Credit Bubble Bulletin : January 2017

Now that was one eventful week. President Trump wasted not a minute in making good on a series of campaign promises. A bevy of executive orders moved to rein in Obamacare, withdraw from Trans-Pacific Partnership (TPP) trade negotiations, tighten immigration, cut regulation and advance the Keystone Pipeline. No earth-shattering surprises there. Perhaps more startling, Team Trump had yet to even unpack before broaching radical notions such as abandoning America's strong dollar policy, imposing a 20% border tax on imports from Mexico and opening direct confrontation with the media. Friday evening from the WSJ: “Trump’s First Week: Governing Without a Script.”

At least for this week, I’ll leave it to others to pontificate on the economic merits of Trump policymaking. Dow 20,000 is testament to the market’s ongoing fixation with tax reduction and reform, de-regulation and imminent fiscal stimulus. There were enough disquieting developments this week to dent confidence, though break-out bullish exuberance proved resilient. Unwavering faith in the course of central banking surely underpins the markets, confidence that I expect to be challenged in 2017.

My focus – one that the world now largely neglects – is on unsound global finance. It’s such an extraordinary backdrop – in all things monetary, in politics, geopolitics and the markets. Yet it is anything but a new experience for speculative markets to disregard latent financial fragilities. And we’ve witnessed in past episodes the capricious nature of market psychology. There’s something to glean from each one.

I think back to the summer of 1998. Markets were surging to record highs, led by monster advances in bank and financial stocks. The mantra was “the West will never allow Russia to collapse” – certainly not after the devastating Asian Tiger debacle. The simultaneous autumn implosions of Russia and LTCM not only punctured the financial Bubble, they almost brought down the global financial system.

Bolstered by “The Committee to Save the World” and all the Fed’s Y2K histrionics, powerful Bubble reflation saw Nasdaq almost double in 1999. Fear somehow just vanished as greed took full control. The U.S. was the indisputable leader of the free-world; there was an unassailable New Paradigm of technology-induced prosperity; America was the vanguard of technological revolution; and the dollar was unconditional king. With the clairvoyant Maestro leading U.S. and global central bankers, the New Millennium was destined to be the golden age of prosperity. Naysayers were tarred and feathered, yet that didn’t change the harsh reality that finance was fundamentally unsound.

These days, markets have grown convinced that Beijing will avert Chinese financial and economic crisis. The Bank of Japan will secure bond prices in Tokyo – no matter how much government debt is issued. The ECB will hold together Italy, Portugal, Spain and euro integration more generally. The Fed will not tolerate any meaningful tightening of financial conditions, ensuring the sustainability of bull markets in U.S. financial assets. The U.S. and king dollar provide a stable foundation for global finance that, along with ongoing Chinese growth, will hold EM debt crisis at bay. And, more generally, the Fed and international central bankers will continue backstopping global markets, guaranteeing ample liquidity and buoyant securities prices. Bear markets – let alone crisis – are simply intolerable.

Examining the backdrop, I think mostly deeply of 2007. For the most part, things looked pretty good at the time – at least superficially. The U.S. and global economy were generally viewed as robust, certainly strong enough to withstand some issues at the fringe of mortgage finance (subprime). Very few at the time recognized the profound financial and economic fragilities that had developed over the mortgage finance Bubble period. In general, policymakers and market participants were oblivious to how distortions in the pricing and issuance of mortgage finance had become such a critical systemic issue. Virtually everyone missed the key analysis: Perceived solid economic fundamentals were no match for deeply unstable financial and market underpinnings. It was a major Bubble, and it would burst.

I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere. Indeed, the world would be altogether different if not for the past year’s $2.0 TN or so of global central bank liquidity injections – and expectations for only somewhat less this year. It’s noteworthy that few market strategist even mention QE these days – as if it no longer matters. With the Fed having suspended QE in 2014, there’s a general perception in the U.S. that markets will transition easily away from QE. Yet global liquidity is “fungible.” How much U.S. bound liquidity has arrived – directly or indirectly – via ECB, BOJ and BOE QE operations? Surely flows have been enormous – hundreds of billions or, likely, more.

Fixated so on Trump, markets have lost focus on the crucial issue of global QE prospects. Expect this to be a short-term phenomenon. The ECB and BOJ are in the middle of colossal policy mistakes. Both grabbed the QE hot potato from Federal Reserve – and now they’re stuck. Both have been buying massive quantities of government debt at highly inflated Bubble prices. Both doubled-down in 2016. Both should be addressing exit strategies but are afraid.

Mario Draghi has been using the electronic printing press as a desperate measure to hold the euro together. The BOJ succumbed to a fool’s errand of pegging government bond yields near zero. European yields have begun rising briskly on the prospect of reduced central bank purchases. The Bank of Japan faces a choice of either massive ongoing purchases necessary to hold yields down – with negative ramifications for the yen – or admitting to a policy blunder and dealing with a spike in yields.

I view the global monetary backdrop as highly problematic. Let’s focus first on Europe. This week saw Italian yields jump 22 bps to 2.23%, the high since July 2015. Portuguese yields surged 32 bps to 4.14%, trading above 4.0% for the first time since March 2014. Greek yields rose 15 bps to 7.11%. Even French yields rose 13 bps this week to 1.03%, the high since July 2015. It’s worth noting that the spread between French and German 10-year yields widened nine bps this week (to 57bps) to the widest level since April 2014.

January 25 – Wall Street Journal (Tom Fairless): “A top European Central Bank official signaled… that the ECB should soon start to wind down its €2.3 trillion bond-purchase program, a much anticipated move that is expected to trigger volatility in financial markets. ‘I am...optimistic that we can soon turn to the question of an exit’ from easy-money policies, said Sabine Lautenschläger, who sits on the ECB’s six-member executive board… The ECB ‘must get ready for better times,’ Ms. Lautenschläger said.”

