Monday, October 16, 2017

Monday Evening Links

[Bloomberg] U.S. Stocks Climb to Record as Treasuries Decline: Markets Wrap

[Bloomberg] Taylor Impresses Trump for Fed Chairman, Warsh Slips

[Reuters] Trump to meet Yellen Thursday in search for new Fed chair: source

[CNBC] Trump says 'there is no such thing as Obamacare anymore' and 'short-term fix' in works

[CNBC] The real cause of the 1987 crash, as told by a trader who lived through it

[WSJ] China’s Xi Approaches a New Term With a Souring Taste for Markets

Monday's News Links

[Bloomberg] Commodities Surge Led by Copper, Oil; Euro Weakens: Markets Wrap

[Reuters] Oil rises as fighting escalates in Iraq's oil-rich Kirkuk

[Reuters] As the quartet breaks up, central banking leadership flux looms

[Bloomberg] Shorts of Volatility Futures Set a New Record

[Bloomberg] The Crash of ’87, From the Wall Street Players Who Lived It

[Bloomberg] Fed's Rosengren Sees Taylor as `Flexible' in Applying Rules

[Bloomberg] China's Factory Inflation Rebounds Amid Capacity Cuts

[Bloomberg] China's Central Bank Chief Warns Corporate Debt Is Too High

[CNBC] China's Communist Party is holding its most important meeting in years: Here's what you need to know

[Bloomberg] Catalans Defend Claim to Independence as Spain Prepares to Act

[Reuters] Madrid moves towards direct rule over Catalonia

[Bloomberg] Theresa May Heads to Brussels to Try to Break Brexit Deadlock

[Reuters] Iraq forces seize Kirkuk outskirts in advance on Kurdish-held territory

[Reuters] Iraq says vast areas taken from Kurds in Kirkuk, Kurds deny gains

[Politico] Deficit hawks trampled in GOP tax cut stampede

[WSJ] Central Bankers Cling to Stimulus Amid Weak Inflation

[WSJ] GOP Tax Plan Would Keep the Mortgage Break But Threaten Irrelevancy

[FT] China’s party congress will matter for investors this time

[WSJ] As Islamic State Recedes, Iraqi Forces and Kurds Turn on Each Other

Saturday, October 14, 2017

Saturday's News Links

[Bloomberg] China Credit Growth Exceeds Estimates Despite Debt Curb Vow

[Reuters] Spain to take control of Catalonia if gets ambiguous reply on independence

[Reuters] China confirms will amend party constitution, likely to include Xi's theories

[AP] Trump’s speech sparks a new war of words between US, Iran

Weekly Commentary: Arms Race

Bloomberg: “Treasuries Surge as December Hike Odds Drop After CPI Miss.” Year-over-year CPI was up 2.2% in September, with consumer inflation above 2% y-o-y for six of the past 10 months. The Producer Price Index gained 2.6% y-o-y in September. Yet, apparently, the focus will remain on core CPI (along with core personal consumption expenditure inflation) that, up 1.7% y-o-y, missed estimates by one tenth and remained below 2% for the sixth straight month. Notably – analytically if not in the markets – the preliminary October reading of University of Michigan Consumer Confidence jumped six points to the high since January 2004. Or taking a slightly different view, Consumer Confidence has been stronger for only one month in the past 17 years. Current Conditions rose to the highest level since November 2000.

Data notwithstanding, from Bloomberg: “Bond Shorts Experience the Agony of Defeat Yet Again.” Ten-year Treasury yields declined nine bps this week to 2.27%, though I’m not sure this qualifies as “defeat.” In stark contrast to the fanatical gathering on the opposing side of the field, not a single central banker was spotted on the bond bears’ sideline.

October 12 – Financial Times (Sam Fleming): “Worries about the risk of stubbornly low inflation hung over the Federal Reserve’s most recent policy meeting, even as the central bank held its course for a further rate rise as soon as the end of the year. Many of the US central bank’s policymakers declared at its latest rate-setting meeting that a further increase is likely to be needed ‘later this year’ as long as the economy stays on track. But minutes of the Fed’s gathering on September 19-20 revealed a body of policymakers who are troubled by this year’s doggedly weak inflation readings and divided over how best to respond. Many expressed worries that poor price growth could reflect entrenched factors following a half-decade of sub-target readings on the Fed’s favoured measure of core inflation. Several insisted they wanted to see economic data that ‘increased their confidence’ that inflation would move towards the Fed’s 2% objective before they acted again.”

October 13 – Reuters (Balazs Koranyi): “European Central Bank policymakers are homing in on extending their stimulus programme for nine months at their next meeting while scaling it back, five people with direct knowledge of discussions told Reuters. The ECB’s asset purchases are due to expire at the end of the year, and policymakers are set to decide on Oct. 26 whether to prolong them. They will have to reconcile the bloc’s best growth run in a decade with an inflation rate expected to undershoot the bank’s target of almost 2% for years. The next move is still up for discussion, but there is a consensus that it should signal both the need to cut support in light of strong economic growth, while also committing to an extended period of monetary accommodation…”

October 13 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda on Thursday stressed the central bank’s resolve to maintain its ultra-loose monetary policy, even as its U.S. and European counterparts begin to dial back their massive, crisis-mode monetary stimulus. Kuroda offered an upbeat view of Japan’s economy, saying it was expanding moderately with rising incomes leading to higher corporate and household spending. But he said inflation and wage growth were disappointingly low, despite such improvements in the economy.”

Goldman Sachs reduced its probability of a December Fed rate hike to 75%, as dovish comments from Fed officials and dovish minutes from the September FOMC meeting allay concerns that the Fed was leaning “normalization.” So global markets take comfort that the Fed is largely on hold with rate hikes; a rate increase may be at least a year away in the euro zone as the ECB sticks to its max leisurely path to winding down QE; and, best yet, the Bank of Japan is gratified to wait and see how the others get along without aggressive stimulus before contemplating its own course.

The S&P500 gained 0.2% this week to new record highs, increasing y-t-d gains to 14%. Indicative of the froth that has taken hold throughout EM, bastions of stability South Korea (up 22% y-t-d) and Turkey (up 36%) gained 3.3% and 2.0%, respectively. Meanwhile, Bitcoin (U.S. spot) surged $1,275 this week (29%!) to $5,615, with 2017 gains of a cool 480%. If central bankers have any concern with acute asset price inflation and speculation it was not apparent this week. And, sure enough, no sooner than Fed officials reiterate below-target inflation angst the commodities pop. The GSCI Commodities index jumped 2.8% this week to a six-month high. Copper rose 2.8% this week, increasing y-t-d gains to 25%. Crude jumped 4.4%, silver 3.7% and Gold 2.2%.

Markets these days have attained that late-nineties feel. Manic 1999 had those crazy Internet stocks. Manic 2017 has the even crazier cryptocurrencies – with biotech (up 39% y-t-d) and semiconductor (up 35%) stocks straining to keep up with the insanity. In the face of conspicuous speculative excess, the Fed in 1999 held firm with its baby-step “tightening” approach that worked only to promote a further loosening of financial conditions. The 1998 crisis was fresh in central bankers’ minds, while markets delighted in the fear central bankers harbored over Y2K. As for central banks here in 2017, apparently the 2008 crisis will remain forever top of mind. Markets have never been as reassured that central bankers are loving the party.

By 1999, a policy-induced prolonged technology boom had fostered a veritable Arms Race, especially in anything Internet and PC. Finance was flooding into the sector, ensuring massive mal- and over-investment. The upshot was the rapid propagation of negative cash-flow enterprises that would turn unviable the minute the Bubble burst. The New Age hype had one thing right: Exciting new technologies changed the world. This did not, however, prevent painful busts and a pair of powerful financial crises.

There’s complacency along with a lack of appreciation for the long-term structural impact associated with late-nineties excesses. I continue to read of the “mild recession” after the bursting of the “tech” Bubble. In reality, collapse ensured depression throughout a segment of the economy. And let’s not forget the 2002 corporate debt crisis.

The Fed held powerful reflationary tools at its discretion. Rates were slashed from 6.5% in December 2000 all the way to 1.00% by June 2003. There was also a strong inflationary bias throughout mortgage finance and housing. This provided the Federal Reserve a robust avenue in which to promote record Credit growth and an attendant Bubble of sufficient scope to more than emerge from the technology bust. No nineties boom and bust then no mortgage finance Bubble reflation and resulting 2008 collapse – and no ongoing global government finance Bubble. Open the central bank crisis-fighting tool kit today and there’s a single slot for QE. Markets are elated with the virtually barren apparatus.

The current “tech” Bubble absolutely dwarfs the late-nineties period. Arms Races now proliferate across various industries, technologies and products on a global basis. Recalling 1999, media these days are filled with ads from scores of upstarts promoting new products and services. How many will ever generate positive cash-flow and earnings? The big global tech firms – flush with extraordinary boom-time profits – spend lavishly in an Arms Race for primacy over the cloud, artificial intelligence and myriad new services. Alternative energies, another Arms Race. Media, telecom, entertainment and programming – more Arms Races. Pharmaceuticals, biotech and biopharma…

And then there’s the massive Arms Race gathering momentum in electric vehicles. “British Vacuum Maker Dyson Plans Electric Car Assault” – with, it’s worth noting, a $2.0 billion investment. From the Seattle Times, “In Race for an Electric-Car Future, China Seeks the Lead.” With a blank checkbook and the power to ban the combustion engine, China will invest hundreds of billions in electric car and battery development. Will anyone ever earn a profit?

One can do worse than ponder the work of the great economist Joseph Schumpeter. Known most for the concept “creative destruction,” Schumpeter was an eminent thinker on economic development and Credit. He believed innovation often evolves in “swarm like clusters,” where development in one sector spurs innovation and development in other areas. Entrepreneur success in one field motivates entrepreneurship more generally. Moreover, innovation fuels - and is fueled by - Credit. The interplay of the entrepreneur and finance plays a fundamental role in boom and bust cycles. Eventually over-production, waning profits and Credit issues lead to cyclical downturn.

Schumpeter’s analysis would occasionally enter the discussion back in the late-nineties. Some of us would compare the proliferation of new technologies to that of the “Roaring Twenties” period (automotive, production line, electricity, radio & entertainment, refrigeration, household appliances, science & medicine, etc.). There’s no doubt that innovation and speculation tend to become kindred spirits.

The Greenspan Fed, Wall Street strategists and most economists argued during the nineties that new technologies had raised the economy’s “speed limit.” This meant less impetus to tap on the monetary brakes to subdue the boom. I saw things differently: Periods of breakneck innovation, technological advancement and resulting economic transformation beckon for a commitment to sound “money.” Especially in our age of unbounded market-based finance, captivating innovation in the real economy over time spurs precarious self-reinforcing excess in “money,” Credit, the securities markets and derivatives.

