanged (up 4.1%). The Utilities gained 0.5% (up 11.7%). The Banks surged 3.5% (up 0.8%), and the Broker/Dealers increased 0.2% (down 2.4%). The Transports slipped 0.2% (up 6.9%). The S&P 400 Midcaps gained 0.5% (up 9.2%), and the small cap Russell 2000 rose 0.5% (up 7.2%). The Nasdaq100 gained 0.9% (up 5.6%), and the Morgan Stanley High Tech index advanced 1.1% (up 10%). The Semiconductors recovered 0.6% (up 22.8%). The Biotechs rallied 0.8% (down 19.8%). With bullion up $15, the HUI gold index surged 8.2% (up 94%).
Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields slipped a basis point to 0.82% (down 23bps y-t-d). Five-year T-note yields fell five bps to 1.24% (down 51bps). Ten-year Treasury yields dropped seven bps to 1.73% (down 52bps). Long bond yields fell eight bps to 2.48% (down 54bps).
Greek 10-year yields rose six bps to 8.28% (up 96bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.16% (up 64bps). Italian 10-year yields slipped a basis point to 1.37% (down 22bps). Spain's 10-year yields declined one basis point to 1.11% (down 66bps). German bund yields dropped five bps to 0.00% (down 62bps). French yields fell five bps to 0.28% (down 71bps). The French to German 10-year bond spread was unchanged at 28 bps. U.K. 10-year gilt yields were unchanged at 1.09% (down 87bps). U.K.'s FTSE equities index was little changed (up 12.5%).
Japan's Nikkei 225 equities index rallied 1.9% (down 9.7% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.07% (down 33bps y-t-d). The German DAX equities index rose 1.2% (down 0.3%). Spain's IBEX 35 equities index surged 3.8% (down 4.6%). Italy's FTSE MIB index jumped 3.5% (down 19.9%). EM equities were mostly higher. Brazil's Bovespa index surged 3.8% (up 48%). Mexico's Bolsa gained 1.5% (up 12.7%). South Korea's Kospi increased 0.5% (up 3.7%). India’s Sensex equities jumped 1.5% (up 7.5%). China’s Shanghai Exchange rose 0.9% (down 12.7%). Turkey's Borsa Istanbul National 100 index jumped 1.7% (up 9.9%). Russia's MICEX equities index slipped 0.4% (up 11.1%).
Junk bond mutual funds saw outflows of $160 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose five bps last week to a four-month high 3.52% (down 27bps y-o-y). Fifteen-year rates added three bps to 2.79% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.63% (down 24bps).
Federal Reserve Credit last week jumped $17.3bn to $4.435 TN. Over the past year, Fed Credit contracted $22.7bn (0.5%). Fed Credit inflated $1.624 TN, or 58%, over the past 206 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $23.7bn last week to a new six-year low $3.122 TN. "Custody holdings" were down $179bn y-o-y, or 5.4%.
M2 (narrow) "money" supply last week surged $43.4bn to a record $13.123 TN. "Narrow money" expanded $955bn, or 7.9%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $5.5bn, while Savings Deposits surged $37.5bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $11.6bn.
Total money market fund assets dropped $14.1bn to a 16-month low $2.635 TN. Money Funds declined $64bn y-o-y (2.4%).
Total Commercial Paper increased $2.4bn to $905bn. CP declined $158bn y-o-y, or 14.8%.
Currency Watch:
The U.S. dollar index added 0.6% to 98.63 (down 0.1% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6%, the New Zealand dollar 1.0%, the British pound 0.4% and the Japanese yen 0.4%. For the week on the downside, the Canadian dollar declined 1.5%, the euro 0.8%, the Swedish krona 0.8%, the Swiss franc 0.3%, the Norwegian krone 0.3%, and the Australian dollar 0.1%. The Chinese yuan fell another 0.6% versus the dollar (down 4.2% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was unchanged (up 20.6% y-t-d). Spot Gold rallied 1.2% to $1,266 (up 19.4%). Silver increased 0.5% to $17.53 (up 27%). Crude gained 50 cents to $50.85 (up 37.3%). Gasoline rose 2.6% (up 21%), while Natural Gas sank 9.1% (up 28%). Copper fell 1.0% (down 2%). Wheat dropped 1.5% (down 12%). Corn declined 0.5% (down 2%).
China Bubble Watch:
October 18 – Bloomberg: “China’s economic growth remained stable in the third quarter, all but ensuring the government’s full-year growth target is met and opening a window for policy makers to deliver on vows to rein in excessive credit and surging property prices. Gross domestic product rose 6.7% in the third quarter from a year earlier, matching the median projection by economists…”
October 16 – Bloomberg (Narae Kim): “China has been issued another yellow card. In a report released last week, S&P Global Ratings warned that China is at risk of losing its AA-status if it doesn't rein in its debt-fueled economic growth. ‘Credit growth in China continues to outpace income growth, and much new lending appears to be financing public investment,’ S&P analysts Kim Eng Tan and Xin Liu wrote. ‘Consequently, we see support for the Chinese sovereign ratings gradually diminishing.’ A downgrade would be the latest blow to the world's second-largest economy, whose outlook was slashed to negative from stable by the ratings agency in March.”
October 20 – Reuters (Samuel Shen and Adam Jourdan): “China has uncovered over 1 trillion yuan (120.35 billion pounds) worth of illegal transactions by underground banks this year, the official Financial News reported… The State Administration of Foreign Exchange (SAFE) will step up investigations into capital outflows and intensify a crackdown on underground banks to foster healthy development of the country's foreign exchange market, Zhang Shenghui, a senior director at SAFE told the newspaper.”
October 18 – Bloomberg: “China’s financial hub Shanghai is stepping up a crackdown on property developers and the flow of funds into land transactions, part of broader government efforts to prevent a housing bubble. Shanghai’s commission of housing and urban-rural development said… it was investigating whether eight developers raised selling prices for residential projects without permission. The agency has already suspended transaction licenses for some properties…”
Europe Watch:
October 20 – Bloomberg (Jeff Black and Jana Randow): “In Germany, fretting about inflation is a political currency that never seems to lose its value. In the past week, for example, at least three national newspapers have run prominent articles telling the populace that their savings -- denied the magic of compound interest by the European Central Bank’s low-rate policies -- are in for a renewed onslaught from accelerating consumer prices. The Bundesbank forecasts average inflation of 1.5% next year, whereas rates will likely be around zero.”
October 16 – Bloomberg (Mark Whitehouse): “Will Italy follow the U.K.'s example and leave the European Union? Far-fetched as it may seem, capital flows suggest that some people aren’t waiting to find out. To keep the euro area's accounts in balance, Europe's central banks track flows of money among the members of the currency union. If, for example, a depositor moves 100 euros from Italy to Germany, the Bank of Italy records a liability to the Eurosystem and the Bundesbank records a credit. If a central bank starts building up liabilities rapidly, that tends to be a sign of capital flight. Lately, Italy's central bank has been building up a lot of liabilities to the Eurosystem. As of the end of September, they stood at about 354 billion euros, up 118 billion from a year earlier -- and up 78 billion since the end of May… The outflow isn't quite as large as during the sovereign-debt crisis of 2012, but it's still significant. The main beneficiary seems to be Germany, which has seen its credits to the Eurosystem increase by 160 billion over the past year.”
October 20 – Bloomberg (Carolynn Look): “Portugal’s debt would no longer be eligible for purchase under the European Central Bank’s quantitative-easing program if the country’s credit rating is downgraded on Friday, President Mario Draghi said. A decision by Canadian rating company DBRS Ltd. to take away the country’s only investment-grade rating would disqualify Portuguese sovereign bonds from asset purchases and use as collateral in refinancing operations, Draghi said…”
Brexit Watch:
October 21 – Bloomberg (Lukanyo Mnyanda and Stephen Spratt): “Money markets are zeroing in on Article 50 as the catalyst for increased risk in banks’ pound borrowing. A gauge of where bank borrowing costs will be in coming months, known as the FRA/OIS spread, shows a marked increase in traders’ perception of risk beyond March 2017. That’s the point by which U.K. Prime Minister Theresa May has pledged to formally invoke the article of the Lisbon Treaty that will formally put the nation on a path out of the European Union.”
Fixed-Income Bubble Watch:
October 18 – Bloomberg (Scott Lanman): “China’s holdings of U.S. Treasuries fell to the lowest level since November 2012, as the world’s second-largest economy draws down its foreign reserves to prop up the yuan. The biggest foreign holder of U.S. government debt had $1.19 trillion in bonds, notes and bills in August, down $33.7 billion from the prior month, the biggest drop since 2013… The portfolio of Japan, the largest holder after China, fell for the first time in three months, down $10.6 billion to $1.14 trillion. Saudi Arabia’s holdings of Treasuries declined for a seventh straight month, to $93 billion.”
October 20 – Reuters (Herbert Lash and Joy Wiltermuth): “The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit. Weak September core retail sales… provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales. Some $128 billion of commercial real estate loans - more than one-quarter of which went to finance malls a decade ago - are due to refinance between now and the end of 2017…”
Global Bubble Watch:
October 16 – Bloomberg (Phil Kuntz): “The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis… The 10 largest lenders now own assets totaling $21.4 trillion, a 10% increase from the end of last year… Their combined holdings grew by 3% or less in both 2015 and 2014. The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market… Almost 75% of the world’s central-bank assets are controlled by policy makers in four places: China, the U.S., Japan and the euro zone. The next six -- …Brazil, Switzerland, Saudi Arabia, the U.K., India and Russia -- each account for an average of 2.5%.”