January 26 – Financial Times (Claire Jones): “Mario Draghi will be disappointed. It has taken just a week after the European Central Bank’s latest policy vote for the governing council’s two most hawkish members to cast doubt on his plans to buy €780bn-worth of bonds under the landmark quantitative easing programme this year. Jens Weidmann, the Bundesbank president, has echoed the remarks his fellow German Sabine Lautenschläger, a member of the ECB’s executive board, made Tuesday and indicated the debate on trimming QE should begin soon. ‘The economic outlook at the beginning of the year is quite positive and the inflation rate is gradually approaching the ECB’s definition of price stability. If this price development is sustainable, the requirements for the withdrawal from the loose monetary policy are met,’ Mr Weidmann said…”

German central bankers appear increasingly anxious - and less willing to maintain a low profile. Germany’s CPI jumped to a (non-deflationary) 1.7% y-o-y rise in December, the strongest pace since July 2013. December Import Prices were up 3.5% y-o-y, the strongest since early 2012. There are important German elections this fall. The ECB is scheduled to reduce monthly purchases from 80 billion euros to 60 billion in April. Expect the more hawkish contingent at the ECB to begin pushing for a 2017 end to QE operations.

While the issue garners little attention these days, it appears increasingly likely that euro zone central banks will sustain large losses on their bond portfolios. Perhaps it doesn’t matter. Or perhaps it will embolden the “hawks” – and even, at some point, unnerve the markets. It’s important uncharted territory for policymakers and the markets. After early-2016 policy moves, markets turned fully persuaded that central banks were willing and able to unleash unlimited resources to support market liquidity and securities prices. This assumption is now deeply embedded in securities prices – across asset classes and around the globe.

Much has changed in a year. Brexit, Trump, crude and commodities prices, equities markets, bond yields and inflationary dynamics more generally – to name only a few. A strong case can be made that desperate central bank measures pushed the global bond Bubble to speculative “blow off” extremes – just as inflationary forces garnered some momentum. While yields have for the most part reversed sharply, a possible major market (burst Bubble) adjustment has been held at bay by ongoing massive QE.

On the political front, President Trump’s America First – anti-globalization, anti-establishment – agenda also complicates what had become a rather predictable central banking environment (“whatever it takes” in the name of robust global securities markets). Sure, Federal Reserve officials can continue to lecture as if their purpose in life is wholly dictated by the “dual mandate.” Yet Yellen – following in the footsteps of predecessors Bernanke and Greenspan – is an activist promoter of globalization and global securities markets. It’s interesting to hear even some of the most dovish Obama Fed appointees take on an almost hawkish tone when it comes to potential Trump fiscal stimulus. Might the Fed choose to adopt a less activist stance down the road when markets respond negatively to aspects of the Trump agenda?

Throughout the financial crisis until now, global central bankers have been a united and unifying force. Can this dynamic be maintained in a backdrop of rising animosity within societies/political ideologies and between governments and nations? In the event of a U.S. initiated trade war, should we expect, for example, such close cooperation between the Fed, the Bank of Mexico and the People’s Bank of China?

And what are the ramifications for the Trump Administration ditching the so-called “strong dollar policy”? Might we see Tweets attacking ECB and BOJ QE on grounds they’re part of a currency devaluation strategy? Trump has been critical of the Fed. He’s surely no proponent of the euro experiment and the ECB’s approach to “whatever it takes” monetary management. There’s great global uncertainty with regards to future trade relations, inflation, fiscal deficits and monetary policy. Past market performance may not be all that relevant to a quite divergent future.

January 24 – New York Times (Alan Rappeport): “After seven years of fitful declines, the federal budget deficit is projected to swell again, adding nearly $10 trillion to the federal debt over the next 10 years, according to projections from the nonpartisan Congressional Budget Office… Statutory caps imposed in 2011 on domestic and military spending have helped temper the deficit. But those controls are likely to be swamped by health care and Social Security spending that will rise with an aging population.”

Going back to the nineties, aggressive GSE market intervention played a profound roll in backstopping and reflating markets after repeated de-risking/de-leveraging episodes. The (late-2004) revelation of accounting scandals constrained their ability to aggressively provide marketplace liquidity. Yet the loss of this key backstop mechanism didn’t slow markets that had by then developed powerful inflationary momentum. The view was that Washington – the Treasury, Fed and GSEs – would never tolerate a housing bust. And this view was integral to an historic financial and economic Bubble – and deeply embedded in securities markets (equities and fixed-income, at home and abroad).

The scope of today’s global Bubble goes so far beyond 2007. The prevailing view holds that global central banks will indefinitely do “whatever it takes” to ensure abundant marketplace liquidity, while backstopping global markets in the event of tumult. And it is precisely this perception that has sustained a prolonged Credit and asset inflation and resulting epic financial Bubble.

January 27 – Wall Street Journal (Kane Wu and Julie Steinberg): “The pace of big Chinese takeovers abroad is slowing as buyers contend with rules tightening the flow of money out of the country and increased government scrutiny at home and overseas. Bankers say many of the record-breaking $225 billion in overseas acquisitions Chinese companies announced last year are stalled by financial or regulatory hurdles—including the country’s biggest-ever deal, China National Chemical Corp.’s $43 billion bid for Syngenta AG, a Swiss seed and pesticide maker… More Chinese acquirers are backing out of deals.”

January 26 – Bloomberg: “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world. In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments. In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point. ‘Everything changed’ as it became more difficult to send money offshore, said Coco Tan, a broker at Keller Williams in Cupertino, California.”