It’s my view that prolonged cycles of economic and financial innovation turn progressively more perilous. The key analysis from the “Roaring Twenties” period was one of spectacular economic and financial innovation commencing even before the outbreak of the first World War. As the Twenties progressed, our fledgling central bank misread the downward pressure on consumer prices. Technological advances, new production methods, a proliferation of new products, and booming international trade – all empowered by loose finance - were generating downward pressure on prices.

The Fed accommodated escalating financial excess and was later unwilling to risk bursting the Bubble (in the face of mounting late-cycle fragilities). At the heart of financial and economic excess was the prevailing view that the Federal Reserve possessed the tools to underpin uninterrupted financial and economic prosperity. The perception of adept central banking had become integral to a transformative change in inflation dynamics – massive investment spurring disinflation in the real economy in the face of powerful inflation dynamics raging in asset markets. What was viewed as an extraordinarily favorable fundamental backdrop was in reality an unsustainable boom, with an acutely unsound financial Bubble at its core. The many parallels to today are too obvious to ignore.

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It's not clear what that means’.”

October 11 – Financial Times (Chris Giles): “Central bankers usurped the titans of Wall Street as the masters of the universe almost a decade ago. They rescued the global economy from the financial crisis, flooding the world with cheap money. They used their powers effectively to get banks lending again. Their actions raised asset prices, keeping business and consumer confidence up. Financial markets and populations hang on their words. But never have they been so vulnerable. As they gather in Washington for the annual meetings of the International Monetary Fund, there is a crisis of confidence in central banking. Their economic models are failing and there are doubts whether they understand the effects of interest rates and other monetary policies on the economy. In short, the new masters of the universe might not understand what makes a modern economy tick and their well-intentioned actions could prove harmful. While there have long been critics of the power of central bankers on the left and the right, such profound doubts have never been so present within their narrow world.”

For those interested, McAlvany Wealth Management’s Tactical Short Q3 Update conference call will be next Wednesday, October 18th at 4:30 pm EST.   For more information please visit: https://mwealthm.com/register/


For the Week:

The S&P500 added 0.2% (up 14.0% y-t-d), and the Dow increased 0.4% (up 15.7%). The Utilities gained 1.2% (up 11.0%). The Banks dropped 1.9% (up 7.7%), and the Broker/Dealers slipped 0.6% (up 20.1%). The Transports added 0.5% (up 9.9%). The S&P 400 Midcaps were unchanged (up 9.5%), while the small cap Russell 2000 dipped 0.5% (up 10.7%). The Nasdaq100 increased 0.5% (up 25.3%). The Semiconductors jumped 2.3% (up 34.5%). The Biotechs declined 0.5% (up 38.6%). With bullion rallying $28, the HUI gold index increased only 0.3% (up 11.2%).

Three-month Treasury bill rates ended the week at 105 bps. Two-year government yields slipped a basis point to 1.50% (up 30bps y-t-d). Five-year T-note yields declined six bps to 1.90% (down 3bps). Ten-year Treasury yields fell nine bps to 2.27% (down 17bps). Long bond yields dropped nine bps to 2.81% (down 26bps).

Greek 10-year yields declined six bps to 5.49% (down 153bps y-t-d). Ten-year Portuguese yields fell eight bps to 2.33% (down 141bps). Italian 10-year yields declined six bps to 2.08% (up 27bps). Spain's 10-year yields dropped 10 bps to 1.61% (up 23bps). German bund yields fell six bps to 0.40% (up 20bps). French yields rose eight bps to 0.82% (up 14bps). The French to German 10-year bond spread widened 14 bps to 42 bps. U.K. 10-year gilt yields were little changed at 1.37% (up 13bps). U.K.'s FTSE equities added 0.2% (up 5.5%).

Japan's Nikkei 225 equities index jumped 2.2% (up 10.7% y-t-d). Japanese 10-year "JGB" yields added one basis point to 0.06% (up 2bps). France's CAC40 slipped 0.2% (up 10.1%). The German DAX equities index increased 0.3% (up 13.2%). Spain's IBEX 35 equities index rallied 0.7% (up 9.7%). Italy's FTSE MIB index was little changed (up 16.5%). EM equities were mostly higher. Brazil's Bovespa index gained 1.2% (up 27.8%), while Mexico's Bolsa declined 0.6% (up 9.5%). India’s Sensex equities index rose 1.9% (up 21.8%). China’s Shanghai Exchange gained 1.2% (up 9.2%). Turkey's Borsa Istanbul National 100 index rose 2.0% (up 35.9%). Russia's MICEX equities index increased 0.2% (down 6.0%).

Junk bond mutual funds saw inflows rise to $967 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose six bps to a 10-month high 3.91% (up 44bps y-o-y). Fifteen-year rates gained six bps to 3.21% (up 45bps).  Five-year hybrid ARM rates slipped two bps to 3.16% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.18% (up 54bps).

Federal Reserve Credit last week slipped $1.2bn to $4.419 TN. Over the past year, Fed Credit was little changed. Fed Credit inflated $1.608 TN, or 57%, over the past 257 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.7bn last week to $3.360 TN. "Custody holdings" were up $214bn y-o-y, or 6.8%.

M2 (narrow) "money" supply last week rose $12.2bn to a record $13.709 TN. "Narrow money" expanded $681bn, or 5.2%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits declined $1.0bn, while Savings Deposits added $7.7bn. Small Time Deposits gained $2.0bn. Retail Money Funds increased $2.3bn.

Total money market fund assets were little changed at $2.741 TN. Money Funds increased $93bn y-o-y, or 3.5%.

Total Commercial Paper declined $5.4bn to $1.064 TN. CP gained $161bn y-o-y, or 17.6%.

Currency Watch:

The U.S. dollar index declined 0.8% to 93.091 (down 9.1% y-t-d). For the week on the upside, the South African rand increased 3.6%, the British pound 1.7%, the Australian dollar 1.5%, the South Korean won 1.5%, the Norwegian krone 1.4%, the New Zealand dollar 1.2%, the Singapore dollar 1.2%, the euro 0.8%, the Japanese yen 0.7%, the Swiss franc 0.5%, the Canadian dollar 0.5%, the Brazilian real 0.3% and the Swedish krona 0.1%. For the week on the downside, the Mexican peso declined 2.0%. The Chinese renminbi gained 1.11% versus the dollar this week (up 5.55% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index surged 2.8% (up 1.1% y-t-d). Spot Gold rallied 2.2% to $1,305 (up 13.2%). Silver jumped 3.7% to $17.411 (up 9.0%). Crude surged $2.16 to $51.45 (down 4%). Gasoline jumped 4.1% (down 3%), and Natural Gas rose 4.8% (down 20%). Copper advanced 3.4% (up 25%). Wheat declined 0.9% (up 8%). Corn gained 0.8% (unchanged).

Trump Administration Watch:

October 13 – Bloomberg (Zachary Tracer): “President Donald Trump said he is moving “step by step” on his own to remake the U.S. health care system because Congress won’t act on his demand to repeal Obamacare. The Trump administration took its most drastic measure yet to roll back the Affordable Care Act Thursday evening, announcing it would cut off a subsidy to insurers hours after issuing an executive order designed to draw people away from the health law’s markets. The moves -- which critics call deliberate attempts to undermine the law -- come just weeks before Americans begin to sign up for coverage in 2018. ‘You saw what we did yesterday with respect to health care,’ Trump said at a Washington event… ‘It’s step by step by step. That was a big step yesterday.’”

October 13 – CNN (Stephen Collinson, Kevin Liptak and Dan Merica): “President Donald Trump on Friday threatened to pull out of a deal freezing and reversing Iran's nuclear program if Congress and US allies do not agree to strengthen it, as he unveiled a tough and comprehensive new policy toward the Islamic Republic. ‘As I have said many times, the Iran deal was one of the worst and most one-sided transactions the United States has ever entered into,’ Trump said in a major speech at the White House.”

October 11 – Politico (Burgess Everett): “Senate Republicans are imploring President Donald Trump and Sen. Bob Corker to end their increasingly ugly feud, fretting that it's threatening to further hobble the party's flagging agenda. But the public tit-for-tat has shown no sign of abating… On Tuesday, Trump took to Twitter to lambaste ‘Liddle Bob Corker,’ after the Tennessee Republican said he worried that Trump’s belligerent foreign policy rhetoric could ignite ‘World War III.’ Former Trump strategist Steve Bannon called on Corker to resign…”

October 11 – Wall Street Journal (Jacob M. Schlesinger): “The Trump administration has honed its strategy for remaking the North American Free Trade Agreement in recent weeks as it prepared for a critical round of talks that started Wednesday—by proposing a number of specific ways to water down the pact and reduce its influence on companies. U.S. trade officials have made that theme clear in recent days, prompting a backlash from Mexico and Canada and from business groups in all three countries, casting new uncertainty over the talks… One provision designed with that objective is a ‘sunset’ clause that would force Nafta’s expiration in five years unless all three countries act to renew it…”

October 8 – BBC: “‘Only one thing will work’ in dealing with North Korea after years of talks with Pyongyang brought no results, US President Donald Trump has warned. ‘Presidents and their administrations have been talking to North Korea for 25 years,’ he tweeted, adding that this ‘hasn't worked’. Mr Trump did not elaborate further.”

October 9 – Financial Times (Bryan Harris): “A trove of classified military documents, including the joint South Korea-US wartime operational plans for conflict with Pyongyang, was stolen by North Korean hackers, a lawmaker in Seoul said. Lee Cheol-hee… said hackers had broken into a defence data centre in September last year. He said stolen documents included Operational Plan 5015, the most recent blueprint for war with North Korea. The plans reportedly includes detailed procedures for a decapitation strike against the North Korean regime, a proposal that has infuriated Kim Jong Un… The development comes amid growing anxiety in South Korea that US President Donald Trump intends to use military action to curb North Korea’s rapidly developing nuclear and ballistic missiles programmes.”

October 11 – Reuters (Idrees Ali): “A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea on Tuesday…, prompting anger in Beijing, even as President Donald Trump’s administration seeks Chinese cooperation in reining in North Korea’s missile and nuclear programs.”

October 8 – Reuters (Babak Dehghanpisheh and William Maclean): “Iran warned the United States against designating its Revolutionary Guards Corp as a terrorist group and said U.S. regional military bases would be at risk if further sanctions were passed. The warning came after the White House said… that President Donald Trump would announce new U.S. responses to Iran’s missile tests, support for ‘terrorism’ and cyber operations as part of his new Iran strategy. ‘As we’ve announced in the past, if America’s new law for sanctions is passed, this country will have to move their regional bases outside the 2,000 km range of Iran’s missiles’” Guards’ commander Mohammad Ali Jafari said…”

Federal Reserve Watch:

October 10 – CNBC (Jeff Cox): “The contest for who will become the next head of the Federal Reserve appears to be coming down to two pretty different choices. In recent days, market participants have become more focused on former Fed Governor Kevin Warsh and current Governor Jerome ‘Jay’ Powell. While Warsh has long been considered a front-runner to head the central bank, Powell has emerged only lately as a compromise candidate who may just get the nod. Fed watchers are keeping a close eye on PredictIt, a predictions market site… He has met with both Powell and Warsh, as well as Yellen and Gary Cohn, the president's chief economic advisor. As of Tuesday morning, PredictIt puts Powell in the lead, with a 40% chance, while Warsh had a 30% likelihood.”