October 19: “ETFGI… today reported assets invested in ETFs/ETPs listed globally reached a new record high US$3.408 trillion at the end of Q3 2016. Net flows gathered by ETFs/ETPs in September were strong with US$25.19 bn… marking the 32nd consecutive month of net inflows… Record levels of assets were also reached at the end of Q3 for ETFs/ETPs listed in the United States at US$2.415 trillion, in Europe at US$566.74 bn, and in Asia Pacific ex-Japan at US$131.88 bn. At the end of Q3 2016, the Global ETF/ETP industry had 6,526 ETFs/ETPs, with 12,386 listings, assets of US$3.408 trillion, from 284 providers listed on 65 exchanges in 53 countries.”
October 17 – Financial Times (Elaine Moore and Thomas Hale): “The European Central Bank’s mass bond-buying programme is escalating stress in a crucial short-term funding market that underpins the eurozone financial system, raising the risk of shocks in wider markets. Large-scale purchases of government bonds by the ECB has resulted in a squeeze on the availability of assets favoured for trillions of euros of repurchase agreements, or ‘repos’ — effectively short-term loans between institutions. Bankers and asset managers say the market’s dysfunction should be high on the list of topics discussed by the ECB’s governing council when it meets in Frankfurt this week to decide on the future of its €80bn a month quantitative easing programme.”
October 18 – Bloomberg (Luke Kawa and Andrea Wong): “It’s not hard to see the potential flash points on the horizon -- the U.S. presidential election; Deutsche Bank AG’s mounting legal charges; the day central banks stop buying bonds. Yet when it comes to gauging risks in the world’s financial markets, these days investors are flying more or less blind. That’s because the once-dependable indicators traders relied on for decades to send out warnings are no longer up to the task. The so-called yield curve isn’t the recession predictor it once was. Swap spreads are so distorted they can’t be trusted. Even the vaunted VIX -- sometimes referred to as the ‘fear gauge,’ is leading its followers astray, strategists say.”
October 18 – Bloomberg (Sid Verma and Luke Kawa): “Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area? There were a bevy of reasons for fund managers to push their cash balances to 5.8% of their portfolios in October, up from 5.5% last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn't been higher than that since November 2001, shortly after the terrorist attacks in the U.S…”
U.S. Bubble Watch:
October 21 – Bloomberg (Oliver Renick and Rebecca Spalding): “U.S. companies are on pace to spend a record $1 trillion on buybacks and dividends in 2016. It’ll be a tough record to top. A total $600 billion in share repurchases and $400 billion in dividends will be doled out by S&P 500 Index members by the end of the year, the biggest combined payout in history, according to… Barclays Plc. Gravy like that is getting tougher to sustain as corporate profits suffer a six-quarter slump and cash levels begin to dwindle. As a result, fewer companies in the third quarter upped their dividend -- and more are tapping the debt market to sustain their buyback programs, data from S&P Global Inc. and JPMorgan… show. For U.S. stock investors, it means a key pillar of the 7 1/2-year-old bull market may be tipping over.”
October 20 – Bloomberg (Michelle Jamrisko): “Sales of previously owned U.S. homes increased more than projected in September, showing residential real estate continues to contribute modestly to growth… Contract closings rose 3.2% to a 5.47 million annual rate… Sales climbed 2.8% from September 2015… Median sales price increased 5.6% from September 2015 to $234,200. Inventory of available properties dropped 6.8% from a year earlier to 2.04 million…”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Investors are giving up on stock picking. Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins. Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.”
October 20 – Financial Times (Robin Wigglesworth, Nicole Bullock and Joe Rennison): “The US Securities and Exchange Commission is gearing up for a root-and-branch review of the rapidly growing exchange traded fund industry amid concerns massive flows into ETFs may be exacerbating volatility in financial markets. In the US alone, ETF assets stand at $2.4tn, and globally they hold $3.3tn, according to ETFGI… They account for about 30% of the value of all US shares traded… ETFs were at the centre of wild equity trading in August 2015. In one session, more than 1,000 securities were suspended from trading for sharp moves and some ETFs veered sharply from their net asset values. The chaotic trading highlighted how interconnected ETFs are with the underlying stocks as well as the futures market.”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Picking stocks is at heart an arrogant act. It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts. Entire cities—notably New York and London—have been erected in service of this belief. And the image of the clever, dauntless stock maestro is embedded in the American ideal. Yet there is a simple, destructive idea taking over Wall Street: that stock pickers can’t pick stocks well—or at least well enough for the fees they charge. And even those who do can’t sustain it year after year. In short, the idea of the ‘active manager’ is rapidly losing its intellectual legitimacy to the primacy of the ‘passive investor’ who merely buys an index of shares.”
October 18 – Bloomberg (Michelle Jamrisko): “The cost of living in the U.S. rose at the fastest pace in five months on energy and shelter prices, a sign inflation is getting closer to the Federal Reserve’s goal. The consumer-price index increased 0.3% in September from the previous month… The year-on-year rise was 1.5%, the most since October 2014.”
October 16 – Wall Street Journal (Julie Jargon and Lillian Rizzo): “The U.S. is having one of its biggest restaurant shakeouts in years, as an oversupply of eateries and new rivals offering prepared meals to go claim what is expected to be a growing number of casualties. In one recent week alone, three restaurant companies filed for chapter 11 bankruptcy protection, including Così Inc.; Rita Restaurant Corp., parent of the Don Pablo chain, and Garden Fresh Corp... At least five other restaurant operators have filed for court protection this year, with restructuring plans that call for restaurant closures.”
Federal Reserve Watch:
October 20 – Bloomberg (Jeanna Smialek): “The U.S. economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a ‘mostly positive’ outlook, a report from the 12 Federal Reserve districts showed. ‘Most districts indicated a modest or moderate pace of expansion,’ according to the Fed’s latest Beige Book, an economic survey by reserve banks. ‘Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several districts.’”
October 18 – Bloomberg (Jeanna Smialek): “The boards of directors at nine of the 12 regional Federal Reserve banks last month sought an increase in the rate on direct loans from the Fed to 1.25% from 1%… The Atlanta Fed joined the calls for an increase in the discount rate, pushing the number of regional banks asking for a hike to its highest since December 2015.”
Japan Watch:
October 18 – Reuters (Malcolm Foster and Tetsushi Kajimoto): “Japan Inc has little faith in the central bank's latest shift in monetary policy, with companies saying it won't generate long-desired inflation, spur further business investment or have an impact on the economy. The findings of the Reuters Corporate Survey… suggest a long road ahead for Prime Minister Shinzo Abe… More than 80% of firms said last month's overhaul in policy - one that targets the bond market's yield curve instead of the amount of money pumped into the financial system - will not have an impact on prices or change their capital spending plans.”
Leveraged Speculator Watch:
October 20 – Bloomberg (Saijel Kishan): “Howard Fischer, wearing a white shirt and khakis, leans back into a window seat at a juice bar in Greenwich, Connecticut, sips a cold-brewed Mexican mocha and shares his angst. ‘It’s miserable, miserable,’ the 57-year-old manager of $1.1 billion Basso Capital Management says of hedge fund returns over the past few years. ‘If that’s the normal expectation, I don’t have a business.’ Fischer’s lament and ones like it are echoing through the industry. It’s an existential crisis for former masters of the universe who once prided themselves on their trading prowess. Now they’re questioning their wisdom and their ability to generate profits that made them among the richest in finance. The $2.9 trillion industry has posted average annual returns of 2% over the past three years, well below those of most index funds…”
October 20 – Bloomberg (Saijel Kishan and Simone Foxman): “Hedge fund investors pulled $28.2 billion from the industry in the third quarter, the most since the aftermath of the global financial crisis, according to Hedge Fund Research Inc. The net outflows, which amount to 0.9% of the industry, are the largest since the second quarter of 2009… Investors redeemed $51.5 billion in the first nine months of the year, even as industry assets rose to a record $2.97 trillion… The third quarter was the fourth consecutive quarter of redemptions for the industry, the longest since 2008 and 2009, HFR said. Redemptions were concentrated in the biggest funds…”
October 20 – Bloomberg (Sonali Basak): “Portfolio managers at hedge funds, facing an exodus of investors frustrated with high fees, are about to feel the pain from an estimated 34% reduction in their compensation. While fund managers may take the biggest pay cut in the industry, professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, recruiter Odyssey Search Partners said in a report…”
October 19 – Wall Street Journal (Justin Baer): “One junk-bond trader at Goldman Sachs Group Inc. earned more than $100 million in trading profits for the firm earlier this year, an unusual gain at a time when new regulations have pushed Wall Street to take fewer risks.”
October 18 – Bloomberg (Suzy Waite): “Asia hedge funds are opening at the slowest pace since the turn of the century. Just 27 new funds started trading in Asia in the first nine months of this year, the fewest since 2000 when 56 funds opened, according to Eurekahedge. It’s the third straight year of declines, and down from 83 new funds last year.”
Geopolitical Watch:
October 19 – Reuters (David Brunnstrom and Arshad Mohammed): “The United States and South Korea agreed… to step up military and diplomatic efforts to counter North Korea's nuclear and missile programs, saying they posed a ‘grave’ security threat following repeated tests this year. After talks in Washington between their foreign and defense ministers, the countries said they had agreed to set up a high-level Extended Deterrence Strategy and Consultation Group to leverage ‘the full breadth of national power – including diplomacy, information, military coordination, and economic elements’ in the face of the North Korean threat.”
October 20 – Bloomberg (Ian Wishart, John Follain and Patrick Donahue): “The European Union said it was too soon to consider imposing sanctions on Russia for the bombing of rebel-held areas of Syria, while maintaining the threat of action if Vladimir Putin doesn’t back down… While the U.K., France and Germany wanted to take a harsher tone with Russia, Italy’s Matteo Renzi led those countries who opposed the move.”