While the markets still have a number of weeks prior to any global QE reduction, the effects of less liquidity emanating from China are already being felt. There were this week indications of further tightening of capital controls. Officials also appeared to ratchet up efforts to restrain Credit growth (See “China Bubble Watch” below).

January 26 – Bloomberg: “China’s central bank has ordered the nation’s lenders to strictly control new loans in the first quarter of the year, people familiar with the matter said, in another move to curb excess leverage in the financial system. The new guidance from the People’s Bank of China puts a particular emphasis on mortgage lending, …as authorities grapple to contain runaway property prices. And while the PBOC regularly seeks to guide banks’ credit decisions, this time it may also make errant lenders pay more for deposit insurance, one of the people said… ‘This is a continuation of the tightening trend we’ve seen since the second half of last year and extends from shadow banking to on-balance sheet loans,’ said Wei Hou, a Hong Kong-based analyst at Sanford C. Bernstein…”

January 27 – Wall Street Journal (James T. Areddy): “A Chinese phone maker’s failure to repay around $166 million in bonds has rippled through the world’s largest internet investment marketplace, hitting investors who hadn’t even bought the securities. The default, by phone maker Cosun Group, is one of the most high-profile failures to hit China’s sprawling network of Internet-based financial firms. It is an embarrassment to Alibaba Group Holding Ltd. because its affiliate Ant Financial Services Group owns the investment marketplace where the bonds were sold, and illustrates a rising risk in China, where hundreds of millions of people seeking higher returns on their savings have used their mobile phones to buy risky, unregulated investments.”

In a world of unsound finance, China remains a major weak link. And while the United States’ relationship with our southern neighbor received most of the attention during the first week of the Trump Administration, I’ll be surprised if China escapes Trump Tweets for long. Prospects for growth in GDP and U.S. corporate profits seem enticing to most these days. I would counter that global financial and economic stability cannot be taken for granted if the U.S. and China come to loggerheads. Latent fragilities will spring to life.

Even if calm prevails, markets have grown way too complacent regarding the global monetary backdrop. So many unknowns. So many things that could go wrong. Whenever it unfolds, the next de-risking/de-leveraging episode should be quite captivating.

For the Week:

The S&P500 gained 1.0% (up 2.5% y-t-d), and the Dow advanced 1.3% (up 1.7%). The Utilities slipped 0.4% (down 0.7%). The Banks jumped 2.6% (up 1.2%), and the Broker/Dealers surged 3.1% (up 5.6%). The Transports gained 2.2% (up 4.4%). The S&P 400 Midcaps rose 1.3% (up 2.2%), and the small cap Russell 2000 gained 1.4% (up 1.0%). The Nasdaq100 jumped 2.1% (up 6.3%), and the Morgan Stanley High Tech index rose 2.8% (up 7.4%). The Semiconductors surged 3.5% (up 6.2%). The Biotechs increased 0.3% (up 3.6%). Although bullion was down $20, the HUI gold index was little changed (up 11.3%).

Three-month Treasury bill rates ended the week at 51 bps. Two-year government yields gained three bps to 1.22% (up 3bps y-t-d). Five-year T-note yields added a basis point to 1.95% (up 2bps). Ten-year Treasury yields increased a basis point to 2.48% (up 4bps). Long bond yields gained one basis point to 3.06% (down one basis point).

Greek 10-year yields jumped 15 bps to 7.11% (up 9bps y-t-d). Ten-year Portuguese yields surged 32 bps to 4.14% (up 40bps). Italian 10-year yields rose 22 bps to 2.23% (up 42bps). Spain's 10-year yields rose 10 bps to 1.59% (up 21bps). German bund yields increased four bps to 0.46% (up 26bps). French yields gained 13 bps to 1.03% (up 35bps). The French to German 10-year bond spread widened nine to 57 bps. U.K. 10-year gilt yields rose four bps to 1.47% (up 24bps). U.K.'s FTSE equities index slipped 0.2% (up 0.6%).

Japan's Nikkei 225 equities index jumped 1.7% (up 1.8% y-t-d). Japanese 10-year "JGB" yields gained three bps to 0.08% (up 4bps). The German DAX equities index rose 1.6% (up 2.9%). Spain's IBEX 35 equities index gained 1.3% (up 1.6%). Italy's FTSE MIB index declined 0.8% (up 0.5%). EM equities were higher. Brazil's Bovespa index rose 2.3% (up 9.6%). Mexico's Bolsa jumped 2.4% (up 3.9%). South Korea's Kospi gained 0.9% (up 2.8%). India’s Sensex equities index surged 3.1% (up 4.7%). China’s Shanghai Exchange advanced 1.2% (up 1.8%). Turkey's Borsa Istanbul National 100 index increased 0.9% (up 7.3%). Russia's MICEX equities index surged 4.9% (up 1.5%).

Junk bond mutual funds saw outflows of $887 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 10 bps to 4.19% (up 40bps y-o-y). Fifteen-year rates gained six bps to 3.40% (up 33bps). The five-year hybrid ARM rate slipped a basis point to 3.20% (up 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.31% (up 48bps).

Federal Reserve Credit last week increased $5.9bn to $4.419 TN. Over the past year, Fed Credit contracted $32.1bn (down 0.7%). Fed Credit inflated $1.608 TN, or 57%, over the past 220 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.8bn last week to $3.171 TN. "Custody holdings" were down $96bn y-o-y, or 3.0%.

M2 (narrow) "money" supply last week expanded $19.8bn to $13.279 TN. "Narrow money" expanded $870bn, or 7.0%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits jumped $19.3bn, while Savings Deposits dipped $1.9bn. Small Time Deposits were little changed. Retail Money Funds added $1.0bn.

Total money market fund assets rose $19.7bn to $2.686 TN. Money Funds declined $71.3bn y-o-y (2.6%).