October 10 – Reuters (Ann Saphir): “Dallas Federal Reserve Bank President Robert Kaplan said… he wants to see more signs of upward inflation before raising interest rates again, but that low long-term borrowing costs may limit how far and fast rates can be raised. The Fed has raised rates twice this year, and is widely expected to do so again in December. But even as the short-term interest rate targeted by the Fed has climbed, the yield on the benchmark 10-year Treasury has fallen, a reversal of what usually happens and a development that Kaplan said he sees as ‘a little ominous.’ ‘I view that as a comment on future economic growth,” Kaplan said... ‘And what I don’t want to see us do is raise rates so fast that we get an inverted yield curve because history has shown an inverted yield curve has tended to be a precursor to a recession.’”

U.S. Bubble Watch:

October 10 – Bloomberg (Jeanna Smialek): “A buoyant and complacent stock market is worrying Richard H. Thaler, the University of Chicago professor who this week won the Nobel Prize in economics. ‘We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,’ Thaler said…’I admit to not understanding it.’”

October 11 – CNBC (Fred Imbert): “BlackRock, the world's largest asset manager, reported better-than-expected third-quarter results… Total assets under management rose 17% to nearly $6 trillion as net inflows easily beat Wall Street expectations… Total assets under management: $5.977 trillion vs StreetAccount's projected $5.94 trillion. Net inflows: $96 billion vs $71.62 billion expected.”

October 11 – Wall Street Journal (Sarah Krouse): “Investors plowed nearly $300 billion into Vanguard Group funds in the first nine months of this year, nearly matching flows into the firm for all of 2016 in the latest affirmation of the primacy of low-cost ‘passive’ investing. The torrent of investor money extends a winning streak for the... firm, which has emerged as one of the chief beneficiaries of Americans’ unprecedented embrace of index funds during an eight-year-old U.S. stock bull market.”

October 8 – Financial Times (Joe Rennison and John Authers): “The head of the fourth-largest exchange traded fund provider has warned that investors are blindly pouring money into highly concentrated stock indices, putting them at risk of outsized losses if markets tumble. Martin Flanagan, president and chief executive of Invesco… said that relying on indices that weight stocks according to their market value could inflate losses if stock markets take a nosedive. So-called ‘cap-weighted’ indices direct money to the largest companies and to stocks with higher valuations. There has been an age-old debate within the passive asset management industry about the high concentrations these products can produce. The S&P 500, the index tracked by the most widely held ETF, is currently dominated by five large technology companies — Apple, Google’s holding company Alphabet, Microsoft, Amazon and Facebook — which make up 11.7% of the total index… ‘Too many people have created their total portfolios with cap-weighted indexes thinking they are safe and cheap,’ said Mr Flanagan. ‘The reality is they are turning more and more into momentum plays. You are ending up with a disproportionate amount of your portfolio in the biggest stocks.’”

October 8 – Financial Times (Eric Platt): “As President Donald Trump touched down at San Juan airport last week, 36-year-old Tanya Diaz was heading in the opposite direction. Although she has no job to go to Ms Diaz, her two sons and grandmother flew to California to escape the aftermath of Hurricane Maria… Some estimates suggest that more than 400,000 of the country’s 3.4m population will follow Ms Diaz in the coming years as the Caribbean island, which has already defaulted on its debt obligations, now confronts something that could be even more devastating to its economic recovery — losing thousands of its most talented people.”

October 10 – Bloomberg (Claire Boston): “Working-class Americans devoted a growing percentage of their income toward paying their debts last year, the first increase since 2010 and a shift that is likely contributing to rising default rates, Moody’s… said. The families’ debt burdens are still relatively low compared with earnings-- less than they’ve been for most of the last three decades… But the borrowers are accumulating more debt even as the economy continues its recovery, which could create problems for lenders if U.S. growth slows, said Jody Shenn, a senior analyst at the bond grader. ‘We are seeing signs of the credit cycle turning,’ Shenn said… It’s important to look out for signs of stress ‘and think about the implications when the economy does hit a rough patch.’”

China Bubble Watch:

October 9 – Financial Times (Tom Mitchell): “China’s outgoing central bank governor has called for an urgent return to his stalled capital account reforms, warning his country’s leaders that the opportunity to further open the economy ‘must be seized’. ‘No country can achieve an open economy with strict foreign exchange controls,’ Zhou Xiaochuan said… ‘Time windows are very important for reforms and must be seized. If missed, the cost of reform will be higher in future.’ Mr Zhou, who has run the People’s Bank of China since 2002, was speaking ahead of a Chinese Communist party congress next week that will mark the start of President Xi Jinping’s second five-year term.”

October 12 – Wall Street Journal (Aaron Back): “The Chinese government is pushing some of its biggest tech companies—including Tencent, Weibo and a unit of Alibaba—to offer the state a stake in them and a direct role in corporate decisions. Wary of the increasing power of private businesses, internet regulators have discussed taking 1% stakes with social-media powers Tencent Holdings Ltd. and Weibo Corp. and with Youku Tudou… While the authoritarian government already exerts heavy sway over businesses through regulation, a management role would give Beijing a direct hand in innovative companies that service hundreds of millions of Chinese.”

Central Banker Watch:

October 8 – Wall Street Journal (Josh Zumbrun): “A synchronized global economic expansion is leading to a big shift in monetary policy around the world—toward central banks shrinking rather than growing—with implications for markets, inflation and the outlook for growth. Following the financial crisis from 2007-2009, the world’s big central banks had been net buyers of financial assets in global markets, expanding their portfolios of government bonds, mortgage debt and corporate securities by 1% to 3% of global economic output per year for much of the past six years. Now that’s changing. The Bank of England announced in February it would mostly end its bond purchases, the Fed stopped buying bonds at the end of 2014 and announced in September it would move ahead with a plan to gradually shrink its holdings, and the European Central Bank is expected to announce at the end of October it will slow its pace of purchases.”

October 8 – Bloomberg (Adam Haigh): “Financial markets may be underpricing global risks, leaving them vulnerable to a major correction, …European Central Bank Governing Council member Klaas Knot warned. As global stocks surge, measures of volatility suggest unprecedented calm even as crises around the world -- including the Catalan separatists in Spain, Turkey’s diplomatic row with the U.S., North Korea’s missile tests and the danger of a hard Brexit -- make political headlines. ‘It increasingly feels uncomfortable to have low volatility in the markets on the one hand while on the other hand there are risks in the global economy,’ said Knot, who is also the president of the Dutch Central Bank.”

Global Bubble Watch:

October 11 – Wall Street Journal (Carolyn Cui and Manju Dalal): “Investors’ thirst for income is enabling governments and companies in some of the world’s poorest countries to sell debt at lower and lower interest rates. And the global bond boom has even reached Tajikistan. The central Asian country last month raised $500 million in its first-ever international bond sale, paying just 7.125% in annual interest… Greece, which was on the brink of default a few years ago, issued new bonds this past summer, and the National Bank of Greece launched a bond sale Tuesday, marking the first visit of a Greek bank to the credit markets since the country’s sovereign-debt crisis. And June saw the bond-market debut of the Maldives, a tiny nation in the Indian Ocean that raised $200 million in a sale of five-year bonds with a 7% coupon. Speculative-grade bond issuance in the developing world has hit a record $221 billion this year, according to data from J.P. Morgan… and Dealogic, up 60% from the full-year total in 2016.”

October 11 – Financial Times (Shawn Donnan): “The International Monetary Fund has warned that good times in the global economy mask longer-term risks, including a $135tn debt pile in G20 nations that companies and consumers are already finding difficult to service. A day after upgrading its global growth forecasts for this year and next the IMF warned… that benign economic conditions were fuelling an appetite for risk that, together with central banks’ response to the 2008 global crisis, appeared to be laying the ground for a new financial crunch. ‘While the waters seem calm, vulnerabilities are building under the surface [and] if left unattended, these could derail the global recovery,’ said Tobias Adrian, of the IMF’s financial stability watchdog… The US and China each accounted for about a third of the $80tn increase in debt since 2006, the IMF said.”

October 10 – CNBC (Evelyn Cheng): “The next global economic slowdown could come from rising risks outside the banking sector, according to the International Monetary Fund. Leverage in the nonfinancial sector for G-20 economies as a whole has surpassed its pre-crisis high, the IMF said… in its Global Financial Stability Report. Nonfinancial sector debt refers to borrowing by governments, nonfinancial companies and households. The total level of that debt for G-20 economies rose to $135 trillion, or about 235% of aggregate gross domestic product in 2016, surpassing the debt-to-GDP ratio of 210% in 2006, before the financial crisis…”

October 8 – Financial Times (Guy Chazan): “Wolfgang Schäuble has warned that spiralling levels of global debt and liquidity present a big risk to the world economy, in his parting shot as Germany’s finance minister. In an interview with the Financial Times, the Europhile who has steered one of the world’s largest economies for the past eight years, said there was a danger of ‘new bubbles’ forming due to the trillions of dollars that central banks have pumped into markets. Mr Schäuble also warned of risks to stability in the eurozone, particularly from bank balance sheets burdened by the post-crisis legacy of non-performing loans.”

October 11 – Bloomberg (Olga Kharif and Camila Russo): “Regulators worldwide are finding that it’s incredibly hard to control the explosive growth of money tied to no nation. Russian President Vladimir Putin is the latest to call for regulation of cryptocurrencies, saying there are ‘serious risks’ they can be used for money laundering or tax evasion. Finance Minister Anton Siluanov has called for regulating digital money as securities, while central bank officials vowed to work with prosecutors to block websites that allow retail investors access to bitcoin exchanges. ‘We think this is a pyramid scheme,’ said Sergey Shvetsov, first deputy governor of the central bank. Global efforts to regulate digital money have accelerated in the past month since China banned initial coin offerings and ordered all cryptocurrency exchanges to close, following inspections of more than 1,000 trading venues over a six-month period.”

October 12 – CNBC (Arjun Kharpal): “Bitcoin hit a new record high Thursday with rising investor interest causing a rally for the price of the cryptocurrency. Bitcoin climbed 11% to an all-time high of $5,364.10, according to… Coindesk. This surpassed the previous high of $5,013.91 hit on September 2. With Thursday's gains, bitcoin is now up around 454% year-to-date.”

October 12 – Wall Street Journal (Aaron Back): “China’s seemingly insatiable demand for foreign assets has driven up prices for everything from U.S. Treasury bonds to global companies to luxury real estate. Now, a combination of market forces and capital controls are choking off the flow of Chinese cash. Asset markets around the world will have to adjust.”