October 20 – Bloomberg (Andreo Calonzo and Cecilia Yap): “Philippine President Rodrigo Duterte will bring home $24 billion worth of funding and investment pledges from his four-day visit to China as both nations agreed to resume talks and explore areas of cooperation in the South China Sea. China will provide $9 billion in soft loans, including a $3 billion credit line with the Bank of China, while economic deals including investments would yield $15 billion… Preliminary agreements in railways, ports, energy and mining worth $11.2 billion were signed… ‘China is not only a friend. China is only a relative, but China is a big brother,’ Communications Secretary Martin Andanar said in Beijing…”
October 20 – Reuters (Ben Blanchard): “Philippine President Rodrigo Duterte announced his ‘separation’ from the United States on Thursday, declaring he had realigned with China as the two agreed to resolve their South China Sea dispute through talks. Duterte made his comments in Beijing, where he is visiting with at least 200 business people to pave the way for what he calls a new commercial alliance as relations with longtime ally Washington deteriorate. ‘In this venue, your honors, in this venue, I announce my separation from the United States,’ Duterte told Chinese and Philippine business people, to applause, at a forum in the Great Hall of the People attended by Chinese Vice Premier Zhang Gaoli.”
October 19 – Reuters (Orhan Coskun and Nick Tattersall): “Smarting over exclusion from an Iraqi-led offensive against Islamic State in Mosul and Kurdish militia gains in Syria, President Tayyip Erdogan warned… Turkey ‘will not wait until the blade is against our bone’ but could act alone in rooting out enemies. In a speech at his palace, Erdogan conjured up an image of Turkey constrained by foreign powers who ‘aim to make us forget our Ottoman and Selcuk history’, when Turkey's forefathers held territory stretching across central Asia and the Middle East. ‘From now on we will not wait for problems to come knocking on our door, we will not wait until the blade is against our bone and skin, we will not wait for terrorist organizations to come and attack us…’”
Geopolitical Watch:
October 19 – Reuters (David Brunnstrom and Arshad Mohammed): “The United States and South Korea agreed… to step up military and diplomatic efforts to counter North Korea's nuclear and missile programs, saying they posed a ‘grave’ security threat following repeated tests this year. After talks in Washington between their foreign and defense ministers, the countries said they had agreed to set up a high-level Extended Deterrence Strategy and Consultation Group to leverage ‘the full breadth of national power – including diplomacy, information, military coordination, and economic elements’ in the face of the North Korean threat.”
October 20 – Bloomberg (Ian Wishart, John Follain and Patrick Donahue): “The European Union said it was too soon to consider imposing sanctions on Russia for the bombing of rebel-held areas of Syria, while maintaining the threat of action if Vladimir Putin doesn’t back down… While the U.K., France and Germany wanted to take a harsher tone with Russia, Italy’s Matteo Renzi led those countries who opposed the move.”
October 20 – Bloomberg (Andreo Calonzo and Cecilia Yap): “Philippine President Rodrigo Duterte will bring home $24 billion worth of funding and investment pledges from his four-day visit to China as both nations agreed to resume talks and explore areas of cooperation in the South China Sea. China will provide $9 billion in soft loans, including a $3 billion credit line with the Bank of China, while economic deals including investments would yield $15 billion… Preliminary agreements in railways, ports, energy and mining worth $11.2 billion were signed… ‘China is not only a friend. China is only a relative, but China is a big brother,’ Communications Secretary Martin Andanar said in Beijing…”
October 20 – Reuters (Ben Blanchard): “Philippine President Rodrigo Duterte announced his ‘separation’ from the United States on Thursday, declaring he had realigned with China as the two agreed to resolve their South China Sea dispute through talks. Duterte made his comments in Beijing, where he is visiting with at least 200 business people to pave the way for what he calls a new commercial alliance as relations with longtime ally Washington deteriorate. ‘In this venue, your honors, in this venue, I announce my separation from the United States,’ Duterte told Chinese and Philippine business people, to applause, at a forum in the Great Hall of the People attended by Chinese Vice Premier Zhang Gaoli.”
October 19 – Reuters (Orhan Coskun and Nick Tattersall): “Smarting over exclusion from an Iraqi-led offensive against Islamic State in Mosul and Kurdish militia gains in Syria, President Tayyip Erdogan warned… Turkey ‘will not wait until the blade is against our bone’ but could act alone in rooting out enemies. In a speech at his palace, Erdogan conjured up an image of Turkey constrained by foreign powers who ‘aim to make us forget our Ottoman and Selcuk history’, when Turkey's forefathers held territory stretching across central Asia and the Middle East. ‘From now on we will not wait for problems to come knocking on our door, we will not wait until the blade is against our bone and skin, we will not wait for terrorist organizations to come and attack us…’”
Weekly Commentary: The Latest on China's Mortgage Finance Bubble
It’s been a full seven days since a CBB focused on China… Important – confirmation of the thesis - data again this week.
October 21 – Reuters (Yawen Chen and Nicholas Heath): “China's new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. The boom in sales and prices was evident in mortgage lending, with new housing loans to individuals totaling 475.9 billion yuan in September alone, some 76% higher than the same month last year… Prices in China's 70 major cities rose 11.2% in September from a year earlier, accelerating from a 9.2% increase in August, as 64 of them saw year-on-year price gains…”
Year-on-year prices were up 34.1% in Shenzhen, 32.7% in Shanghai, and 27.8% in Beijing.
Also from Reuters: “The house-prices-to-household-disposable-income ratio in first-tier cities has risen to be around 18 to 20 times in this year's housing fever, putting housing affordability close to Hong Kong's and making it less affordable than London, UBS wrote…”
October 19 – Wall Street Journal (Lingling Wei): “Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of China’s capital. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing… Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The above noted WSJ article, "China’s Property Frenzy Spurs Risky Business" (Lingling Wei), included some insightful data and a particularly interesting chart. While briefly dipping below 10% in 2012, new mortgage loans as a share of the value of total new loans averaged around 20% for much of the period 2010 through 2015 – before spiking over recent quarters. “…medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The article also included a graphic, “Number of years of median household income needed to buy a property of median value.” Here, Chinese cities are compared to some of the more notoriously expensive markets in the world: London 29 years, Tokyo 23, New York 15 and Sydney 12. With China’s Credit Bubble now spurring rampant housing inflation, Shenzhen has shot to the top of the list at 41 years, followed by Beijing (34) and Shanghai (32). Guangzhou made the list at 25 years, followed by Nanjing (22) and Hangzhou (17).
Not a big surprise, China’s September loan growth was reported at a level double forecasts.
October 18 – AFP: “New loans by Chinese banks in September surged nearly 30% from the previous month…, deepening concern about risky credit expansion in the world’s second largest economy. New loans extended by banks jumped to 1.22 trillion yuan ($181.3bn) last month from 948.7 billion yuan in August… Beijing has relied on stimulus measures such as loose credit to boost the economy, which faces a tough structural transition and sluggish global demand. But the rapid rise in borrowing has sparked alarm.”
October 21 – Reuters (Yawen Chen and Nicholas Heath): “China's new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. The boom in sales and prices was evident in mortgage lending, with new housing loans to individuals totaling 475.9 billion yuan in September alone, some 76% higher than the same month last year… Prices in China's 70 major cities rose 11.2% in September from a year earlier, accelerating from a 9.2% increase in August, as 64 of them saw year-on-year price gains…”
Year-on-year prices were up 34.1% in Shenzhen, 32.7% in Shanghai, and 27.8% in Beijing.
Also from Reuters: “The house-prices-to-household-disposable-income ratio in first-tier cities has risen to be around 18 to 20 times in this year's housing fever, putting housing affordability close to Hong Kong's and making it less affordable than London, UBS wrote…”
October 19 – Wall Street Journal (Lingling Wei): “Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of China’s capital. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing… Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The above noted WSJ article, "China’s Property Frenzy Spurs Risky Business" (Lingling Wei), included some insightful data and a particularly interesting chart. While briefly dipping below 10% in 2012, new mortgage loans as a share of the value of total new loans averaged around 20% for much of the period 2010 through 2015 – before spiking over recent quarters. “…medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”
The article also included a graphic, “Number of years of median household income needed to buy a property of median value.” Here, Chinese cities are compared to some of the more notoriously expensive markets in the world: London 29 years, Tokyo 23, New York 15 and Sydney 12. With China’s Credit Bubble now spurring rampant housing inflation, Shenzhen has shot to the top of the list at 41 years, followed by Beijing (34) and Shanghai (32). Guangzhou made the list at 25 years, followed by Nanjing (22) and Hangzhou (17).
Not a big surprise, China’s September loan growth was reported at a level double forecasts.
October 18 – AFP: “New loans by Chinese banks in September surged nearly 30% from the previous month…, deepening concern about risky credit expansion in the world’s second largest economy. New loans extended by banks jumped to 1.22 trillion yuan ($181.3bn) last month from 948.7 billion yuan in August… Beijing has relied on stimulus measures such as loose credit to boost the economy, which faces a tough structural transition and sluggish global demand. But the rapid rise in borrowing has sparked alarm.”
Fueled by a surge in housing-related finance, September Total Social Finance (total Credit excluding govt bonds) surged to almost $250 billion, about a third larger than forecast. This was the strongest Credit expansion since (“off the charts”) March ($360bn).
October 18 – Bloomberg: “The value of China’s new home sales rose 61% in September from a year earlier, defying policymakers’ moves earlier this year to cool the property market. The value of homes sold rose to 1.2 trillion yuan ($178bn) last month from a year earlier… The increase compares with a 33% gain the previous month.”
“CTV.” During the U.S. mortgage finance Bubble heyday period, I regularly highlighted a “Calculated Transaction Value” that I pulled from my spreadsheet of National Association of Realtors data (sales volumes by average prices). A Bubble’s manic phase sees a powerful surge in the number of transactions - at rapidly inflating prices. This explains how the value of China’s September home sales inflated 61% from September 2015, with “new housing loans to individuals” up 76% y-o-y.