Total Commercial Paper declined $4.0bn to $963bn. CP declined $98bn y-o-y, or 9.3%.

Currency Watch:

The U.S. dollar index slipped 0.4% to 100.74 (down 1.6% y-t-d). For the week on the upside, the Mexican peso increased 3.4%, the British pound 1.5%, the Canadian dollar 1.3%, the New Zealand dollar 1.2%, the Brazilian real 1.1%, the South African rand 0.9%, the Norwegian krone 0.8%, the South Korean won 0.8%, the Swedish krona 0.4% and the Swiss franc 0.2%. For the week on the downside, the Japanese yen declined 0.4%, the Singapore dollar 0.4% and the Australian dollar 0.1%. The Chinese yuan declined 0.4% versus the dollar (up 0.9% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.5% (down 0.3% y-t-d). Spot Gold gave back 1.6% to $1,191 (up 3.4%). Silver added 0.6% to $17.136 (up %). Crude slipped five cents to $53.17 (down 1.2%). Gasoline dropped 2.5% (down 8.6%), while Natural Gas surged 4.8% (down 10.2%). Copper jumped 2.5% (up 7.3%). Wheat declined 1.8% (up 3.1%). Corn fell 2.0% (up 3.0%).

Trump Administration Watch:

January 26 – Reuters (Steve Holland and Miguel Gutierrez): “U.S. President Donald Trump could pay for a wall on the southern border with a new 20% tax on goods from Mexico…, deepening a crisis after plans for a summit with the Mexican president fell apart. Trump wants the measure to be part of a broader tax overhaul package that the U.S. Congress is contemplating, White House spokesman Sean Spicer told reporters… It was not immediately clear how the tax would work. Parts of the proposal that Spicer described resemble an existing idea, known as a border adjustment tax, being considered by the Republican-led U.S. House of Representatives. Spicer said: ‘We have a new tax at $50 billion at 20% of imports -which is, by the way, a practice that 160 other countries do right now.’”

January 24 – Bloomberg (Saleha Mohsin): “U.S. Treasury Secretary nominee Steven Mnuchin said an ‘excessively strong dollar’ could have a negative short-term effect on the economy. ‘The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America,’ Mnuchin said in a written response to a senator’s question about the implications of a hypothetical 25% dollar rise. ‘From time to time, an excessively strong dollar may have negative short-term implications on the economy.’ The dollar slumped to the weakest in more than six weeks after the remarks…”

January 23 – Wall Street Journal (Carol E. Lee and Damian Paletta): “President Donald Trump started his first full workday at the White House focused on the U.S. economy, trade and jobs, the top themes of his campaign. Amid a round of meetings with business leaders, labor union representatives and members of Congress, Mr. Trump signed a memorandum withdrawing the U.S. from the Trans-Pacific Partnership… He also pledged to cut taxes and regulations that he said were blunting job growth and promised to impose a ‘very major’ border tax on companies that move some operations overseas, which would require legislation.”

January 24 – Reuters (Ben Blanchard and David Brunnstrom): “China said… it had ‘irrefutable’ sovereignty over disputed islands in the South China Sea after the White House vowed to defend ‘international territories’ in the strategic waterway. White House spokesman Sean Spicer in his comments on Monday signaled a sharp departure from years of cautious U.S. handling of China's assertive pursuit of territorial claims in Asia. ‘The U.S. is going to make sure that we protect our interests there,’ Spicer said when asked if Trump agreed with comments by his secretary of state nominee, Rex Tillerson. On Jan. 11, Tillerson said China should not be allowed access to islands it has built in the contested South China Sea. ‘It's a question of if those islands are in fact in international waters and not part of China proper, then yeah, we're going to make sure that we defend international territories from being taken over by one country,’ Spicer said.”

January 24 – New York Times (Jane Perlez and Chris Buckley): “For China, President Trump’s scrapping of the American-brokered Pacific trade agreement is a chance to extend Beijing’s economic and political influence. And it is an opportunity to deepen ties with its neighbors in Asia. But with a cooling economy at home and a looming leadership shake-up, the last thing President Xi Jinping wants is a trade war, though officials are girding for that possibility. Rather, China’s leaders crave stability and predictability. Early signs indicate they may not get their wish. The Chinese fear that if Mr. Trump was willing to toss aside years of delicate negotiations with allies and decades of American trade policy, he could also go his own way on issues he has staked out with Beijing, including Taiwan and the South China Sea.”

January 23 – Bloomberg: “Donald Trump’s administration may be on course for a fraught relationship with China amid disputes over trade policy, according to Citigroup Inc., which warned the new U.S. government could introduce more protectionist measures against manufactured goods from Asia’s top economy. ‘There are growing signs that the Trump administration is heading for antagonistic relations with China,’ the bank said in a report… While the bank stuck with its view that a trade war could be avoided, it did anticipate ‘increasing trade frictions’ between the two.”

January 23 – Reuters (Lisa Lambert and David Lawder): “Dialing back the Volcker Rule that limits banks' ability to engage in speculative investments is a top priority for President Donald Trump's nominee for U.S. Treasury secretary, Steve Mnuchin, according to a document seen by Reuters… In written responses to questions posed by members of the U.S. Senate Finance Committee, Mnuchin said he would use his role as head of the interagency Financial Stability Oversight Council to give the Volcker Rule a stricter definition of proprietary trading. In ‘prop trading’ a financial firm uses its own money to invest in privately held companies, hedge funds and similar vehicles. The Volcker rule was designed to limit the type of risk-taking activities that helped land banks in trouble during the financial crisis. ‘As Chair of FSOC I would plan to address the issue of the definition of the Volcker Rule to make sure that banks can provide the necessary liquidity for customer markets and address the issues in the Fed report,’ Mnuchin wrote…”

January 26 – Financial Times (Barney Jopson): “Dozens of US exporters including GE and Boeing are squaring off against Walmart and other retailers as a radical Republican plan to tax imports divides the giants of corporate America. The rift in the business community threatens President Donald Trump’s pledge to overhaul the tax code for the first time in 30 years by undermining a blueprint that House Republicans are drafting for the White House. The Financial Times has learnt that GE, Boeing, Dow Chemical and dozens of other manufacturers are in advanced talks over forming a coalition to lobby in favour of the import tax, just as Walmart and other big importers… rally against it… The ‘border adjustment’ tax regime, which would penalise imports and exempt exports, is central to the plans of House Republicans initiating tax legislation. But visceral divisions over the idea do not bode well for its prospects.”