Fixed-Income Bubble Watch:


October 12 – Financial Times (Miles Johnson): “A boom in issuance of risky debt used to finance takeovers has resulted in a fee bonanza for investment bankers, with revenues generated this year from selling leveraged loans and high-yield bonds close to surpassing their post-crisis peak. Investment banks have made $10.5bn in revenues from selling leveraged finance deals so far this year, up from $6.9bn in 2016 and have hit the highest level since 2013… The surge in fees paid for arranging junk bond and leveraged loan deals reflects an explosion in demand for riskier debt from yield-starved institutional investors, such as pension funds, which have been among the largest buyers of $1.1tn of this debt so far this year. This appetite has helped private equity companies in Europe and the US finance an acquisition spree over the past 12 months larger than at any time since the financial crisis, with leveraged buyouts in Europe and the US this year surpassing $200bn.”

October 10 – Financial Times (Eric Platt): “With eight words last week, US president Donald Trump sent a tremor through Puerto Rico’s $74bn of debt and the broader municipal bond market, where states and local governments borrow to fund critical infrastructure projects and services. The president and former real estate mogul warned, in a heavily scrutinised interview, that ‘we’re going to have to wipe that out’ after Hurricane Maria devastated the island. That knocked the US’s $3.8tn municipal bond market. It suffered outflows in the seven days to October 4, the first redemptions since early July… Retail investors have pulled cash from muni bond funds every day since Mr Trump told investors to ‘say goodbye’ to the debt…”

Europe Watch:

October 11 – Bloomberg (Angeline Benoit, Todd White and Charles Penty): “Spanish Prime Minister Mariano Rajoy stepped up pressure on Catalonia to halt its drive for independence, taking the first step in a process that could strip the region’s separatist government of its limited autonomy and impose direct control from Madrid. Rajoy convened an emergency session of cabinet…, at which ministers agreed to issue a formal request to the Catalan government for confirmation of whether it had declared independence… Catalan President Carles Puigdemont’s response to the request will determine what happens next, Rajoy said… Rajoy’s request is a preamble to triggering Article 155 of the Spanish Constitution, a move that would enable him to suspend Catalonia’s devolved government and take over control of its affairs in what would represent an ultimate defeat of the Catalan leadership.”

October 11 – Bloomberg (Alessandro Speciale, Piotr Skolimowski and Carolynn Look): “European Central Bank policy makers are poised to preserve their commitment to ultra-low interest rates even as they wrangle over how long to keep their bond-buying program going. Members of President Mario Draghi’s Governing Council will meet this month amid discord over whether a strengthening economy means now is the time to plot an end to more than 2 1/2 years of quantitative easing or whether to keep it going until inflation accelerates. Where there is agreement is on keeping a pledge to not raise interest rates until ‘well past’ the end of bond buying, according to euro-area central bank officials… Maintaining that promise would remove one potential point of contention in the debate while offering reassurance to investors that higher borrowing costs won’t be imminent when purchases slow.”

Brexit Watch:

October 12 – Bloomberg (Ian Wishart and Tim Ross): “The European Union said talks hit an impasse over what the U.K. owes when it leaves, increasing the chances of a messy departure as time is running out to clinch a deal. The pound fell to the weakest in a month after chief EU negotiator Michel Barnier said there had been no discussions over the all-important bill that the U.K. has to agree it will pay before the EU will start trade talks. Barnier put the onus firmly on the U.K.’s squabbling government to find the political will to move the talks forward, while both sides raised the prospect of talks breaking down without an agreement -- throwing businesses into a chaotic legal limbo.”

Emerging Market Watch:

October 8 – Bloomberg (Adam Haigh): “Emerging-market investors were handed a timely reminder that political risk is never very far away. The lira briefly tumbled to a record low on Monday morning against a basket of currencies including the euro and the dollar as tensions between Turkey and the U.S. escalated. It’s the last thing the country needs -- with widening twin deficits in Turkey already dampening sentiment together with concern many emerging-market assets will be weakened in a climate of higher U.S. interest rates. Investors this year have already had to cope with President Recep Tayyip Erdogan’s state of emergency and the nation’s companies continue to grapple with vast financing needs… And the yield-hunting global wave of money means that appetite for lira-denominated assets has remained strong and may continue to be so if this latest political spat can be cooled quickly.”

Geopolitical Watch:

October 10 – Reuters (Christine Kim and Eric Beech): “The U.S. military flew two strategic bombers over the Korean peninsula in a show of force late on Tuesday, as President Donald Trump met top defense officials to discuss how to respond to any threat from North Korea. Tensions have soared between the United States and North Korea following a series of weapons tests by Pyongyang and a string of increasingly bellicose exchanges between Trump and North Korean leader Kim Jong Un.”

October 12 – Wall Street Journal (Yaroslav Trofimov): “Here’s one measure of where Turkey stands in today’s world. Russian and Iranian citizens are free to enter the country without a visa. Americans, following the recent spat over the detention of a U.S. consulate employee, are essentially barred from traveling to their fellow North Atlantic Treaty Organization ally. The unfolding breakup between Turkey and the U.S. goes far beyond that dispute. It is fueled by increasing frustration on both sides—and is encouraged by countries most interested in such a separation, especially Russia and Iran. Even in the Syrian war, Turkey now has found itself in a new convergence of aims with Moscow and Tehran—and opposing American goals.”

October 10 – NBC (Andrea Mitchell and Ken Dilanian): “The cybersecurity company FireEye says in a new report to private clients, obtained exclusively by NBC News, that hackers linked to North Korea recently targeted U.S. electric power companies with spearphishing emails.

The emails used fake invitations to a fundraiser to target victims, FireEye said. A victim who downloaded the invitation attached to the email would also be downloading malware into his or her computer network…”

Friday, October 13, 2017

Friday Evening Links

[Bloomberg] Stocks, Bonds Rally as Inflation Debate Lingers: Markets Wrap

[Reuters] Oil rallies nearly 2 percent on China import boost, U.S.-Iran tensions

[Bloomberg] What’s at Stake for Oil Markets After Trump’s Iran Move

[Reuters] Trump strikes blow at Iran nuclear deal in major U.S. policy shift

[Reuters] BOJ's Kuroda does not see excesses building up in markets

Friday's News Links

[Reuters] S&P, Nasdaq hit records on strong retail sales data

[Bloomberg] U.S. Inflation Picks Up on Fuel Costs While Core Gauge Slows

[Bloomberg] U.S. Retail Sales Rise Most Since 2015 on Storm-Related Lift

[CNBC] Sen. Ted Cruz: Tax reform may not happen until early next year

[Bloomberg] Trump Cuts Off Health-Insurer Subsidy, Threatening Obamacare Chaos

[Bloomberg] ECB to Consider Cutting QE Purchases in Half Next Year

[Reuters] ECB homes in on 9 more months of bond buying, at lower volumes

[Reuters] Kuroda says BOJ to keep easy policy, tread different path from Fed, ECB

[CNBC] A US debt ceiling crisis 'certainly would be rating relevant,' S&P says

[Bloomberg] China Exports Remain Resilient as Rising Imports Signal Strength

[CNBC] S&P warns: There's a worrying trend in emerging markets; Turkey and South Africa are prime examples

[WSJ] Trump to End Subsidies to Health Insurers

[WSJ] Central Bankers Use Moment of Calm to Debate How to Fight the Next Crisis

[WSJ] ECB Official Warns About Impact of Extending Bond-Buying Programs

[WSJ] Trump Interviews Stanford Economist John Taylor for Fed Chairman Job

[FT] US demands World Bank overhaul of lending to China

Thursday, October 12, 2017

Thursday Evening Links

[Bloomberg] Stocks Turn Lower, Dollar Gains as Crude Oil Drops: Markets Wrap

[Bloomberg] Trump Is Angry About a Proposal in His Own Tax Plan, Sources Say

[Reuters] White House: Trump is 'some time away' from Fed chair decision

[Reuters] Trump meets economist John Taylor in Fed search - official

[Reuters] Fed 'should defend' inflation target or risk losing credibility: Bullard

[Bloomberg] U.S. Offers Proposal That Could Kill Nafta in 5 Years

[Reuters] Trump's Iran plans driving EU toward Russia and China: Germany

Thursday's News Links

[Bloomberg] U.S. Stocks Slump, Dollar Gains as Crude Oil Drops: Markets Wrap

[Reuters] U.S. producer prices increase as Harvey boosts gasoline prices

[Reuters] New Fed chair could be set in next month: U.S. Treasury Secretary

[CNBC] Powell odds-on favorite for Fed chair amid report Mnuchin is pushing for him

[NYT] Fed Still Puzzled by Inflation, but Rate Increase Is on Track

[Bloomberg] Brexit Talks Hit Deadlock as Both Sides Prepare for Cliff Edge

[Bloomberg] China Wants a Win Where Draghi and Carney Fell Short

[CNBC] Bitcoin hits a new record high above $5,200

[Bloomberg] Missile Threats Aren't the Only Problem for South Korean Bonds

[Reuters] Asked to explain 'calm before the storm' remark, Trump talks North Korea

[WSJ] Say Goodbye to the China Bid

[WSJ] Beijing Pushes for a Direct Hand in China’s Big Tech Firms

[WSJ] Six Reasons Why China Matters

[FT] The ECB’s self-imposed limits complicate its QE exit

[FT] Investment banks ride leveraged loan boom

[WSJ] Turkey and the West Clash, Pleasing Russia and Iran

Wednesday, October 11, 2017

Wednesday Evening Links

[Reuters] Wall Street ticks higher to record close; eyes on earnings, Fed

[Reuters] Fed divide on inflation intensified at September policy meeting

[Bloomberg] Goldman Has a New Way for You to Bet on the Next Banking Crisis

[Reuters] Trump denies seeking nearly tenfold increase in U.S. nuclear arsenal

[WSJ] Fed on Track to Raise Rates Despite Weak Inflation, Minutes Show

[FT] Inflation cloud hangs over Federal Reserve

Wednesday's News Links

[Bloomberg] Stocks Gain, With Japan at Decade High; Euro Rise: Markets Wrap

[Bloomberg] Spain Turns Screws on Catalonia With Threat of Direct Control

[Bloomberg] ECB Wrangling on Stimulus Find Common Ground on Rates, Sources Say

[Reuters] Fed's Kaplan says low 10-year yield an 'ominous' sign

[Reuters] Fed's Evans favors gradual approach to monetary normalization

[Bloomberg] One Man’s Future May Foreshadow Xi’s Plans to Retain Power

[CNBC] Financial leverage outside of banking system surpasses pre-housing crisis high, IMF warns

[CNBC] Wealth manager warns on bond markets creating the 'biggest financial crisis of our lifetime'

[Bloomberg] Global Regulators Play Bitcoin Whack-a-Mole as Demand Explodes

[CNBC] BlackRock earnings easily beat Wall Street expectations as assets jump to almost $6 trillion