I viewed CTV as the leading indicator of systemic risk associated with mortgage Bubble excess. For one, it provided a timely barometer of the general tenor of Credit growth. It was clearly the best gauge of the “inflationary bias” at work throughout housing. Parabolic growth in CTV also accurately reflected the commencement of “Terminal Phase” excess. Moreover, the historic surge of (borrowed) “money” into housing was indicative of destabilizing speculative excess, loose Credit conditions and, more generally, the degree to which financial stimulus was fueling economic imbalances.
It’s my view that the world is at the critical late-stage of a historic multi-decade Credit Bubble. China has become integral to the global Bubble – the marginal source of Credit and global finance. And in the face of a faltering Bubble Economy and increasingly vulnerable Chinese financial system, China’s mortgage finance Bubble has evolved into the predominant source of stimulus. Record Chinese Credit growth is the biggest global financial and economic story of 2016.
There’s a fundamental problem with speculative melt-ups and Credit Bubble “Terminal Phases:” They are invariably unsustainable. A torrent of Credit-driven liquidity inflates prices to unsustainable levels. Mortgage finance Bubbles are especially dangerous. They tend to be powerfully self-reinforcing, with Credit expanding exponentially during the precarious “Terminal Phase.” Fear and panic, as we’ve witnessed, can rather quickly see massive Credit expansion transformed into collapse.
It’s now been years of Chinese officials tinkering with an increasingly impervious Credit Bubble. They remain too timid, and I’d be surprised if current measures to slow housing markets have a dramatic impact. More likely, Chinese Credit continues to grow rapidly over the coming months. The much higher interest rates needed to slow rampant mortgage Credit excess are viewed as completely incompatible with a struggling general economy. Instead, it appears China will tolerate booming mortgage Credit as it systematically devalues its currency.
October 18 – Bloomberg: “The value of China’s new home sales rose 61% in September from a year earlier, defying policymakers’ moves earlier this year to cool the property market. The value of homes sold rose to 1.2 trillion yuan ($178bn) last month from a year earlier… The increase compares with a 33% gain the previous month.”
“CTV.” During the U.S. mortgage finance Bubble heyday period, I regularly highlighted a “Calculated Transaction Value” that I pulled from my spreadsheet of National Association of Realtors data (sales volumes by average prices). A Bubble’s manic phase sees a powerful surge in the number of transactions - at rapidly inflating prices. This explains how the value of China’s September home sales inflated 61% from September 2015, with “new housing loans to individuals” up 76% y-o-y.
I viewed CTV as the leading indicator of systemic risk associated with mortgage Bubble excess. For one, it provided a timely barometer of the general tenor of Credit growth. It was clearly the best gauge of the “inflationary bias” at work throughout housing. Parabolic growth in CTV also accurately reflected the commencement of “Terminal Phase” excess. Moreover, the historic surge of (borrowed) “money” into housing was indicative of destabilizing speculative excess, loose Credit conditions and, more generally, the degree to which financial stimulus was fueling economic imbalances.
It’s my view that the world is at the critical late-stage of a historic multi-decade Credit Bubble. China has become integral to the global Bubble – the marginal source of Credit and global finance. And in the face of a faltering Bubble Economy and increasingly vulnerable Chinese financial system, China’s mortgage finance Bubble has evolved into the predominant source of stimulus. Record Chinese Credit growth is the biggest global financial and economic story of 2016.
There’s a fundamental problem with speculative melt-ups and Credit Bubble “Terminal Phases:” They are invariably unsustainable. A torrent of Credit-driven liquidity inflates prices to unsustainable levels. Mortgage finance Bubbles are especially dangerous. They tend to be powerfully self-reinforcing, with Credit expanding exponentially during the precarious “Terminal Phase.” Fear and panic, as we’ve witnessed, can rather quickly see massive Credit expansion transformed into collapse.
It’s now been years of Chinese officials tinkering with an increasingly impervious Credit Bubble. They remain too timid, and I’d be surprised if current measures to slow housing markets have a dramatic impact. More likely, Chinese Credit continues to grow rapidly over the coming months. The much higher interest rates needed to slow rampant mortgage Credit excess are viewed as completely incompatible with a struggling general economy. Instead, it appears China will tolerate booming mortgage Credit as it systematically devalues its currency.
According to Zerohedge, a Goldman analyst (MK Tang) estimated that flows out of China surged to $78 billion during September, up from August’s estimated $32 billion. This would be the highest outflows since January. The Chinese currency weakened another 60 bps versus the dollar this week, putting the year-to-date devaluation to a not insignificant 4.2%.
Perhaps booming Chinese Credit and strong financial outflows are behind a growing inflationary bias taking hold in global markets. Crude traded near 15-month highs this week. This week in the currencies, the South African rand jumped 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6% and the Russian ruble 0.9%. Brazilian stocks surged 3.8%, and Mexican stocks jumped 1.5%.
Along with EM, markets are looking at bank stocks through more rose-colored glasses. European banks jumped 5.1% this week, with Italian bank surging 7.3%. U.S. bank stocks rose 3.5%. The European periphery also rallied strongly this week, with Spanish and Italian stocks up 3.8% and 3.5%.
And while global yields have risen over the past month, bonds don’t seem all that fearful of an inflation resurgence. Recall 2007, and how the bond market had smelled out the loaming mortgage bust. Yields dropped, basically ignoring stocks (and crude) as equities went to all-time highs. What I remember most from that period was how monetary disorder created heightened instability across the markets right up until the crisis.
Perhaps booming Chinese Credit and strong financial outflows are behind a growing inflationary bias taking hold in global markets. Crude traded near 15-month highs this week. This week in the currencies, the South African rand jumped 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6% and the Russian ruble 0.9%. Brazilian stocks surged 3.8%, and Mexican stocks jumped 1.5%.
Along with EM, markets are looking at bank stocks through more rose-colored glasses. European banks jumped 5.1% this week, with Italian bank surging 7.3%. U.S. bank stocks rose 3.5%. The European periphery also rallied strongly this week, with Spanish and Italian stocks up 3.8% and 3.5%.
And while global yields have risen over the past month, bonds don’t seem all that fearful of an inflation resurgence. Recall 2007, and how the bond market had smelled out the loaming mortgage bust. Yields dropped, basically ignoring stocks (and crude) as equities went to all-time highs. What I remember most from that period was how monetary disorder created heightened instability across the markets right up until the crisis.
For the Week:
The S&P500 added 0.4% (up 4.8% y-t-d), while the Dow was about unchanged (up 4.1%). The Utilities gained 0.5% (up 11.7%). The Banks surged 3.5% (up 0.8%), and the Broker/Dealers increased 0.2% (down 2.4%). The Transports slipped 0.2% (up 6.9%). The S&P 400 Midcaps gained 0.5% (up 9.2%), and the small cap Russell 2000 rose 0.5% (up 7.2%). The Nasdaq100 gained 0.9% (up 5.6%), and the Morgan Stanley High Tech index advanced 1.1% (up 10%). The Semiconductors recovered 0.6% (up 22.8%). The Biotechs rallied 0.8% (down 19.8%). With bullion up $15, the HUI gold index surged 8.2% (up 94%).
Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields slipped a basis point to 0.82% (down 23bps y-t-d). Five-year T-note yields fell five bps to 1.24% (down 51bps). Ten-year Treasury yields dropped seven bps to 1.73% (down 52bps). Long bond yields fell eight bps to 2.48% (down 54bps).
Greek 10-year yields rose six bps to 8.28% (up 96bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.16% (up 64bps). Italian 10-year yields slipped a basis point to 1.37% (down 22bps). Spain's 10-year yields declined one basis point to 1.11% (down 66bps). German bund yields dropped five bps to 0.00% (down 62bps). French yields fell five bps to 0.28% (down 71bps). The French to German 10-year bond spread was unchanged at 28 bps. U.K. 10-year gilt yields were unchanged at 1.09% (down 87bps). U.K.'s FTSE equities index was little changed (up 12.5%).
Japan's Nikkei 225 equities index rallied 1.9% (down 9.7% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.07% (down 33bps y-t-d). The German DAX equities index rose 1.2% (down 0.3%). Spain's IBEX 35 equities index surged 3.8% (down 4.6%). Italy's FTSE MIB index jumped 3.5% (down 19.9%). EM equities were mostly higher. Brazil's Bovespa index surged 3.8% (up 48%). Mexico's Bolsa gained 1.5% (up 12.7%). South Korea's Kospi increased 0.5% (up 3.7%). India’s Sensex equities jumped 1.5% (up 7.5%). China’s Shanghai Exchange rose 0.9% (down 12.7%). Turkey's Borsa Istanbul National 100 index jumped 1.7% (up 9.9%). Russia's MICEX equities index slipped 0.4% (up 11.1%).
Junk bond mutual funds saw outflows of $160 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose five bps last week to a four-month high 3.52% (down 27bps y-o-y). Fifteen-year rates added three bps to 2.79% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.63% (down 24bps).
Federal Reserve Credit last week jumped $17.3bn to $4.435 TN. Over the past year, Fed Credit contracted $22.7bn (0.5%). Fed Credit inflated $1.624 TN, or 58%, over the past 206 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $23.7bn last week to a new six-year low $3.122 TN. "Custody holdings" were down $179bn y-o-y, or 5.4%.
M2 (narrow) "money" supply last week surged $43.4bn to a record $13.123 TN. "Narrow money" expanded $955bn, or 7.9%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $5.5bn, while Savings Deposits surged $37.5bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $11.6bn.
Total money market fund assets dropped $14.1bn to a 16-month low $2.635 TN. Money Funds declined $64bn y-o-y (2.4%).
Total Commercial Paper increased $2.4bn to $905bn. CP declined $158bn y-o-y, or 14.8%.