January 24 – New York Times (Andrew Ross Sorkin): “For years, chief executive officers lived in fear they would become a target of the activist investor Carl Icahn. Now, they live in dread of a different and somewhat more unexpected kind of activist: President Donald J. Trump. As corporate executives around the globe try to understand the implications of the Trump administration on their businesses, they seem to be having an almost bipolar reaction: a euphoric sense that regulations and taxes could soon be lowered — which would likely increase their profits and paychecks — yet a simultaneous anxiety that they could become a target of one of the president’s Twitter tirades, which could undo their businesses or possibly their careers.”

January 26 – New York Times (Michael M. Grynbaum): “Stephen K. Bannon, President Trump’s chief White House strategist, laced into the American press…, arguing that news organizations had been ‘humiliated’ by an election outcome few anticipated, and repeatedly describing the media as ‘the opposition party’ of the current administration. ‘The media should be embarrassed and humiliated and keep its mouth shut and just listen for a while,’ Mr. Bannon said… ‘I want you to quote this,’ Mr. Bannon added. ‘The media here is the opposition party. They don’t understand this country. They still do not understand why Donald Trump is the president of the United States.’ The scathing assessment — delivered by one of Mr. Trump’s most trusted and influential advisers, in the first days of his presidency — comes at a moment of high tension between the news media and the administration…”

China Bubble Watch:

January 23 – Wall Street Journal (Shen Hong): “China has injected a torrent of money into its financial system in recent days, using a mix of short-term tools aimed at pre-empting a seasonal cash crunch without signaling a shift toward an easier monetary policy. China’s central bank pumped 1.13 trillion yuan (roughly $165bn) into domestic money markets last week via its routine operations, a record for one week… The heavy cash injection came ahead of China’s Lunar New Year break, which this year begins Saturday, a time when Chinese consumers traditionally go on shopping sprees and hand out red packets filled with fresh yuan notes to friends and relatives.”

January 26 – Bloomberg: “China’s foreign exchange regulator has announced measures aimed at luring money back to the country or keeping it there in the latest effort to stem capital outflows and bolster a weakening currency. The State Administration of Foreign Exchange asked companies with outbound investment plans to clarify the source of their funding for purchases and give additional details on their spending plans. That increased scrutiny comes as a record global shopping spree last year by Chinese firms abroad contributed to an exodus of capital. SAFE said… it will also require companies to provide materials including tax documents, financial statements and board resolutions to banks if they plan to remit more than $50,000 in profits from direct investments in China back to their countries.”

January 23 – Financial Times (Don Weinland): “China’s battle against capital flight is threatening the country’s trade flows, with recent restrictions on the use of basic tools for cross-border finance beginning to hamper the businesses driving the country’s $1.7tn in annual imports. While regulators seeking to keep Chinese money onshore remain focused on outbound foreign direct investment that they believe is being used to funnel money abroad, payments for goods and services have also felt the squeeze. Transactions are being delayed and contracts forced into renegotiation, while trade credit insurers are cutting exposure to the country.”

January 25 – Bloomberg (Kana Nishizawa): “China’s frequent tweaks to monetary policy are puzzling market watchers. In recent weeks, the People’s Bank of China has been using lending tools to both tighten and loosen liquidity as authorities seek to curb leverage while preventing a cash squeeze before the country’s biggest annual holiday… ‘I’m very confused,’ Tim Orchard, Fidelity International’s chief investment officer for Asia Pacific excluding Japan, said… ‘They’re trying to send signals the whole time and trying to micromanage the economy. That looks like a bit of a muddle sometimes when you’re looking at it from the outside.’ The PBOC startled analysts on Tuesday by increasing interest rates on medium-term loans that it uses to manage liquidity… The move came days after the central bank said it provided a one-month ‘temporary liquidity facility’ to large banks, without detailed explanation, and injected a record net 1.13 trillion yuan ($164bn) in open-market operations during the course of the week.”

January 26 – Reuters (Samuel Shen and John Ruwitch): “China's campaign to cut high debt levels in its economy is aiming this year to shrink the $3 trillion shadow banking sector, which could drain a critical source of income for the country's banks and of funding for its fragile bond market. Shadow banking… has boomed in China, the world's second-largest economy, as a way of circumventing government's tight controls on lending. It has been a key driver of the breakneck growth in debt in the economy, which UBS says rose to 277% of GDP from 254% in 2016, and is now a target as Beijing tries to reduce that figure before it destabilizes the economy. But with banks' shadow banking business accounting for about a fifth of total outstanding loans, analysts fear that the unintended consequences… ‘We see a policy-induced drastic deleveraging in shadow banking as a policy miscalculation that could trigger unexpected tail risks for the banking sector,’ said Liao Qiang, credit analyst at S&P Global Ratings. Investors' concerns stem from new rules this month that put lenders' wealth management products (WMPs)… under the scrutiny of the People's Bank of China (PBOC) for the first time and into its calculations on prudence, capital adequacy and loan growth guidelines. …WMPs jumped 42% year-on-year to 26 trillion yuan ($3.8 TN) at the end of June, doubling in just two years.”