[Politico] Republicans to Trump and Corker: Please just stop

[Reuters] U.S. flies bombers over Korea as Trump discusses options

[CNBC] Experts: North Korea Targeted U.S. Electric Power Companies

[FT] Central bankers face a crisis of confidence as models fail

[WSJ] Junk Bond Boom Reaches Far Corners of the World

[WSJ] Fed Minutes Could Detail Views on Weak Inflation, Next Rate Rise

[FT] IMF warns of ‘vulnerabilities’ that could derail global recovery

[Financial Times] Under Xi Jinping, China is turning back to dictatorship

[WSJ] Trump Sets Nafta Goals: Dilute Pact’s Force, Loosen Regional Bonds

[FT] US muni bonds knocked by Trump’s Puerto Rico debt wipeout talk

Tuesday, October 10, 2017

Tuesday Evening Links

[Reuters] Wal-Mart helps Wall Street to new records, but techs curb gains

[Reuters] Oil rises 2 percent on signs rebalancing underway

[CNBC] The contest for next Fed chair is coming down to two pretty different choices

[Bloomberg] Catalans Call Time Out on Independence Bid And Ask Spain to Talk

[CNBC] President Trump’s fight with GOP leaders threatens tax reform

[Bloomberg] Nobel Economist Thaler Says He's Nervous About Stock Market

[WSJ] ‘Passive’ Investing Frenzy Pushes Vanguard to $4.7 Trillion in Assets

[Reuters] Exclusive: U.S. warship sails near islands Beijing claims in South China Sea - U.S. officials

Tuesday's News Links

[Bloomberg] U.S. Stocks Hit New Highs, Spanish Equities Drop: Markets Wrap

[Bloomberg] Spain Readies Forces Able to Seize Catalan Leader Today

[Bloomberg] Trump Allies Fear His Corker Feud Is Putting the GOP Tax Plan at Risk

[Bloomberg] Working-Class Americans Face Growing Debt Burdens, Moody's Says

[CNBC] Market just as dangerous as late 1990s, and bank stocks could 'come crashing down,' analyst Dick Bove warns

[Bloomberg] Yuan Volatility Climbs With Spot After Strong Fix, Zhou Comments

[Bloomberg] China Central Bank Boss Calls for Reform Amid Congress Countdown

[FT] North Korea hacked allied war plans, Seoul lawmaker says

[FT] Outgoing head of PBoC calls for urgent easing of capital controls

[Reuters] North Korean missiles will be able to reach U.S. after modernization: Ifax cites Russian lawmaker

Monday, October 9, 2017

Monday Evening Links

[Bloomberg] U.S. Stocks Slip, Dollar Mixed as Gold Advances: Markets Wrap

[Reuters] Trump-Corker spat complicates drive for tax reform in U.S. Senate

[Reuters] 'Ball in your court:' Britain, EU clash over next Brexit move

[WSJ] Ten Years Ago, the S&P 500 Hit Its Last Record Before the Financial Crisis

[WSJ] Critic of the Establishment Challenges Japan’s Leader

[FT] Trump’s feud with top Republican clouds agenda

[FT] US relations with Turkey take another turn for worse

[FT] Political hotspots across the globe keep investors cautious

Monday's News Links

[Bloomberg] U.S. Stocks Fluctuate Near Record as Dollar Slumps: Markets Wrap

[Bloomberg] Turkish Markets Tumble After Erdogan’s Feud With U.S. Escalates

[Bloomberg] Lira Plunge a Reminder That Fed Isn't Only Emerging Market Risk

[Bloomberg] Spain Warns Catalonia Independence Bid Risks Economic Meltdown

[Reuters] China services sector growth falls to 21-month low in September: Caixin PMI

[WSJ] ECB May Choose a Long, Slow Goodbye to Extraordinary Stimulus

[Bloomberg] Republicans Worry About Keeping Trump’s Middle-Class Tax Promise

[Bloomberg] Thaler, Famed for ‘Nudge’ Theory, Wins Nobel Economics Prize

[Reuters] ECB still concerned about existing stock of bank bad loans: Mersch

[Bloomberg] ECB’s Knot Warns of Market Correction as Risk May Be Underpriced

[NYT] The Economy Is Humming. Bankers Are Cheering. What Could Go Wrong?

[NYT] Wall Street Firms Gambled on Puerto Rico. They’re Losing.

[FT] Transcript: Wolfgang Schäuble bids farewell to the eurogroup

[FT] Head of ETF provider warns on concentration of holdings in bigger stocks

[WSJ] ETF Trading Volume Slumps to Near Three-Year Lows

[Reuters] Iran promises 'crushing' response if U.S. designates Guards a terrorist group

Saturday, October 7, 2017

Saturday's News Links

[Bloomberg] It's Market Mania for Assets All Around the World

[Bloomberg] Fed's Rosengren Stands by Call for Gradual Interest-Rate Hikes

[Bloomberg] Kyle Bass Says ICO Investors Will Get Wiped Out in Crypto ‘Mania’

[Reuters] Spaniards take to streets as Catalonia independence tensions rise

[Reuters] North Korea preparing long-range missile test: RIA cites Russian lawmaker

[Reuters] Trump to unveil new responses to Iranian 'bad behavior': White House

[NYT] Treasury Report Calls for Sweeping Changes to Financial Rules

Weekly Commentary: Kevin Warsh to Lead the Fed in a New Direction

The threat of nuclear crisis with North Korea. Two destructive hurricanes. Puerto Rico devastated and about out of money. The start of a major comprehensive tax reform effort, along with general political mayhem in Washington. The worst mass shooting in U.S. history. In the midst of it all, the President is apparently about to make a potentially momentous decision: A Fed chair will be appointed with a new four-year term.

As has become the norm, markets are happy-go-lucky (at almost daily record highs). How could anything possibly rock the boat? Outside of the financial media, a change of guard at the Fed is hardly newsworthy.

It’s an interesting narrative leading up to the President’s decision. Of course, there’s the typical “hawk” vs. “dove” framework. The Wall Street Journal had an insightful op-ed: “Donald Trump’s Fed Choice: Continuity or Disruption.” And then there was Friday’s Krugman piece in the New York Times: “Will Trump Trumpify the Fed?” – that I will return to.

I am working to prepare myself for the President’s decision. When it comes to the Fed, I have been consistently disappointed over the years. At every turn. Trumpeting the risk of deflation, the Greenspan Fed in the early-nineties took to interest-rate and yield curve manipulation as primary reflationary policy measures. Greenspan recognized how the clever exploitation of contemporary market-based finance yielded the Federal Reserve history’s most potent monetary policy transfer mechanism.

Monkeying with the markets is always a slippery slope. And generations ago it was appreciated that the greatest risk associated with discretionary policymaking was that one mistake invariably leads to another (and another and…).

What began in 1987 with post-crash assurances of ample liquidity for the stock market - and then a few years later a surreptitious bank bailout (after late-eighties “decade of greed” excess) - evolved into a cycle of historic booms and busts. Ever more experimental reflationary measures were the inevitable policy responses.

It has been said that it took a “cold war hawk” like Ronald Reagan to break the ice in relations with the Soviet Union. In that vein, it was the subterfuge of the free-market disciple Alan Greenspan that got the inflationism ball rolling. Back in March 2000, I titled a CBB “John Law and Alan Greenspan - The Great Inflationists.”

Another burst (“tech”) Bubble and only more histrionic deflation fears. It was a bogey man, powerfully conjuring images of the Great Depression. The establishment brought in Dr. Ben Bernanke in 2002, replete with an inflationist doctrine that in most backdrops would have been designated the fringe of lunatic fringe. When it came time to replace Alan Greenspan, I argued “Anyone but Bernanke!” It was astonishing how the establishment – and conventional thinking more generally – had so readily adopted inflationist doctrine.

Sure, it was all seductive; but not even token pushback? The New Age Wall Street “money” machine – backstopped by the Fed, the GSEs and the Treasury - had transfixed the rich, the powerful and the levers of power in Washington. The seeds to our nation’s drift toward socialism – and the counterrevolution that brought Donald Trump to the Whitehouse – were neglectfully scattered by Greenspan and then aggressively fertilized by “helicopter Ben.”

Quality contemporaneous analysis is valuable for providing a historical account to be called upon in the future to counter historical revisionism. Especially in these days of record prices for most assets around the world (securities, real estate and otherwise), it’s important to appreciate the unmitigated disaster that inflationism turned out to be. Bernanke was the lead instigator of “mortgage finance Bubble” reflation that culminated in the “greatest financial crisis since the Great Depression.” No Credit is given for reflating Bubbles.

A top Wall Street executive was lauding the Fed’s “brilliance” Friday morning on Bloomberg Television. Yet the Fed has done nothing close to brilliant for a long time now. The Bernanke Fed doubled-down on experimental inflationist monetary management. While there have been numerous zealous bouts of inflationism throughout history, I know of none that emerged from the test of time as esteemed policymaking. The proponents of contemporary central banking disregard a crucial fact: Now approaching a decade since the start of the crisis period, the world is more addicted than ever to ultra-low rates and massive QE. Inflationism is always a trap.

I was naïve. The degree to which the establishment would embrace inflationism caught me by surprise. Have they finally seen enough? Fed governor Jerome Powell has become the favorite candidate for those preferring to stay the course.

I would much prefer former Fed governor (2006-2011) Kevin Warsh at the helm of the Federal Reserve. He is viewed as the reformer candidate – somewhat of a disrupter that might shake things up a bit. From my perspective, he is more the outcast traditionalist in an age of monetary radicalism. Fed governor Warsh was the most outspoken member of the Fed’s inner circle arguing against Bernanke’s radical monetary doctrine.

Importantly, Warsh is not an inflationist – and for this he is on the receiving end of criticism from the left as well as the right. Willing to stand tall against the powerful consensus view, Warsh recognizes the great risks that come with monetary inflation. He was against QE and - despite the chorus of pundits convinced otherwise – Warsh was right.

Mr. Warsh is generally opposed to the Fed meddling in the markets. As Larry Kudlow suggested, the former Fed governor wants “the Fed out of the day trading business.” Of course, overheated Bubble markets simply cannot contemplate a world where the Fed’s number one priority is anything other than bolstering the markets – with routine assurances, low rates and QE on demand.

If things weren’t already ludicrous enough, the Fed went off the deep end with Bernanke’s 2013 assurances that the Fed would “push back against a tightening of financial conditions.” With booming equities, corporate Credit and derivatives markets having come to dominate system financial conditions, the Fed at that point was basically pre-committing to zero tolerance for market disruptions, corrections, recessions and bear markets. This was a gross assault on free-market Capitalism – a twist of the knife - administered without protest.

The Fed needs to reverse course and return to traditional monetary management. It is imperative to rein in its discretionary power to manipulate markets and whimsically print “money.” It is fundamental that the Fed ends its doctrine of the securities markets as “Too Big to Fail.”

It is taken as fact that the U.S. (and the world more generally) is better off today because of the extreme crisis-era measures taken by the Fed and global central bankers. I vehemently disagree. Today’s faux prosperity is built on a fragile foundation of electronic debits and Credits – contemporary (speculative) finance too often divorced from real economic wealth creation. Central banks have inflated the greatest Bubble in history, a Bubble that created only greater excesses and global imbalances. Already deep structural maladjustment worsened, and vital financial and economic reforms were forestalled.