Currency Watch:
The U.S. dollar index added 0.6% to 98.63 (down 0.1% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6%, the New Zealand dollar 1.0%, the British pound 0.4% and the Japanese yen 0.4%. For the week on the downside, the Canadian dollar declined 1.5%, the euro 0.8%, the Swedish krona 0.8%, the Swiss franc 0.3%, the Norwegian krone 0.3%, and the Australian dollar 0.1%. The Chinese yuan fell another 0.6% versus the dollar (down 4.2% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was unchanged (up 20.6% y-t-d). Spot Gold rallied 1.2% to $1,266 (up 19.4%). Silver increased 0.5% to $17.53 (up 27%). Crude gained 50 cents to $50.85 (up 37.3%). Gasoline rose 2.6% (up 21%), while Natural Gas sank 9.1% (up 28%). Copper fell 1.0% (down 2%). Wheat dropped 1.5% (down 12%). Corn declined 0.5% (down 2%).
China Bubble Watch:
October 18 – Bloomberg: “China’s economic growth remained stable in the third quarter, all but ensuring the government’s full-year growth target is met and opening a window for policy makers to deliver on vows to rein in excessive credit and surging property prices. Gross domestic product rose 6.7% in the third quarter from a year earlier, matching the median projection by economists…”
October 16 – Bloomberg (Narae Kim): “China has been issued another yellow card. In a report released last week, S&P Global Ratings warned that China is at risk of losing its AA-status if it doesn't rein in its debt-fueled economic growth. ‘Credit growth in China continues to outpace income growth, and much new lending appears to be financing public investment,’ S&P analysts Kim Eng Tan and Xin Liu wrote. ‘Consequently, we see support for the Chinese sovereign ratings gradually diminishing.’ A downgrade would be the latest blow to the world's second-largest economy, whose outlook was slashed to negative from stable by the ratings agency in March.”
October 20 – Reuters (Samuel Shen and Adam Jourdan): “China has uncovered over 1 trillion yuan (120.35 billion pounds) worth of illegal transactions by underground banks this year, the official Financial News reported… The State Administration of Foreign Exchange (SAFE) will step up investigations into capital outflows and intensify a crackdown on underground banks to foster healthy development of the country's foreign exchange market, Zhang Shenghui, a senior director at SAFE told the newspaper.”
October 18 – Bloomberg: “China’s financial hub Shanghai is stepping up a crackdown on property developers and the flow of funds into land transactions, part of broader government efforts to prevent a housing bubble. Shanghai’s commission of housing and urban-rural development said… it was investigating whether eight developers raised selling prices for residential projects without permission. The agency has already suspended transaction licenses for some properties…”
Europe Watch:
October 20 – Bloomberg (Jeff Black and Jana Randow): “In Germany, fretting about inflation is a political currency that never seems to lose its value. In the past week, for example, at least three national newspapers have run prominent articles telling the populace that their savings -- denied the magic of compound interest by the European Central Bank’s low-rate policies -- are in for a renewed onslaught from accelerating consumer prices. The Bundesbank forecasts average inflation of 1.5% next year, whereas rates will likely be around zero.”
October 16 – Bloomberg (Mark Whitehouse): “Will Italy follow the U.K.'s example and leave the European Union? Far-fetched as it may seem, capital flows suggest that some people aren’t waiting to find out. To keep the euro area's accounts in balance, Europe's central banks track flows of money among the members of the currency union. If, for example, a depositor moves 100 euros from Italy to Germany, the Bank of Italy records a liability to the Eurosystem and the Bundesbank records a credit. If a central bank starts building up liabilities rapidly, that tends to be a sign of capital flight. Lately, Italy's central bank has been building up a lot of liabilities to the Eurosystem. As of the end of September, they stood at about 354 billion euros, up 118 billion from a year earlier -- and up 78 billion since the end of May… The outflow isn't quite as large as during the sovereign-debt crisis of 2012, but it's still significant. The main beneficiary seems to be Germany, which has seen its credits to the Eurosystem increase by 160 billion over the past year.”
October 20 – Bloomberg (Carolynn Look): “Portugal’s debt would no longer be eligible for purchase under the European Central Bank’s quantitative-easing program if the country’s credit rating is downgraded on Friday, President Mario Draghi said. A decision by Canadian rating company DBRS Ltd. to take away the country’s only investment-grade rating would disqualify Portuguese sovereign bonds from asset purchases and use as collateral in refinancing operations, Draghi said…”
Brexit Watch:
October 21 – Bloomberg (Lukanyo Mnyanda and Stephen Spratt): “Money markets are zeroing in on Article 50 as the catalyst for increased risk in banks’ pound borrowing. A gauge of where bank borrowing costs will be in coming months, known as the FRA/OIS spread, shows a marked increase in traders’ perception of risk beyond March 2017. That’s the point by which U.K. Prime Minister Theresa May has pledged to formally invoke the article of the Lisbon Treaty that will formally put the nation on a path out of the European Union.”
Fixed-Income Bubble Watch:
October 18 – Bloomberg (Scott Lanman): “China’s holdings of U.S. Treasuries fell to the lowest level since November 2012, as the world’s second-largest economy draws down its foreign reserves to prop up the yuan. The biggest foreign holder of U.S. government debt had $1.19 trillion in bonds, notes and bills in August, down $33.7 billion from the prior month, the biggest drop since 2013… The portfolio of Japan, the largest holder after China, fell for the first time in three months, down $10.6 billion to $1.14 trillion. Saudi Arabia’s holdings of Treasuries declined for a seventh straight month, to $93 billion.”
October 20 – Reuters (Herbert Lash and Joy Wiltermuth): “The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit. Weak September core retail sales… provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales. Some $128 billion of commercial real estate loans - more than one-quarter of which went to finance malls a decade ago - are due to refinance between now and the end of 2017…”
Global Bubble Watch:
October 16 – Bloomberg (Phil Kuntz): “The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis… The 10 largest lenders now own assets totaling $21.4 trillion, a 10% increase from the end of last year… Their combined holdings grew by 3% or less in both 2015 and 2014. The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market… Almost 75% of the world’s central-bank assets are controlled by policy makers in four places: China, the U.S., Japan and the euro zone. The next six -- …Brazil, Switzerland, Saudi Arabia, the U.K., India and Russia -- each account for an average of 2.5%.”
October 19: “ETFGI… today reported assets invested in ETFs/ETPs listed globally reached a new record high US$3.408 trillion at the end of Q3 2016. Net flows gathered by ETFs/ETPs in September were strong with US$25.19 bn… marking the 32nd consecutive month of net inflows… Record levels of assets were also reached at the end of Q3 for ETFs/ETPs listed in the United States at US$2.415 trillion, in Europe at US$566.74 bn, and in Asia Pacific ex-Japan at US$131.88 bn. At the end of Q3 2016, the Global ETF/ETP industry had 6,526 ETFs/ETPs, with 12,386 listings, assets of US$3.408 trillion, from 284 providers listed on 65 exchanges in 53 countries.”
October 17 – Financial Times (Elaine Moore and Thomas Hale): “The European Central Bank’s mass bond-buying programme is escalating stress in a crucial short-term funding market that underpins the eurozone financial system, raising the risk of shocks in wider markets. Large-scale purchases of government bonds by the ECB has resulted in a squeeze on the availability of assets favoured for trillions of euros of repurchase agreements, or ‘repos’ — effectively short-term loans between institutions. Bankers and asset managers say the market’s dysfunction should be high on the list of topics discussed by the ECB’s governing council when it meets in Frankfurt this week to decide on the future of its €80bn a month quantitative easing programme.”
October 18 – Bloomberg (Luke Kawa and Andrea Wong): “It’s not hard to see the potential flash points on the horizon -- the U.S. presidential election; Deutsche Bank AG’s mounting legal charges; the day central banks stop buying bonds. Yet when it comes to gauging risks in the world’s financial markets, these days investors are flying more or less blind. That’s because the once-dependable indicators traders relied on for decades to send out warnings are no longer up to the task. The so-called yield curve isn’t the recession predictor it once was. Swap spreads are so distorted they can’t be trusted. Even the vaunted VIX -- sometimes referred to as the ‘fear gauge,’ is leading its followers astray, strategists say.”
October 18 – Bloomberg (Sid Verma and Luke Kawa): “Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area? There were a bevy of reasons for fund managers to push their cash balances to 5.8% of their portfolios in October, up from 5.5% last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn't been higher than that since November 2001, shortly after the terrorist attacks in the U.S…”
U.S. Bubble Watch:
October 21 – Bloomberg (Oliver Renick and Rebecca Spalding): “U.S. companies are on pace to spend a record $1 trillion on buybacks and dividends in 2016. It’ll be a tough record to top. A total $600 billion in share repurchases and $400 billion in dividends will be doled out by S&P 500 Index members by the end of the year, the biggest combined payout in history, according to… Barclays Plc. Gravy like that is getting tougher to sustain as corporate profits suffer a six-quarter slump and cash levels begin to dwindle. As a result, fewer companies in the third quarter upped their dividend -- and more are tapping the debt market to sustain their buyback programs, data from S&P Global Inc. and JPMorgan… show. For U.S. stock investors, it means a key pillar of the 7 1/2-year-old bull market may be tipping over.”
October 20 – Bloomberg (Michelle Jamrisko): “Sales of previously owned U.S. homes increased more than projected in September, showing residential real estate continues to contribute modestly to growth… Contract closings rose 3.2% to a 5.47 million annual rate… Sales climbed 2.8% from September 2015… Median sales price increased 5.6% from September 2015 to $234,200. Inventory of available properties dropped 6.8% from a year earlier to 2.04 million…”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Investors are giving up on stock picking. Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins. Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.”