January 26 – Bloomberg: “China’s embattled bond investors should expect little respite in the Lunar New Year. Since an 11-quarter debt rally came to an abrupt end last month, losses have deepened and analysts are turning more bearish. The benchmark 10-year sovereign yield is heading for its biggest monthly increase since October 2010, rising to levels last seen during the height of the turmoil in December. And there is no sign of a let-up in policy makers’ efforts to weed out excessive leverage in the financial system.”

January 25 – Bloomberg: “Forged seals, fake letters, and counterfeit documents. They’re all part of China’s recent spate of fraud coming to light in the country’s $3 trillion corporate debt market amid a rout that has analysts predicting a record number of defaults in 2017. As it becomes harder for Chinese companies to issue new notes to repay maturing debt, expect more scandals to come -- and to worsen the bond market’s already-precipitous downturn. ‘We expect to see more of this type of behavior given the increasingly problematic environment for refinancing in the domestic bond market,’ said Charles Macgregor, head of emerging markets at Lucror Analytics… ‘Unfortunately, these frauds may be difficult to detect, as documentation and seals may appear authentic given collusion between various parties.’ A survey by Ernst & Young last year found that 56% of Chinese executives polled said that unethical behavior, including misstating financial performance, could be justified to help a company survive a downturn…”

January 24 – Bloomberg (Justina Lee): “China should tighten monetary policy as signs of overheating emerge amid quickening inflation, according to the top-ranked forecaster for the nation’s economy. With policy makers torn between reining in price gains and stabilizing growth, corporate lending has become too cheap, said Song Yu, chief China economist at Beijing Gao Hua Securities Co. The real interest rate for companies… has turned negative for the first time since 2011 as the People’s Bank of China kept its benchmark lending rate at a record low and the economy snapped out of a deflationary funk. ‘Economic growth is trending down gradually while inflation is trending up,’ said Song, whose firm is Goldman Sachs Group Inc.’s joint-venture partner in the mainland. ‘This makes it hard for policy makers to be decisive in moving in one direction or the other.’”

January 24 – Bloomberg (Narae Kim): “Much focus is on how China's capital outflows will impact the world's biggest pile of foreign-exchange reserves, but another issue in need of attention here is the rally in crude, argues Goldman Sachs… In a country where oil prices play ‘a disproportionate role’ in the balance of payments — and China's crude output is forecast to fall as much as 75 this year — the commodity's bullish outlook poses a serious threat to reserves that have already shrunk more than 20% in the past two years. ‘The outlook for the balance of payments has deteriorated from a year ago, because oil prices are now on an upward trajectory, which could push the current-account surplus to around $200 billion this year, down from $331 billion as recently as 2015,’ Goldman analysts Robin Brooks and Michael Cahill wrote…”

January 24 – Bloomberg (Jeanny Yu): “A gauge of China’s small-cap shares slid, extending a monthly retreat, as a liquidity crunch pressured the most speculative part of the nation’s equities. The ChiNext index fell 1.4%..., taking its January loss to 5.1%. The measure of mostly technology shares has underperformed the large-cap CSI 300 Index this year as funding costs rose and speculation mounted the regulator will accelerate the pace of initial public offerings, already at a 19-year high -- thereby diverting liquidity from existing shares.”

January 23 – Bloomberg (Jeanny Yu): “Chinese stocks haven’t been so subdued since 1992 as government efforts to maintain stability as well as tightening liquidity deter traders. A gauge of 90-day volatility on the Shanghai Composite Index fell to a 24-year low at the end of December and has barely budged since, while turnover on the nation’s equity exchanges slumped to the lowest in two years last week.”

January 23 – Bloomberg: “China sentenced former hedge fund manager Xu Xiang to five-and-a-half years imprisonment for market manipulation, in one of the most high-profile cases following the 2015 market rout… Xu, known as ‘hedge fund brother No. 1’ for his winning record in the stock market, was charged with colluding to manipulate share prices in an operation from 2010 to 2015…”

Brexit Watch:

January 25 – Bloomberg (Tim Ross and Alex Morales): “U.K. Prime Minister Theresa May is battling a rebellion from her own lawmakers which threatens to complicate her talks over leaving the European Union. Emboldened by the Supreme Court’s decision on Tuesday to hand Parliament more power over the Brexit process, at least six Conservative legislators are uniting with the main opposition Labour party to demand May publishes an official government document detailing her negotiating goals.”

January 25 – Reuters (Kylie MacLellan and William James): “Britain said it would publish legislation on Thursday seeking parliament's approval to begin formal divorce talks with the European Union as Prime Minister Theresa May agreed to lawmakers' demands to publish her Brexit plan. The Supreme Court ruled on Tuesday that May must give parliament a vote before she can invoke Article 50 of the EU's Lisbon Treaty, with Brexit minister David Davis promising a ‘straightforward’ bill within days. May said last week Britain would quit the EU's single market when it leaves the union, charting a course for a clean break with the world's largest trading bloc.”

Europe Watch:

January 26 – Bloomberg (Stefania Spezzati): “The Italian political outlook remains too cloudy for investors. The yield spread on Italian 10-year debt over German bunds has risen faster than elsewhere in the peripheral euro area to 170 bps, the highest since Dec. 5, the day after the rejection of former Premier Matteo Renzi’s reforms in a referendum. Italy’s Constitutional Court yesterday struck down parts of the country’s existing election law for the lower house, including a provision for a run-off vote, saying it should be held in just one round.”