I could only chuckle at the headline: “Paul Krugman: Trump Is About to Take a Wrecking Ball to the Last Competent Government Institution Left.”

From Krugman’s Friday New York Times piece: “What all this means is that if congressional Republicans play a large role in selecting the next Fed chair, they’ll insist that it be someone who has been wrong about everything for the past decade. Kevin Warsh… certainly fits the bill. He warned about inflation in the midst of global economic collapse; he argued vigorously against doing anything, monetary or other, to fight 10% unemployment; he warned that the United States was about to turn into Greece, Greece I tell you. And he has shown no hint of being chastened by the failure of events to play out the way he expected. Now, I don’t know who Trump will actually pick to head the Federal Reserve. It might actually end up being someone smart, knowledgeable and honest. Hey, there’s a first time for everything. But surely it’s possible, even probable, that the Federal Reserve, like other government agencies, is about to get Trumpified, that one of American policy’s last remaining havens of competence and expertise will soon share in the general degradation. And won’t that be fun when the next crisis hits?”

Regrettably, the Fed is anything but a “haven of competence.” Their progressive policy radicalization has been fundamental to the repeated inflation of ever more destabilizing asset Bubbles - the great culprit when it comes to social strife and divisiveness. As candidate Trump stated unequivocally throughout the campaign, the Fed is in desperate need of new leadership and a new direction. Maybe it was all BS – or perhaps the administration has tied its agenda to equities and (seemingly like everyone else) became a serf to the markets. Yet I’m holding out hope that there is a behind the scenes groundswell of support for rescuing monetary policy from the quagmire of experimental inflationism.

This is not about “hawk” or “dove” – low rates or even actual normalization. And, in the grand scheme of things, I don’t get all that worked up about modest financial deregulation. Responding to Krugman, the next crisis will be no fun whatsoever. A 1929-like systemic crisis of confidence event would not be a surprise.

I have argued that the Fed’s balance sheet is likely on its way to $10 TN. This is a rough guesstimate – expecting that the unwind of unprecedented speculative leverage during the next serious market dislocation would see the Fed again doubling the size of its balance sheet (as it did even after formulating its so-called “exit strategy” in 2011). Such a scenario risks a full-fledged calamity. The fanciful notion of open-ended QE forever must be invalidated. A straight-shooter appealing to my analytical heart, Mr. Warsh authored a provocative 2016 paper titled, “Challenging the Groupthink of the [economics] Guild.”

Adhering to the inflationist mindset, Yellen or Power would surely be willing to double-down on desperate “money” printing operations. Why not “helicopter money” – just toss it about to needy governments, businesses, consumers and securities markets alike? I hold out hope that a Chairman Warsh – along with some fresh faces on the committee – would be willing to hold back the printing presses. Such an incredibly important feat will require a rare combination of competence, communication skills and courage. In my eyes, Kevin Warsh is one of the few individuals associated with the Federal Reserve that has demonstrated much in the way of attributes that will be so vitally important come the next crisis.

Below are excerpts from two articles that help illuminate how Kevin Warsh has distinguished himself from other leading Fed chief contenders:


“The Federal Reserve Needs New Thinking - Its Models are Unreliable, its Policies Erratic and its Guidance Confusing. It is also Politically Vulnerable,” Kevin Warsh, Wall Street Journal, August 24, 2016.

“The conduct of monetary policy in recent years has been deeply flawed… A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed’s tools, strategies, communications and governance. Two major obstacles must be overcome: groupthink within the academic economics guild, and the reluctance of central bankers to cede their new power.

First, the economics guild pushed ill-considered new dogmas into the mainstream of monetary policy. The Fed’s mantra of data-dependence causes erratic policy lurches in response to noisy data. Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated. Its inflation objectives are far more precise than the residual measurement error. Its output-gap economic models are troublingly unreliable.

The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously—an impossible task with the free flow of capital. Its “forward guidance,” promising low interest rates well into the future, offers ambiguity in the name of clarity. It licenses a cacophony of communications in the name of transparency. And it expresses grave concern about income inequality while refusing to acknowledge that its policies unfairly increased asset inequality.

The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word. A simple, troubling fact: From the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of Federal Open Market Committee decisions.

The groupthink gathers adherents even as its successes become harder to find. The guild tightens its grip when it should open its mind to new data sources, new analytics, new economic models, new communication strategies, and a new paradigm for policy.

The second obstacle to real reform is no less challenging. Real reform should reverse the trend that makes the Fed a general purpose agency of government. Many guild members believe that central bankers—nonpartisan, high-minded experts—are particularly well-suited to expand their policy remit. They fail to recognize that central bank power is permissible in a democracy only when its scope is limited, its track record strong, and its accountability assured.”



“The Fed Has Hurt Business Investment - QE is Partly to Blame for Record Share Buybacks and Meager Capital Spending,” Michael Spence And Kevin Warsh, Wall Street Journal, October 26, 2015.

“We believe that QE has redirected capital from the real domestic economy to financial assets at home and abroad. In this environment, it is hard to criticize companies that choose ‘shareholder friendly’ share buybacks over investment in a new factory. But public policy shouldn’t bias investments to paper assets over investments in the real economy.

How has monetary policy created such a divergence between real and financial assets?

First, corporate decision-makers can’t be certain about the consequences of QE’s unwinding on the real economy. The resulting risk-aversion translates into a corporate preference for shorter-term commitments—that is, for financial assets.

Second, financial assets are considerably more liquid than real assets. Trade among financial assets like stocks is far easier than buying and selling real assets like capital equipment. The financial crisis taught an important lesson to investors of all sorts: Illiquidity can be fatal. Financial assets have large liquidity benefits over real assets…

Third, QE reduces volatility in the financial markets, not the real economy. By purchasing long-term securities, the Fed removes significant market volatility from stocks and bonds. Any resulting reduction in macroeconomic volatility—affecting real asset prices—is far more speculative. In fact, much like 2007, actual macroeconomic risk may be highest when market measures of volatility are lowest. Central banks have been quite successful in stoking risk-taking by investors in financial markets… Clearly, market participants believe central bankers use QE, among other reasons, to put a floor under financial asset prices.”



For the Week:

The S&P500 gained 1.2% (up 13.9% y-t-d), and the Dow rose 1.6% (up 15.2%). The Utilities increased 1.0% (up 9.8%). The Banks jumped another 1.5% (up 9.8%), and the Broker/Dealers surged 2.7% (up 20.8%). The Transports slipped 0.3% (up 9.3%). The S&P 400 Midcaps gained 1.3% (up 9.5%), and the small cap Russell 2000 rose 1.3% (up 11.3%). The Nasdaq100 advanced 1.4% (up 24.7%). The Semiconductors jumped 1.7% (up 31.4%). The Biotechs rose 1.9% (up 39.3%). While bullion dipped $4, the HUI gold index rallied 2.8% (up 10.9%).

Three-month Treasury bill rates ended the week at 105 bps. Two-year government yields added two bps to 1.51% (up 32bps y-t-d). Five-year T-note yields increased two bps to 1.96% (up 3bps). Ten-year Treasury yields gained three bps to 2.36% (down 9bps). Long bond yields rose three bps to 2.89% (down 17bps).

Greek 10-year yields dipped five bps to 5.55% (down 147bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 2.41% (down 133bps). Italian 10-year yields gained four bps to 2.15% (up 34bps). Spain's 10-year yields rose 11 bps to 1.71% (up 33bps). German bund yields slipped a basis point to 0.46% (up 26bps). French yields slipped one basis point to 0.74% (up 5bps). The French to German 10-year bond spread was little changed at 28 bps. U.K. 10-year gilt yields were unchanged at 1.36% (up 13bps). U.K.'s FTSE equities index jumped 2.0% (up 5.3%).

Japan's Nikkei 225 equities index rose 1.6% (up 8.2% y-t-d). Japanese 10-year "JGB" yields dipped one basis point to 0.06% (up 2bps). France's CAC40 added 0.6% (up 10.2%). The German DAX equities index rose 1.0% (up 12.8%). Spain's IBEX 35 equities index sank 1.9% (up 10.2%). Italy's FTSE MIB index dropped 1.3% (up 16.4%). EM equities were mixed. Brazil's Bovespa index rallied 2.4% (up 26.3%), while Mexico's Bolsa was little changed (up 10.2%). India’s Sensex equities index advanced 1.7% (up 19.5%). China’s Shanghai Exchange was closed for holiday (up 7.9%). Turkey's Borsa Istanbul National 100 index gained 1.2% (up 33.3%). Russia's MICEX equities index rose 0.8% (down 6.2%).

Junk bond mutual funds saw inflows of $646 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 3.85% (up 43bps y-o-y). Fifteen-year rates gained two bps to 3.15% (up 43bps). The five-year hybrid ARM rate dipped two bps to 3.18% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (up 57bps).

Federal Reserve Credit last week declined $3.7bn to $4.420 TN. Over the past year, Fed Credit was little changed. Fed Credit inflated $1.609 TN, or 57%, over the past 256 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.7bn last week to $3.366 TN. "Custody holdings" were up $214bn y-o-y, or 6.8%.

M2 (narrow) "money" supply last week expanded $15.4bn to $13.696 TN. "Narrow money" expanded $664bn, or 5.1%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits slipped $4.0bn, while Savings Deposits rose $15.3bn. Small Time Deposits added $2.5bn. Retail Money Funds dipped $1.0bn.

Total money market fund assets were about unchanged at $2.741 TN. Money Funds increased $86bn y-o-y, or 3.2%.

Total Commercial Paper rose another $10bn to a 16-month high $1.069 TN. CP gained $153bn y-o-y, or 16.7%.

Currency Watch:

The U.S. dollar index gained 0.8% to 93.8 (down 8.4% y-t-d). For the week on the upside, the Swedish krona increased 0.4% and the Brazilian real gained 0.2%. For the week on the downside, the British pound declined 2.5%, the New Zealand dollar 1.6%, the Mexican peso 1.5%, the South African rand 1.4%, the Swiss franc 1.2%, the Australian dollar 0.9%, the euro 0.7%, the Singapore dollar 0.5%, the Norwegian krone 0.5%, the Canadian dollar 0.5%, and the Japanese yen 0.1%. The Chinese renminbi was unchanged versus the dollar this week (up 4.39% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.9% (down 1.7% y-t-d). Spot Gold slipped 0.3% to $1,277 (up 10.8%). Silver gained 0.7% to $16.79 (up 5.1%). Crude dropped $2.38 to $49.29 (down 8%). Gasoline fell 2.0% (down 7%), and Natural Gas sank 4.8% (down 23%). Copper jumped 2.5% (up 21%). Wheat fell 1.1% (up 9%). Corn dropped 1.5% (down 1%).

Trump Administration Watch:

October 1 – Wall Street Journal (Felicia Schwartz): “President Donald Trump said he didn’t think it was worth pursuing negotiations with North Korean leader Kim Jong Un, a day after his secretary of state revealed the U.S. was in direct contact with Pyongyang. ‘I told Rex Tillerson, our wonderful Secretary of State, that he is wasting his time trying to negotiate with Little Rocket Man,’ Mr. Trump said on Twitter… ‘Save your energy Rex, we’ll do what has to be done!’”