October 20 – Financial Times (Robin Wigglesworth, Nicole Bullock and Joe Rennison): “The US Securities and Exchange Commission is gearing up for a root-and-branch review of the rapidly growing exchange traded fund industry amid concerns massive flows into ETFs may be exacerbating volatility in financial markets. In the US alone, ETF assets stand at $2.4tn, and globally they hold $3.3tn, according to ETFGI… They account for about 30% of the value of all US shares traded… ETFs were at the centre of wild equity trading in August 2015. In one session, more than 1,000 securities were suspended from trading for sharp moves and some ETFs veered sharply from their net asset values. The chaotic trading highlighted how interconnected ETFs are with the underlying stocks as well as the futures market.”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Picking stocks is at heart an arrogant act. It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts. Entire cities—notably New York and London—have been erected in service of this belief. And the image of the clever, dauntless stock maestro is embedded in the American ideal. Yet there is a simple, destructive idea taking over Wall Street: that stock pickers can’t pick stocks well—or at least well enough for the fees they charge. And even those who do can’t sustain it year after year. In short, the idea of the ‘active manager’ is rapidly losing its intellectual legitimacy to the primacy of the ‘passive investor’ who merely buys an index of shares.”
October 18 – Bloomberg (Michelle Jamrisko): “The cost of living in the U.S. rose at the fastest pace in five months on energy and shelter prices, a sign inflation is getting closer to the Federal Reserve’s goal. The consumer-price index increased 0.3% in September from the previous month… The year-on-year rise was 1.5%, the most since October 2014.”
October 16 – Wall Street Journal (Julie Jargon and Lillian Rizzo): “The U.S. is having one of its biggest restaurant shakeouts in years, as an oversupply of eateries and new rivals offering prepared meals to go claim what is expected to be a growing number of casualties. In one recent week alone, three restaurant companies filed for chapter 11 bankruptcy protection, including Così Inc.; Rita Restaurant Corp., parent of the Don Pablo chain, and Garden Fresh Corp... At least five other restaurant operators have filed for court protection this year, with restructuring plans that call for restaurant closures.”
Federal Reserve Watch:
October 20 – Bloomberg (Jeanna Smialek): “The U.S. economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a ‘mostly positive’ outlook, a report from the 12 Federal Reserve districts showed. ‘Most districts indicated a modest or moderate pace of expansion,’ according to the Fed’s latest Beige Book, an economic survey by reserve banks. ‘Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several districts.’”
October 18 – Bloomberg (Jeanna Smialek): “The boards of directors at nine of the 12 regional Federal Reserve banks last month sought an increase in the rate on direct loans from the Fed to 1.25% from 1%… The Atlanta Fed joined the calls for an increase in the discount rate, pushing the number of regional banks asking for a hike to its highest since December 2015.”
Japan Watch:
October 18 – Reuters (Malcolm Foster and Tetsushi Kajimoto): “Japan Inc has little faith in the central bank's latest shift in monetary policy, with companies saying it won't generate long-desired inflation, spur further business investment or have an impact on the economy. The findings of the Reuters Corporate Survey… suggest a long road ahead for Prime Minister Shinzo Abe… More than 80% of firms said last month's overhaul in policy - one that targets the bond market's yield curve instead of the amount of money pumped into the financial system - will not have an impact on prices or change their capital spending plans.”
Leveraged Speculator Watch:
October 20 – Bloomberg (Saijel Kishan): “Howard Fischer, wearing a white shirt and khakis, leans back into a window seat at a juice bar in Greenwich, Connecticut, sips a cold-brewed Mexican mocha and shares his angst. ‘It’s miserable, miserable,’ the 57-year-old manager of $1.1 billion Basso Capital Management says of hedge fund returns over the past few years. ‘If that’s the normal expectation, I don’t have a business.’ Fischer’s lament and ones like it are echoing through the industry. It’s an existential crisis for former masters of the universe who once prided themselves on their trading prowess. Now they’re questioning their wisdom and their ability to generate profits that made them among the richest in finance. The $2.9 trillion industry has posted average annual returns of 2% over the past three years, well below those of most index funds…”
October 20 – Bloomberg (Saijel Kishan and Simone Foxman): “Hedge fund investors pulled $28.2 billion from the industry in the third quarter, the most since the aftermath of the global financial crisis, according to Hedge Fund Research Inc. The net outflows, which amount to 0.9% of the industry, are the largest since the second quarter of 2009… Investors redeemed $51.5 billion in the first nine months of the year, even as industry assets rose to a record $2.97 trillion… The third quarter was the fourth consecutive quarter of redemptions for the industry, the longest since 2008 and 2009, HFR said. Redemptions were concentrated in the biggest funds…”
October 20 – Bloomberg (Sonali Basak): “Portfolio managers at hedge funds, facing an exodus of investors frustrated with high fees, are about to feel the pain from an estimated 34% reduction in their compensation. While fund managers may take the biggest pay cut in the industry, professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, recruiter Odyssey Search Partners said in a report…”
October 19 – Wall Street Journal (Justin Baer): “One junk-bond trader at Goldman Sachs Group Inc. earned more than $100 million in trading profits for the firm earlier this year, an unusual gain at a time when new regulations have pushed Wall Street to take fewer risks.”
The S&P500 added 0.4% (up 4.8% y-t-d), while the Dow was about unchanged (up 4.1%). The Utilities gained 0.5% (up 11.7%). The Banks surged 3.5% (up 0.8%), and the Broker/Dealers increased 0.2% (down 2.4%). The Transports slipped 0.2% (up 6.9%). The S&P 400 Midcaps gained 0.5% (up 9.2%), and the small cap Russell 2000 rose 0.5% (up 7.2%). The Nasdaq100 gained 0.9% (up 5.6%), and the Morgan Stanley High Tech index advanced 1.1% (up 10%). The Semiconductors recovered 0.6% (up 22.8%). The Biotechs rallied 0.8% (down 19.8%). With bullion up $15, the HUI gold index surged 8.2% (up 94%).
Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields slipped a basis point to 0.82% (down 23bps y-t-d). Five-year T-note yields fell five bps to 1.24% (down 51bps). Ten-year Treasury yields dropped seven bps to 1.73% (down 52bps). Long bond yields fell eight bps to 2.48% (down 54bps).
Greek 10-year yields rose six bps to 8.28% (up 96bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.16% (up 64bps). Italian 10-year yields slipped a basis point to 1.37% (down 22bps). Spain's 10-year yields declined one basis point to 1.11% (down 66bps). German bund yields dropped five bps to 0.00% (down 62bps). French yields fell five bps to 0.28% (down 71bps). The French to German 10-year bond spread was unchanged at 28 bps. U.K. 10-year gilt yields were unchanged at 1.09% (down 87bps). U.K.'s FTSE equities index was little changed (up 12.5%).
Japan's Nikkei 225 equities index rallied 1.9% (down 9.7% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.07% (down 33bps y-t-d). The German DAX equities index rose 1.2% (down 0.3%). Spain's IBEX 35 equities index surged 3.8% (down 4.6%). Italy's FTSE MIB index jumped 3.5% (down 19.9%). EM equities were mostly higher. Brazil's Bovespa index surged 3.8% (up 48%). Mexico's Bolsa gained 1.5% (up 12.7%). South Korea's Kospi increased 0.5% (up 3.7%). India’s Sensex equities jumped 1.5% (up 7.5%). China’s Shanghai Exchange rose 0.9% (down 12.7%). Turkey's Borsa Istanbul National 100 index jumped 1.7% (up 9.9%). Russia's MICEX equities index slipped 0.4% (up 11.1%).
Junk bond mutual funds saw outflows of $160 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose five bps last week to a four-month high 3.52% (down 27bps y-o-y). Fifteen-year rates added three bps to 2.79% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.63% (down 24bps).
Federal Reserve Credit last week jumped $17.3bn to $4.435 TN. Over the past year, Fed Credit contracted $22.7bn (0.5%). Fed Credit inflated $1.624 TN, or 58%, over the past 206 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $23.7bn last week to a new six-year low $3.122 TN. "Custody holdings" were down $179bn y-o-y, or 5.4%.
M2 (narrow) "money" supply last week surged $43.4bn to a record $13.123 TN. "Narrow money" expanded $955bn, or 7.9%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $5.5bn, while Savings Deposits surged $37.5bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $11.6bn.
Total money market fund assets dropped $14.1bn to a 16-month low $2.635 TN. Money Funds declined $64bn y-o-y (2.4%).
Total Commercial Paper increased $2.4bn to $905bn. CP declined $158bn y-o-y, or 14.8%.
Currency Watch:
The U.S. dollar index added 0.6% to 98.63 (down 0.1% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6%, the New Zealand dollar 1.0%, the British pound 0.4% and the Japanese yen 0.4%. For the week on the downside, the Canadian dollar declined 1.5%, the euro 0.8%, the Swedish krona 0.8%, the Swiss franc 0.3%, the Norwegian krone 0.3%, and the Australian dollar 0.1%. The Chinese yuan fell another 0.6% versus the dollar (down 4.2% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was unchanged (up 20.6% y-t-d). Spot Gold rallied 1.2% to $1,266 (up 19.4%). Silver increased 0.5% to $17.53 (up 27%). Crude gained 50 cents to $50.85 (up 37.3%). Gasoline rose 2.6% (up 21%), while Natural Gas sank 9.1% (up 28%). Copper fell 1.0% (down 2%). Wheat dropped 1.5% (down 12%). Corn declined 0.5% (down 2%).