January 23 – Bloomberg (Kristine Aquino and Paul Dobson): “The ‘Frexit’ barometer is flickering into life. With National Front leader Marine Le Pen ahead in a poll on the first round of France’s presidential election, the country’s government bonds are starting to lose their cachet as some of the safest in the euro area. The yield on 10-year French securities is the highest relative to Spanish debt since April 2010 and the spread between French and German yields is near the widest level in more than two years. A victory for Le Pen on April 23 would set up a run-off vote in May, raising the prospect that an open critic of the euro could become the next president of the region’s second-biggest economy.”

January 25 – Bloomberg (Marcus Bensasson): “Greek Prime Minister Alexis Tsipras dug in against creditor demands for more pension cuts and tax increases before a meeting of euro-area finance ministers to unblock the country’s bailout review. ‘There is no way we are going to legislate even one euro more than what was agreed in the bailout,’ Tsipras said... ‘The demand to legislate more measures, and contingent ones, no less, is alien not just to the Greek Constitution but to democratic norms.’”

Fixed-Income Bubble Watch:

January 26 – Financial Times (Eric Platt and Joe Rennison): “The combination of rebounding commodity prices and hopes for faster US economic growth under Donald Trump is helping some of the riskiest corporate borrowers secure cheaper financing and underlines investors’ growing stomach for risk. An expanding list of companies with a triple-C rating — deep within speculative territory — have been able to lock in borrowing costs below 7%, as yields have fallen over the past 10 months. Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6%. Last February, triple-C paper traded with a yield of 18.57%... That figure has nearly halved to 9.36% today.”

January 24 – Financial Times (Joe Rennison): “Foreign investor participation in US government bond auctions remains subdued, according to fresh data…, despite renewed appetite for 3-year and 10-year debt. Foreign investors bought the smallest percentage of the recent 30-year Treasury bond auction since February 2016… Analysts point to the reduction in Treasury holdings from big foreign holders such as China and Japan putting pressure on others to back away from the Treasury market, despite it’s relatively more attractive yields compared to other government securities across the globe.”

U.S. Bubble Watch:

January 24 – Reuters (Lucia Mutikani): “U.S. home resales fell more than expected in December as the supply of houses on the market dropped to levels last seen in 1999… Last month, the number of homes on the market fell 10.8% from November to 1.65 million units, the lowest level since December 1999.”

January 24 – Bloomberg (Sho Chandra and Patricia Laya): “Sales of previously owned U.S. homes declined more than forecast in December… Still, sales for the full year were the strongest since 2006. Contract closings fell 2.8% to a 5.49 million annual rate last month (forecast was 5.52 million) after a revised 5.65 million in November. Median sales price rose 4% from year earlier to $232,200. For all of 2016, existing home sales increased to 5.45 million, the highest since 2006, from 5.25 million a year earlier.”

January 24 – Bloomberg (Tanvir Sandhu): “S&P 500 options are showing little anxiety over Donald Trump’s policies over the next few weeks, even as rates options capture concerns, according to Bloomberg strategist Tanvir Sandhu. The smoothness of S&P 500 Index’s volatility term structure indicates complacency in factoring in policy shifts by the government, reminiscent of a similar formation three weeks before the U.S. election on Nov. 8 when opinion polls overwhelmingly predicted a Hillary Clinton win.”

January 25 – Bloomberg (Jamie Butters, David Welch, and Keith Naughton): “President Donald Trump is asking U.S. automakers to invest in domestic manufacturing at a bad time. Car sales have gained for seven-straight years after the U.S. auto bailouts and the financial crisis, a streak that’s close to running out of gas. That’s a recipe for trouble facing companies wary of undoing the painful but necessary steps they took to shut dozens of factories across the country, before and during a more than $70 billion government bailout. New assembly plants cost General Motors Co., Ford Motor Co. or Fiat Chrysler Automobiles NV about $1 billion -- the sort of investment companies look to avoid making as a market peaks.”

January 24 – Wall Street Journal (Liz Hoffman and Tom McGinty): “Executives at some of the biggest Wall Street banks have sold nearly $100 million worth of stock since the presidential election, more than in that same period in any year over the past decade… The share sales occurred as financial stocks soared since Nov. 9 on expectations of lighter regulation, lower taxes and pro-growth economic policies. The KBW Nasdaq Bank index is up nearly 20% since Donald Trump’s victory, about triple the gains notched by the broader market. In addition to the share sales, bank executives have sold another $350 million worth of stock to cover the cost of exercising options, filings show. That is twice the amount sold for that purpose at big banks in the year leading up to the election.”

January 23 – Bloomberg (Gabrielle Coppola): “All those years of rising U.S. auto sales are starting to work against carmakers. A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33% surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year. ‘Ford is the canary in the coal mine,’ said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant…”

January 25 – Bloomberg (Patrick Clark): “A tactic that helped define the height of homebuying madness in the U.S. in the years before the market collapsed is rearing its head again. Home flippers, who buy homes as a speculative bet on short-term price appreciation, accounted for 6.1% of U.S. home sales in 2016, according to Trulia… That’s the highest share since 2006, when flips accounted for 7.3% of sales.”

Federal Reserve Watch:

January 23 – Reuters (Ann Saphir): “Jeffrey Lacker, the hawkish president of the Federal Reserve Bank of Richmond, said… he is worried inflation could surge unless the U.S. central bank raises interest rates faster than his fellow policymakers anticipate. ‘Right now I think we are at risk of getting behind the curve, so lately I've been an advocate of pushing rates up a little more aggressively than my colleagues,’ Lacker said… Most of the Fed's policymakers see the central bank raising rates three times this year.”

Central Bank Watch:

January 23 – Wall Street Journal (Christopher Whittall, Jon Sindreu and Brian Blackstone): “By keeping interest rates low and in some cases negative, central banks have prompted some of the most conservative investors to join the hunt for higher returns: Other central banks. Central banks from Switzerland to South Africa are investing a bigger share of their growing foreign-exchange reserves in equities, corporate bonds and other riskier assets. Branching out from the traditional central-bank practice of investing primarily in ultrasafe government bonds such as U.S. Treasurys means taking on more risk. But at a time when global growth, interest rates and potential returns on many assets are low, many central bankers are becoming increasingly focused on maximizing investment returns.”