October 5 – Bloomberg (Erik Wasson): “House and Senate Republicans took their first concrete steps… toward enacting a major U.S. tax cut by advancing budget resolutions for fiscal 2018 -- and it only gets harder from here. ‘It’s uphill, there’s no doubt about that,’ Senator Orrin Hatch of Utah, chairman of the tax-writing Finance Committee, told reporters… Republicans are arguing over the size of proposed tax cuts, whether those cuts should add to the federal deficit, and which tax breaks to eliminate -- in particular the deduction for state and local taxes. Lawmakers say there will be more fights ahead on other tax breaks for individuals and businesses as the GOP tries to reach its longtime tax-cut goals. ‘I think every one of these is going to be hard,’ said Senator John Thune of South Dakota, a member of Republican leadership and the Finance Committee.”

October 4 – Reuters (David Morgan and Susan Cornwell): “The U.S. budget deficit is proving to be a major obstacle to the tax reform plan being offered by President Donald Trump and top congressional Republicans, with one leading Senate hawk saying a week after the plan was introduced that any enlarging of the fiscal gap could kill his support. From proposed infrastructure enhancements to a military build-up, the deficit long ago put the brakes on major new federal spending programs; now Trump’s tax-cut proposal is threatened. ‘It looks to me like the administration’s already running for the hills. It looks to me like some of the tax-writing chairmen are already running for the hills ... I’m disheartened by the lack of intestinal fortitude I’m seeing,’ Sen. Bob Corker said. The main problem is that the federal government is swimming in red ink with an annual deficit of $550 billion and a national debt -- the accumulation of past deficits and interest due to lenders to the U.S. Treasury -- exceeding $20 trillion.”

October 4 – The Hill (Scott Wong and Naomi Jagoda): “Republicans are feeling antsy over a key provision in their tax plan that could put some of the party’s most vulnerable members in the House in deeper jeopardy. The GOP tax plan would raise $1.3 trillion over the next decade by eliminating a deduction for state and local taxes. The provision would help Republicans pay for lower rates, but could hit people hard in high-tax states such as New York, New Jersey and California. In the House, Republicans in swing districts disproportionately represent constituencies where the tax deduction is important, creating an immediate campaign ad for Democrats. A few Republicans are already warning that they’ll oppose their party’s tax overhaul if the deduction is a part of the plan.”

October 3 – CNBC (Ben White): “Tax reform, we have a problem. President Donald Trump and the Republican Congress are betting their 2018 electoral fortunes on getting a big tax bill signed into law by the end of the year. Without it, the GOP will be zero-for-two on big-ticket items following the Obamacare repeal failure. But significant problems are already emerging that could turn their hopes into disaster — or at least into a much less ambitious, temporary tax cut bill. The problems begin with Senate Republicans, who also torched Obamacare repeal. Last week, Sen. Bob Corker, the Tennessee Republican now unchained from political considerations after announcing he won't run again, said he would not vote for a bill that significantly adds to the deficit. ‘With realistic growth projections, it cannot produce a deficit’ Corker said. ‘There is no way in hell I'm voting for it.’ That ‘realistic growth projections’ line is key.”

October 2 – CNBC (Jeff Cox): “Profits that companies are holding overseas would be brought back home at a tax rate that looks to be around 10%, according to current White House estimates. Gary Cohn… said the tax reform plan the administration supports seeks to bring back what could be $3 trillion in offshore wealth, but at a reasonable rate. ‘We are not giving companies the choice. They are going to pay the rate if they have the money overseas,’ Cohn said… ‘That's how we catch up from the worldwide system to the territorial system.’”

China Bubble Watch:

October 3 – Financial Times (Lucy Hornby): “China’s Communist party is making clear that it expects to dictate business decisions — not only at state-owned enterprises, but also at private companies and joint ventures with foreign partners. Under President Xi Jinping, the party has become more assertive, reclaiming functions that the civil government and industrial groups carved out during decades of liberalisation. Beijing has largely abandoned a list of promised economic liberalisation issued four years ago, opting instead for greater control by the party and state over the economy and civil society. For businesses, that control takes the form of party cells, long a feature of SOEs but increasingly a part of corporate life at private companies and foreign joint ventures. In the past week, the party has moved to define its role in business. A government statement laid out Beijing’s definition of ‘entrepreneurship’, saying it involves patriotism and professionalism, followed by observing discipline, obeying laws, innovation and serving society.”

October 1 – Bloomberg: “China’s official factory gauge rose to a five-year high, signaling that efforts to clean up the financial sector and the environment aren’t damping economic growth yet. The manufacturing purchasing managers index rose to 52.4 in September, compared with a projected 51.6… and 51.7 in August. The non-manufacturing PMI stood at 55.4 compared with 53.4 a month earlier.”

October 1 – Financial Times (Xinning Liu and Gabriel Wildau): “Chinese banking regulators have told lenders to crack down on the use of consumer loans to finance home purchases, the latest effort to cool down the overheated property market and rein in financial risk. In principle, Chinese banks enforce a stringent minimum downpayment of 20% on first mortgages. For second homes, the requirement is about 60% in big cities. But this can, in effect, drop to zero if homebuyers use other sources of credit to finance the downpayment. Chinese lenders issued a net Rmb1.28tn ($192bn) in short-term household loans — the category targeted by the latest crackdown — in the first eight months of this year, up from Rmb651bn for all of 2016…”

October 2 – Wall Street Journal (Nathaniel Taplin): “It’s not easy being an entrepreneur in China. A high-level document published last week by China’s cabinet emphasized that entrepreneurs are important contributors to growth—but also that they need to be more patriotic and approach their role with the mind-set of serving society. Little wonder private investment has been weak for years. This weekend’s move by China’s central bank… is unlikely to do much to lift the dark mood of China’s private sector. That’s especially given the clear tilt of China’s ‘reform’ agenda back toward the state under President Xi Jinping.”

October 1 – Bloomberg: “China’s central bank said it will reduce the amount of cash lenders must hold as reserves from next year, with the size of the cut linked to the flow of funding to parts of the economy where credit is scarce. The targeted measures apply to all major banks, 90% of city commercial banks, and 95% of rural commercial lenders, the People’s Bank of China said… Cuts will range from 0.5 percentage point to 1.5 percentage point depending on how much business banks do with small enterprises, agricultural borrowers and startups. Foreign banks will also be eligible for the cut should they meet the requirements.”

Central Banker Watch:

October 4 – Financial Times (Claire Jones): “The European Central Bank’s policymakers are keen to press ahead with plans to end their bond-buying spree next year — despite some reservations on wage inflation and the strength of the euro. Accounts of the bank’s September vote… suggest members of its governing council were increasingly confident that the region’s economic recovery would last. Market developments were favourable, while there were ‘nascent’ signs of reflationary forces. ‘A view was put forward that conditions were increasingly falling into place that would allow the intensity of monetary policy accommodation to be adapted and would provide an opportunity to scale back the Eurosystem’s net asset purchases,’ the accounts read. The ECB is widely expected to announce that it will wind down QE from January 2018 at its October 26 vote.”

October 3 – Financial Times (Adam Samson): “As central banks begin shrinking their balance sheets, they risk triggering another financial crisis, something that may be sharpened by the shift away from active investing, JPMorgan’s top quant strategist has warned. Central banks are expected to begin next year the process of unwinding the $15tn or so in financial assets they purchased over the past decade, said Marko Kolanovic, global head of macro quantitative and derivatives research… ‘Such outflows (or lack of new inflows) could lead to asset declines and liquidity disruptions, and potentially cause a financial crisis,’ said Mr Kolanovic… ‘The timing will largely be determined by the pace of central bank normalisation, business cycle dynamics and various idiosyncratic events, and hence cannot be known accurately.’ Mr Kolanovic pointed out that ‘this is similar to the 2008 [Great Financial Crisis], when those that accurately predicted the nature of the GFC started doing so around 2006.’”

Global Bubble Watch:

October 1 – Bloomberg (David Welch): “Here are two facts that defy logic: By the end of the year, electric-car maker Tesla Inc. will have burned through more than $10 billion without ever having made 10 cents. Yet companies around the world are lining up to compete with it. Almost 50 new pure electric-car models will come to market globally between now and 2022, including vehicles from Daimler AG and Volkswagen AG. General Motors Co. raised the stakes Monday by pledging to sell 20 all-electric vehicles by 2023, including launching two new EVs in the next 18 months. Even British inventor James Dyson is getting into the game, announcing last week that he’s investing two billion pounds ($2.7bn) to develop an electric car and the batteries to power it.”

October 4 – Bloomberg (James Crombie): “President Donald Trump’s starting point for repaying Puerto Rico’s $74 billion in debt -- zero -- isn’t just hallmark behavior from the man who wrote ‘The Art of the Deal.’ It recalls some classic emerging-market sovereign debt restructurings of recent years. Think Argentina, which long argued that its ability to repay $100 billion in debt was next to nothing. Every time the populist president spoke about the country’s liabilities, creditors were cast as ‘vultures’ … And there’s Ecuador, where populist President Rafael Correa rose to power in 2007 on an anti-investor platform and declared the national debt illegitimate. True, Puerto Rico is a commonwealth and the liabilities are municipal bonds, not U.S. sovereign debt, but Trump’s suggestion that ‘you can say goodbye to that’ debt bears the hallmarks of a populist leader facing tumult in the streets.”

October 3 – Bloomberg (Shaji Mathew): “It’s a bumper bond harvest in the Middle East and North Africa, with governments raking in $23.5 billion in the past week alone. Not only do the sales boost 2017’s offerings to a new record, it also firms up JPMorgan Chase & Co.’s lead as the region’s top manager for a second straight year… The borrowing binge pushes sales from the Middle East and North Africa to a record $89 billion this year.”

October 4 – Bloomberg (Emily Cadman): “Home ownership among young Australians has fallen to the lowest level on record, as an explosive property boom squeezes out all but the wealthiest. Supercharged by record low interest rates, a lack of supply and a tax system that favors property investors, home prices have surged more than 140% in the past 15 years, propelling Sydney past London and New York to rank as the world’s second-most expensive housing market… In response, home ownership among the young has plunged: only 45% of 25-to-34 year-olds own their own home, down 16 percentage points from the 1980s, with almost half the decline coming in the past decade.”