China Bubble Watch:
October 18 – Bloomberg: “China’s economic growth remained stable in the third quarter, all but ensuring the government’s full-year growth target is met and opening a window for policy makers to deliver on vows to rein in excessive credit and surging property prices. Gross domestic product rose 6.7% in the third quarter from a year earlier, matching the median projection by economists…”
October 16 – Bloomberg (Narae Kim): “China has been issued another yellow card. In a report released last week, S&P Global Ratings warned that China is at risk of losing its AA-status if it doesn't rein in its debt-fueled economic growth. ‘Credit growth in China continues to outpace income growth, and much new lending appears to be financing public investment,’ S&P analysts Kim Eng Tan and Xin Liu wrote. ‘Consequently, we see support for the Chinese sovereign ratings gradually diminishing.’ A downgrade would be the latest blow to the world's second-largest economy, whose outlook was slashed to negative from stable by the ratings agency in March.”
October 20 – Reuters (Samuel Shen and Adam Jourdan): “China has uncovered over 1 trillion yuan (120.35 billion pounds) worth of illegal transactions by underground banks this year, the official Financial News reported… The State Administration of Foreign Exchange (SAFE) will step up investigations into capital outflows and intensify a crackdown on underground banks to foster healthy development of the country's foreign exchange market, Zhang Shenghui, a senior director at SAFE told the newspaper.”
October 18 – Bloomberg: “China’s financial hub Shanghai is stepping up a crackdown on property developers and the flow of funds into land transactions, part of broader government efforts to prevent a housing bubble. Shanghai’s commission of housing and urban-rural development said… it was investigating whether eight developers raised selling prices for residential projects without permission. The agency has already suspended transaction licenses for some properties…”
Europe Watch:
October 20 – Bloomberg (Jeff Black and Jana Randow): “In Germany, fretting about inflation is a political currency that never seems to lose its value. In the past week, for example, at least three national newspapers have run prominent articles telling the populace that their savings -- denied the magic of compound interest by the European Central Bank’s low-rate policies -- are in for a renewed onslaught from accelerating consumer prices. The Bundesbank forecasts average inflation of 1.5% next year, whereas rates will likely be around zero.”
October 16 – Bloomberg (Mark Whitehouse): “Will Italy follow the U.K.'s example and leave the European Union? Far-fetched as it may seem, capital flows suggest that some people aren’t waiting to find out. To keep the euro area's accounts in balance, Europe's central banks track flows of money among the members of the currency union. If, for example, a depositor moves 100 euros from Italy to Germany, the Bank of Italy records a liability to the Eurosystem and the Bundesbank records a credit. If a central bank starts building up liabilities rapidly, that tends to be a sign of capital flight. Lately, Italy's central bank has been building up a lot of liabilities to the Eurosystem. As of the end of September, they stood at about 354 billion euros, up 118 billion from a year earlier -- and up 78 billion since the end of May… The outflow isn't quite as large as during the sovereign-debt crisis of 2012, but it's still significant. The main beneficiary seems to be Germany, which has seen its credits to the Eurosystem increase by 160 billion over the past year.”
October 20 – Bloomberg (Carolynn Look): “Portugal’s debt would no longer be eligible for purchase under the European Central Bank’s quantitative-easing program if the country’s credit rating is downgraded on Friday, President Mario Draghi said. A decision by Canadian rating company DBRS Ltd. to take away the country’s only investment-grade rating would disqualify Portuguese sovereign bonds from asset purchases and use as collateral in refinancing operations, Draghi said…”
Brexit Watch:
October 21 – Bloomberg (Lukanyo Mnyanda and Stephen Spratt): “Money markets are zeroing in on Article 50 as the catalyst for increased risk in banks’ pound borrowing. A gauge of where bank borrowing costs will be in coming months, known as the FRA/OIS spread, shows a marked increase in traders’ perception of risk beyond March 2017. That’s the point by which U.K. Prime Minister Theresa May has pledged to formally invoke the article of the Lisbon Treaty that will formally put the nation on a path out of the European Union.”
Fixed-Income Bubble Watch:
October 18 – Bloomberg (Scott Lanman): “China’s holdings of U.S. Treasuries fell to the lowest level since November 2012, as the world’s second-largest economy draws down its foreign reserves to prop up the yuan. The biggest foreign holder of U.S. government debt had $1.19 trillion in bonds, notes and bills in August, down $33.7 billion from the prior month, the biggest drop since 2013… The portfolio of Japan, the largest holder after China, fell for the first time in three months, down $10.6 billion to $1.14 trillion. Saudi Arabia’s holdings of Treasuries declined for a seventh straight month, to $93 billion.”
October 20 – Reuters (Herbert Lash and Joy Wiltermuth): “The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit. Weak September core retail sales… provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales. Some $128 billion of commercial real estate loans - more than one-quarter of which went to finance malls a decade ago - are due to refinance between now and the end of 2017…”
Global Bubble Watch:
October 16 – Bloomberg (Phil Kuntz): “The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis… The 10 largest lenders now own assets totaling $21.4 trillion, a 10% increase from the end of last year… Their combined holdings grew by 3% or less in both 2015 and 2014. The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market… Almost 75% of the world’s central-bank assets are controlled by policy makers in four places: China, the U.S., Japan and the euro zone. The next six -- …Brazil, Switzerland, Saudi Arabia, the U.K., India and Russia -- each account for an average of 2.5%.”
October 19: “ETFGI… today reported assets invested in ETFs/ETPs listed globally reached a new record high US$3.408 trillion at the end of Q3 2016. Net flows gathered by ETFs/ETPs in September were strong with US$25.19 bn… marking the 32nd consecutive month of net inflows… Record levels of assets were also reached at the end of Q3 for ETFs/ETPs listed in the United States at US$2.415 trillion, in Europe at US$566.74 bn, and in Asia Pacific ex-Japan at US$131.88 bn. At the end of Q3 2016, the Global ETF/ETP industry had 6,526 ETFs/ETPs, with 12,386 listings, assets of US$3.408 trillion, from 284 providers listed on 65 exchanges in 53 countries.”
October 17 – Financial Times (Elaine Moore and Thomas Hale): “The European Central Bank’s mass bond-buying programme is escalating stress in a crucial short-term funding market that underpins the eurozone financial system, raising the risk of shocks in wider markets. Large-scale purchases of government bonds by the ECB has resulted in a squeeze on the availability of assets favoured for trillions of euros of repurchase agreements, or ‘repos’ — effectively short-term loans between institutions. Bankers and asset managers say the market’s dysfunction should be high on the list of topics discussed by the ECB’s governing council when it meets in Frankfurt this week to decide on the future of its €80bn a month quantitative easing programme.”
October 18 – Bloomberg (Luke Kawa and Andrea Wong): “It’s not hard to see the potential flash points on the horizon -- the U.S. presidential election; Deutsche Bank AG’s mounting legal charges; the day central banks stop buying bonds. Yet when it comes to gauging risks in the world’s financial markets, these days investors are flying more or less blind. That’s because the once-dependable indicators traders relied on for decades to send out warnings are no longer up to the task. The so-called yield curve isn’t the recession predictor it once was. Swap spreads are so distorted they can’t be trusted. Even the vaunted VIX -- sometimes referred to as the ‘fear gauge,’ is leading its followers astray, strategists say.”
October 18 – Bloomberg (Sid Verma and Luke Kawa): “Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area? There were a bevy of reasons for fund managers to push their cash balances to 5.8% of their portfolios in October, up from 5.5% last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn't been higher than that since November 2001, shortly after the terrorist attacks in the U.S…”
U.S. Bubble Watch:
October 21 – Bloomberg (Oliver Renick and Rebecca Spalding): “U.S. companies are on pace to spend a record $1 trillion on buybacks and dividends in 2016. It’ll be a tough record to top. A total $600 billion in share repurchases and $400 billion in dividends will be doled out by S&P 500 Index members by the end of the year, the biggest combined payout in history, according to… Barclays Plc. Gravy like that is getting tougher to sustain as corporate profits suffer a six-quarter slump and cash levels begin to dwindle. As a result, fewer companies in the third quarter upped their dividend -- and more are tapping the debt market to sustain their buyback programs, data from S&P Global Inc. and JPMorgan… show. For U.S. stock investors, it means a key pillar of the 7 1/2-year-old bull market may be tipping over.”
October 20 – Bloomberg (Michelle Jamrisko): “Sales of previously owned U.S. homes increased more than projected in September, showing residential real estate continues to contribute modestly to growth… Contract closings rose 3.2% to a 5.47 million annual rate… Sales climbed 2.8% from September 2015… Median sales price increased 5.6% from September 2015 to $234,200. Inventory of available properties dropped 6.8% from a year earlier to 2.04 million…”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Investors are giving up on stock picking. Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins. Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.”
October 20 – Financial Times (Robin Wigglesworth, Nicole Bullock and Joe Rennison): “The US Securities and Exchange Commission is gearing up for a root-and-branch review of the rapidly growing exchange traded fund industry amid concerns massive flows into ETFs may be exacerbating volatility in financial markets. In the US alone, ETF assets stand at $2.4tn, and globally they hold $3.3tn, according to ETFGI… They account for about 30% of the value of all US shares traded… ETFs were at the centre of wild equity trading in August 2015. In one session, more than 1,000 securities were suspended from trading for sharp moves and some ETFs veered sharply from their net asset values. The chaotic trading highlighted how interconnected ETFs are with the underlying stocks as well as the futures market.”
October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Picking stocks is at heart an arrogant act. It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts. Entire cities—notably New York and London—have been erected in service of this belief. And the image of the clever, dauntless stock maestro is embedded in the American ideal. Yet there is a simple, destructive idea taking over Wall Street: that stock pickers can’t pick stocks well—or at least well enough for the fees they charge. And even those who do can’t sustain it year after year. In short, the idea of the ‘active manager’ is rapidly losing its intellectual legitimacy to the primacy of the ‘passive investor’ who merely buys an index of shares.”