Fixed-Income Bubble Watch:

October 4 – Bloomberg (Brian Chappatta): “Even before Wall Street awoke, Wednesday looked like a wild day for the nation’s $3.8 trillion municipal-bond market. Few might have predicted just how wild things would get. President Donald Trump had suggested late the previous night… that the beleaguered U.S. commonwealth of Puerto Rico -- bankrupt even before Hurricane Maria hit last month -- might simply wipe out its $74 billion of municipal debt. On Wednesday, Puerto Rico’s beaten-down benchmark bonds plummeted from an already unprecedented 44 cents on the dollar to as little as 30.25 cents. ‘It may possibly be the end of the municipal bond market as we know it,’ Harry Fong, an analyst at MKM Partners, wrote…”

October 4 – Bloomberg (Justin Sink and Jennifer Epstein): “President Donald Trump’s budget chief said not to take literally the president’s suggestion that Puerto Rico’s debt would be ‘wiped out,’ even as the territory’s bonds plunged to a record low on Wednesday: 32 cents on the dollar. ‘I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem,’ Mick Mulvaney, director of the White House budget office, said… Puerto Rico… is dealing with a disaster worsened by the long-term debt crisis that led it to declare a form of bankruptcy this year. The commonwealth’s government for decades has been plagued by budget deficits and borrowed $74 billion in a spree enabled by a yield-hungry Wall Street. After the president suggested that the debt must be erased, a benchmark general-obligation bond due in 2035 plunged 12 cents on the dollar...”

October 2 – CNBC (Lauren Hirsch): “The percentage of U.S. retailers with high-risk CCC ratings has doubled since the beginning of the year, according to a new report by S&P. Eighteen percent of U.S. retail ratings are in the CCC range… A CCC rating indicates that an obligation is vulnerable to nonpayment and that the ability to pay the obligation could hinge on whether business conditions are favorable. The bankruptcy filing of iconic Toys R Us last month, which took many insiders by surprise, further spooked an already rattled industry.”

Federal Reserve Watch:

October 4 – Financial Times (Sam Fleming): “Central bankers are steering the economy without the benefit of a reliable theory of what drives inflation, a former top Federal Reserve policymaker said, as he called for policymakers to pay less attention to theoretical models and more to actual data. Daniel Tarullo… said economists displayed a paradoxical faith in the usefulness of unobservable concepts such as the natural rate of unemployment or neutral real rate of interest, even as they expressed doubts about how robust those concepts were. He was particularly doubtful about the weight inflation expectations play in rate-setting policy, given the ‘range and depth of unanswered questions’ about how they are formed and measured. ‘The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policymaking,’ said Mr Tarullo in a speech…”

October 4 – Bloomberg (Christopher Condon and Craig Torres): “On a Wednesday in mid-September, a group of progressive activists concerned about the stewardship of the American economy packed a meeting room on Capitol Hill with staff of Senate Democrats. Part strategy session and part pep talk, the gathering had a very specific aim. ‘We’ll do whatever we can do to prevent Kevin Warsh from taking on the role of chair of the Federal Reserve,’ Jennifer Epps-Addison, president of the Center for Popular Democracy, told the gathering. The attack from the liberal group on the Republican former Fed governor wasn’t surprising. But a few days later, a group closer to him on the political spectrum weighed in. Karl Smith, director of economic research at the libertarian Niskanen Center, assembled a blog for the Washington-based think tank entitled, ‘Just Say No to Kevin Warsh.’”

U.S. Bubble Watch:

October 5 – Bloomberg (Piotr Skolimowski): “Puerto Rico faces a government shutdown on Oct. 31, including halting its hurricane recovery, if Congress doesn’t provide billions in emergency funds, said Treasury Secretary Raul Maldonado. The U.S. commonwealth’s bankrupt government is burning through the $1.6 billion it had on hand before Hurricane Maria ravaged the island… With widespread damage to telecommunications systems and the electricity grid, Maldonado doesn’t expect to begin collecting sales tax for at least another month, he said… ‘I don’t have any collections, and we are spending a lot of money providing direct assistance for the emergency,’ he said…”

October 2 – Financial Times (Eric Platt): “Puerto Rico will need ‘tens of billions’ of dollars in aid from Washington as it struggles to stabilise a humanitarian crisis in the wake of Hurricane Maria, according to the island’s treasury secretary… The hurricane crippled the bankrupt US territory’s electric grid, plunging much of the island into darkness, knocking out its communication network and leaving many of its 3.4m residents without drinking water. While relief workers have fanned out across Puerto Rico, the governor warned on Monday that 75% of the island would still not have electricity restored through the power grid by the end of the month.”

October 2 – Reuters (Lucia Mutikani): “A measure of U.S. manufacturing activity surged to a near 13-1/2-year high in September as disruptions to the supply chains caused by Hurricanes Harvey and Irma resulted in factories taking longer to deliver goods and boosted raw material prices. Still, details of the Institute for Supply Management’s (ISM) survey… underscored the economy’s underlying momentum, with factories reporting stronger order growth last month. A measure of factory employment hit its highest level since 2011.”

October 2 – Reuters (Richard Leong): “The U.S. economy is on track to grow at a 2.7% annualized pace in the third quarter, based on the stronger-than-forecast rise on construction spending in August and a surprise acceleration in factory activity in September, the Atlanta Federal Reserve’s GDP Now forecast model showed…”

October 3 – Reuters (Nick Carey): “Major automakers… posted higher U.S. new vehicle sales in September as consumers in hurricane-hit parts of the country replaced flood-damaged cars, extending a rally in their shares that began when Hurricane Harvey hit southeast Texas in late August. Analysts and industry consultants had predicted hurricanes Harvey and Irma would provide automakers with their first monthly gains in 2017. Sales had been weak after a strong run since 2010 that culminated in record sales of 17.55 million units in 2016… The seasonally adjusted annualized rate of U.S. car and light truck sales in September rose to 18.57 million units from 17.72 million units a year earlier…”

October 3 – Wall Street Journal (Laura Kusisto): “A chill that started in the New York and San Francisco rental-apartment markets last year is spreading to less expensive cities. Several metros that enjoyed strong rent growth last year dropped off sharply in the third quarter of 2017. Dallas posted annual rent growth of 2.8% in the third quarter, down from 5% in the same quarter a year earlier… In the urban core… rent growth was essentially flat. Likewise, rents in Charlotte, N.C., grew just 2.5% year-over-year in the third quarter, down from 4.2% in the same quarter a year earlier. Higher-flying markets slowed as well.”

October 2 – CNBC (Oshrat Carmiel): “Manhattan condo buyers who rent out their apartments are getting little more yield than they would with government debt. Newly purchased condos that were listed for lease in the second quarter brought their owners a median return of 2.5%, according to… StreetEasy. It’s been stuck at that level since the end of last year, the lowest in data going back to 2010. The median yield on relatively risk-free 10-year Treasury notes was 2.25% in the second quarter. ‘This is the lowest point we’ve seen in history,’ Grant Long, a senior economist at StreetEasy, said… ‘It’s a steady downward trend.’”

Europe Watch:

October 4 – Bloomberg (Angus Berwick and Sonya Dowsett): “Catalonia will move on Monday to declare independence from Spain after holding a banned referendum, pushing the European Union nation toward a rupture that threatens the foundations of its young democracy. Catalan President Carles Puigdemont said he favored mediation to find a way out of the crisis but that Spain’s central government had rejected this. Prime Minister Mariano Rajoy’s government responded by calling on Catalonia to “return to the path of law” first before any negotiations.”

October 1 – Financial Times (Tony Barber): “After Catalonia’s chaotic, disputed referendum on independence, Mariano Rajoy, Spain’s prime minister, will have to display political skills of the highest order. Sunday’s illegal vote has drastically polarised Catalonian society. It has fuelled tensions between the region’s government and the authorities in Madrid to an intensity unseen since Spain’s return to democracy in the late 1970s. Mr Rajoy faces an extraordinarily difficult task. He is adamant that it is his government’s fundamental duty to uphold the law and preserve the integrity of the Spanish state.”

Brexit Watch:

October 5 – Bloomberg (Tim Ross and Kitty Donaldson): “U.K. Prime Minister Theresa May is losing the confidence of her colleagues and should consider stepping down, a former minister suggested, after a key speech aimed at revitalizing her leadership descended into chaos. Conservative lawmaker Ed Vaizey is the first member of Parliament since the speech to publicly air concerns about May continuing as leader, adding that he believed many of his colleagues feel the same. Vaizey was a culture minister under May’s predecessor and left when David Cameron resigned. If more Tories join him on the record in asking her to go, May’s position could become untenable.”

Japan Watch:

October 1 – Bloomberg (Isabel Reynolds and Maiko Takahashi): “Support for Japanese Prime Minister Shinzo Abe fell in two polls…, three weeks before a general election where Tokyo Governor Yuriko Koike’s new Party of Hope threatens to eat into his majority. The premier’s approval rate dropped below his disapproval rate in polls… Almost 46% of respondents to the Kyodo survey said they saw Abe as an appropriate person to be prime minister, compared with 33% who chose Koike…”

October 1 – Bloomberg (Toru Fujioka): “Confidence among Japan’s big manufacturers has improved to the highest level in a decade… Sentiment among large manufacturers rose to 22 from 17 three months ago, the highest level since September 2007, (estimate 18), according to the quarterly Tankan survey…”

Emerging Market Watch:

October 3 – Wall Street Journal (Georgi Kantchev): “The amount of money flowing into emerging markets is set to top $1 trillion in 2017, the biggest flow of funds in three years… Nonresident capital flows to emerging markets are likely to rise to $1.1 trillion in 2017 and edge up to $1.2 trillion in 2018, according to the Institute of International Finance… Geopolitical tensions could escalate, while central banks in the developed world might move faster than expected when tightening the monetary policies that have damped returns in home markets. Investors could also be put off emerging markets if the dollar continues its recent upswing or if President Donald Trump follows through on plans to implement protectionist policies. For now, though, money is continuing to move into emerging markets.”

October 3 – Wall Street Journal (Peter Grant): “Investors are showing more interest in commercial real estate in Asia, South America and other emerging markets, where growth trends and the lure of outsize returns overshadow the additional political and financial risks these regions can pose. From 2012 to 2016, investors mostly were fleeing markets like Brazil, Russia and India as those countries were hit by political turmoil, weak growth and shaky values. But in the last 18 months, some of the biggest names in real-estate investing have become more bullish on emerging markets as growth has picked up and some governments implement reforms.”

Leveraged Speculator Watch:

October 3 – Financial Times (Lindsay Fortado): “Private equity and hedge fund firms are lending to companies at the highest rate ever, driving up competition in the sector and forcing funds to look outside the US for more opportunities. Private credit, which has sprouted while post-crisis regulation curtailed the amount that banks were willing to lend, is growing at a rate not seen since the hedge fund industry boom in the 1990s. Private credit funds managed about $600bn at the end of last year, according to… Preqin. That figure could grow to $1tn by 2020, according to two industry lobby groups…”

Geopolitical Watch:

September 30 – Reuters (Dirimcan Barut): “Turkey’s President Tayyip Erdogan said… Iraqi Kurdish authorities would pay the price for an independence referendum which was widely opposed by foreign powers. Iraq’s Kurds overwhelmingly backed independence in Monday’s referendum, defying neighboring countries which fear the vote could fuel Kurdish separatism within their own borders and lead to fresh conflict. ‘They are not forming an independent state, they are opening a wound in the region to twist the knife in’ Erdogan told members of his ruling AK Party…”