October 18 – Bloomberg (Michelle Jamrisko): “The cost of living in the U.S. rose at the fastest pace in five months on energy and shelter prices, a sign inflation is getting closer to the Federal Reserve’s goal. The consumer-price index increased 0.3% in September from the previous month… The year-on-year rise was 1.5%, the most since October 2014.”
October 16 – Wall Street Journal (Julie Jargon and Lillian Rizzo): “The U.S. is having one of its biggest restaurant shakeouts in years, as an oversupply of eateries and new rivals offering prepared meals to go claim what is expected to be a growing number of casualties. In one recent week alone, three restaurant companies filed for chapter 11 bankruptcy protection, including Così Inc.; Rita Restaurant Corp., parent of the Don Pablo chain, and Garden Fresh Corp... At least five other restaurant operators have filed for court protection this year, with restructuring plans that call for restaurant closures.”
Federal Reserve Watch:
October 20 – Bloomberg (Jeanna Smialek): “The U.S. economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a ‘mostly positive’ outlook, a report from the 12 Federal Reserve districts showed. ‘Most districts indicated a modest or moderate pace of expansion,’ according to the Fed’s latest Beige Book, an economic survey by reserve banks. ‘Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several districts.’”
October 18 – Bloomberg (Jeanna Smialek): “The boards of directors at nine of the 12 regional Federal Reserve banks last month sought an increase in the rate on direct loans from the Fed to 1.25% from 1%… The Atlanta Fed joined the calls for an increase in the discount rate, pushing the number of regional banks asking for a hike to its highest since December 2015.”
Japan Watch:
October 18 – Reuters (Malcolm Foster and Tetsushi Kajimoto): “Japan Inc has little faith in the central bank's latest shift in monetary policy, with companies saying it won't generate long-desired inflation, spur further business investment or have an impact on the economy. The findings of the Reuters Corporate Survey… suggest a long road ahead for Prime Minister Shinzo Abe… More than 80% of firms said last month's overhaul in policy - one that targets the bond market's yield curve instead of the amount of money pumped into the financial system - will not have an impact on prices or change their capital spending plans.”
Leveraged Speculator Watch:
October 20 – Bloomberg (Saijel Kishan): “Howard Fischer, wearing a white shirt and khakis, leans back into a window seat at a juice bar in Greenwich, Connecticut, sips a cold-brewed Mexican mocha and shares his angst. ‘It’s miserable, miserable,’ the 57-year-old manager of $1.1 billion Basso Capital Management says of hedge fund returns over the past few years. ‘If that’s the normal expectation, I don’t have a business.’ Fischer’s lament and ones like it are echoing through the industry. It’s an existential crisis for former masters of the universe who once prided themselves on their trading prowess. Now they’re questioning their wisdom and their ability to generate profits that made them among the richest in finance. The $2.9 trillion industry has posted average annual returns of 2% over the past three years, well below those of most index funds…”
October 20 – Bloomberg (Saijel Kishan and Simone Foxman): “Hedge fund investors pulled $28.2 billion from the industry in the third quarter, the most since the aftermath of the global financial crisis, according to Hedge Fund Research Inc. The net outflows, which amount to 0.9% of the industry, are the largest since the second quarter of 2009… Investors redeemed $51.5 billion in the first nine months of the year, even as industry assets rose to a record $2.97 trillion… The third quarter was the fourth consecutive quarter of redemptions for the industry, the longest since 2008 and 2009, HFR said. Redemptions were concentrated in the biggest funds…”
October 20 – Bloomberg (Sonali Basak): “Portfolio managers at hedge funds, facing an exodus of investors frustrated with high fees, are about to feel the pain from an estimated 34% reduction in their compensation. While fund managers may take the biggest pay cut in the industry, professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, recruiter Odyssey Search Partners said in a report…”
October 19 – Wall Street Journal (Justin Baer): “One junk-bond trader at Goldman Sachs Group Inc. earned more than $100 million in trading profits for the firm earlier this year, an unusual gain at a time when new regulations have pushed Wall Street to take fewer risks.”
October 18 – Bloomberg (Suzy Waite): “Asia hedge funds are opening at the slowest pace since the turn of the century. Just 27 new funds started trading in Asia in the first nine months of this year, the fewest since 2000 when 56 funds opened, according to Eurekahedge. It’s the third straight year of declines, and down from 83 new funds last year.”
Geopolitical Watch:
October 19 – Reuters (David Brunnstrom and Arshad Mohammed): “The United States and South Korea agreed… to step up military and diplomatic efforts to counter North Korea's nuclear and missile programs, saying they posed a ‘grave’ security threat following repeated tests this year. After talks in Washington between their foreign and defense ministers, the countries said they had agreed to set up a high-level Extended Deterrence Strategy and Consultation Group to leverage ‘the full breadth of national power – including diplomacy, information, military coordination, and economic elements’ in the face of the North Korean threat.”
October 20 – Bloomberg (Ian Wishart, John Follain and Patrick Donahue): “The European Union said it was too soon to consider imposing sanctions on Russia for the bombing of rebel-held areas of Syria, while maintaining the threat of action if Vladimir Putin doesn’t back down… While the U.K., France and Germany wanted to take a harsher tone with Russia, Italy’s Matteo Renzi led those countries who opposed the move.”
October 20 – Bloomberg (Andreo Calonzo and Cecilia Yap): “Philippine President Rodrigo Duterte will bring home $24 billion worth of funding and investment pledges from his four-day visit to China as both nations agreed to resume talks and explore areas of cooperation in the South China Sea. China will provide $9 billion in soft loans, including a $3 billion credit line with the Bank of China, while economic deals including investments would yield $15 billion… Preliminary agreements in railways, ports, energy and mining worth $11.2 billion were signed… ‘China is not only a friend. China is only a relative, but China is a big brother,’ Communications Secretary Martin Andanar said in Beijing…”
October 20 – Reuters (Ben Blanchard): “Philippine President Rodrigo Duterte announced his ‘separation’ from the United States on Thursday, declaring he had realigned with China as the two agreed to resolve their South China Sea dispute through talks. Duterte made his comments in Beijing, where he is visiting with at least 200 business people to pave the way for what he calls a new commercial alliance as relations with longtime ally Washington deteriorate. ‘In this venue, your honors, in this venue, I announce my separation from the United States,’ Duterte told Chinese and Philippine business people, to applause, at a forum in the Great Hall of the People attended by Chinese Vice Premier Zhang Gaoli.”
October 19 – Reuters (Orhan Coskun and Nick Tattersall): “Smarting over exclusion from an Iraqi-led offensive against Islamic State in Mosul and Kurdish militia gains in Syria, President Tayyip Erdogan warned… Turkey ‘will not wait until the blade is against our bone’ but could act alone in rooting out enemies. In a speech at his palace, Erdogan conjured up an image of Turkey constrained by foreign powers who ‘aim to make us forget our Ottoman and Selcuk history’, when Turkey's forefathers held territory stretching across central Asia and the Middle East. ‘From now on we will not wait for problems to come knocking on our door, we will not wait until the blade is against our bone and skin, we will not wait for terrorist organizations to come and attack us…’”
Geopolitical Watch:
October 19 – Reuters (David Brunnstrom and Arshad Mohammed): “The United States and South Korea agreed… to step up military and diplomatic efforts to counter North Korea's nuclear and missile programs, saying they posed a ‘grave’ security threat following repeated tests this year. After talks in Washington between their foreign and defense ministers, the countries said they had agreed to set up a high-level Extended Deterrence Strategy and Consultation Group to leverage ‘the full breadth of national power – including diplomacy, information, military coordination, and economic elements’ in the face of the North Korean threat.”
October 20 – Bloomberg (Ian Wishart, John Follain and Patrick Donahue): “The European Union said it was too soon to consider imposing sanctions on Russia for the bombing of rebel-held areas of Syria, while maintaining the threat of action if Vladimir Putin doesn’t back down… While the U.K., France and Germany wanted to take a harsher tone with Russia, Italy’s Matteo Renzi led those countries who opposed the move.”
October 20 – Bloomberg (Andreo Calonzo and Cecilia Yap): “Philippine President Rodrigo Duterte will bring home $24 billion worth of funding and investment pledges from his four-day visit to China as both nations agreed to resume talks and explore areas of cooperation in the South China Sea. China will provide $9 billion in soft loans, including a $3 billion credit line with the Bank of China, while economic deals including investments would yield $15 billion… Preliminary agreements in railways, ports, energy and mining worth $11.2 billion were signed… ‘China is not only a friend. China is only a relative, but China is a big brother,’ Communications Secretary Martin Andanar said in Beijing…”
October 20 – Reuters (Ben Blanchard): “Philippine President Rodrigo Duterte announced his ‘separation’ from the United States on Thursday, declaring he had realigned with China as the two agreed to resolve their South China Sea dispute through talks. Duterte made his comments in Beijing, where he is visiting with at least 200 business people to pave the way for what he calls a new commercial alliance as relations with longtime ally Washington deteriorate. ‘In this venue, your honors, in this venue, I announce my separation from the United States,’ Duterte told Chinese and Philippine business people, to applause, at a forum in the Great Hall of the People attended by Chinese Vice Premier Zhang Gaoli.”
October 19 – Reuters (Orhan Coskun and Nick Tattersall): “Smarting over exclusion from an Iraqi-led offensive against Islamic State in Mosul and Kurdish militia gains in Syria, President Tayyip Erdogan warned… Turkey ‘will not wait until the blade is against our bone’ but could act alone in rooting out enemies. In a speech at his palace, Erdogan conjured up an image of Turkey constrained by foreign powers who ‘aim to make us forget our Ottoman and Selcuk history’, when Turkey's forefathers held territory stretching across central Asia and the Middle East. ‘From now on we will not wait for problems to come knocking on our door, we will not wait until the blade is against our bone and skin, we will not wait for terrorist organizations to come and attack us…’”