Japan Watch:

January 24 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Bank of Japan officials would rather be late than early in raising their 10-year bond yield target from zero percent, even if consumer price gains reach 1% later this year, according to people familiar with the central bank’s discussions. Officials see considerable risks in moving too quickly and are mindful of policy exits in 2000 and 2006… These exits were criticized for coming too soon and prolonging deflation. BOJ officials would want to first confirm that the underlying inflation trend is improving and view it as important to look beyond the impact of higher oil prices and a weaker yen, which have the potential to change quickly.”

January 23 – Reuters (Stanley White): “Japanese manufacturing activity expanded in January at the fastest pace in almost three years as export orders surged, suggesting that overseas demand is not as weak as some economists and business leaders had feared. The Markit/Nikkei Japan Flash Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.8 in January from a final 52.4 in the previous month.”

EM Watch:

January 24 – New York Times (Elisabeth Malkin): “Not long ago, any suggestion that Mexico might walk away from the North American Free Trade Agreement would have been met with utter disbelief. That was before Donald J. Trump was elected president of the United States. Free trade is a mantra of Mexico’s political elite, the core of the country’s development strategy. But now that Mr. Trump has said he wants to renegotiate Nafta, a growing number of Mexican officials and businesspeople are asking what price is worth paying to stay in it. Many of them are concluding that Mexico could have more to lose from years of haggling and economic uncertainty than from simply opting out. ‘There could be no other option,’ Mexico’s economy minister, Ildefonso Guajardo, said… ‘If we go for something that is less than what we have, well, then there is no sense in staying.’”

January 24 – Financial Times (Jude Webber): “Battle lines have been drawn as Mexico and the US kick off what promise to be tough negotiations on the future of the two-decades old North American Free Trade Agreement, which both sides have threatened to kill off if they do not get their way. Pressure from US president Donald Trump has already cowed US corporate investors operating in Mexico. President Enrique Peña Nieto has vowed to stand up to pressure from the White House, but with Nafta as the backbone of Mexico’s export-oriented economy, he has most to lose from the talks. ‘If there are no clear benefits, there’s no point staying,’ Ildefonso Guajardo, Mexico’s economy secretary, told a television interviewer. A worse deal for Mexico made no sense, he said.”

January 24 – Financial Times (Katie Martin): “‘Yes, it looks like a mess,’ said Turkey’s deputy prime minister Mehmet Simsek last week of his country’s image in the eyes of investors and foreign politicians in an early contender for Understatement Of The Year. The latest interest rate decision from the country’s central bank will do little to turn that around. The central bank opted to leave its benchmark interest rate on hold on Tuesday, stunning economists who had predicted a rise of anywhere between a quarter and a full percentage point, and sending the lira plunging, albeit briefly. The central bank did not stand still entirely, raising the overnight lending rate by 0.75 percentage points and pledging more tightening in future if ‘inflation expectations, pricing behaviour and other factors affecting inflation’ warrant it.”

Leveraged Speculator Watch:

January 23 – CNBC (Tae Kim): “Hedge fund assets hit a record high at the end of last year as solid market returns from the Donald Trump rally overcame large investor redemptions. ‘Total hedge fund industry capital rose for the third consecutive quarter, surpassing the $3 trillion milestone for the first time,’ Hedge Fund Research said... ‘The growth of hedge fund assets occurred against a challenging backdrop of continued investor withdrawals.’ Investors pulled $18.7 billion of capital from hedge funds during the fourth quarter, according to HFR data. For 2016, the firm said $70.1 billion was withdrawn; the worst showing since $131 billion was redeemed in 2009. However, fourth-quarter hedge fund assets increased by $46.8 billion to $3.02 trillion due to performance, HFR added. The industry returned 5.5% in 2016, its best return since 2013…”

January 23 – Bloomberg (Brian Chappatta and Liz McCormick): “There’s a big showdown looming in the U.S. Treasury market. The ‘fast money,’ made up of hedge funds and other speculators, upped its bearish bets like never before this month, based on futures data for five-year notes. At the same time, ‘real-money’ accounts, composed of institutional buyers like mutual funds and insurers, did the opposite and built up their bullish positions in much the same way… But for JPMorgan Chase & Co.’s Jay Barry, the speculators are sowing their own demise. While Treasuries have suffered five straight months of losses, fast-money investors tend to be reliable contrarian indicators whenever they crowd together. More than 75% of the time, the market moves the other way over the following month, his figures show.”

Geopolitical Watch:

January 23 – CNBC (Evelyn Cheng): “China's government newspaper used the weekend after U.S. President Donald Trump's inauguration to promote China as an alternative to the ‘crisis’ of Western democracy and capitalism. ‘Western-style democracy has played a progressive role in history, but right now it has heavy drawbacks,’ Han Zhen, Communist Party secretary of the Beijing Foreign Studies University, wrote in a Chinese editorial in the People's Daily. The article and two similar pieces filled up a full page in the government paper on Sunday, and blamed Western democracy and capitalism for global troubles such as the financial crisis and populist movements in the U.S. and Europe. In this context, the editorials said, China could show the benefits of ‘socialism with Chinese characteristics.’”

January 23 – Washington Post (Ylan Q. Mui): “President Trump’s cancellation Monday of an agreement for a sweeping trade deal with Asia began recasting America’s role in the global economy, leaving an opening for other countries to flex their muscles. Trump’s executive order formally ending the United States’ participation in the Trans-Pacific Partnership was a largely symbolic move intended to signal that his tough talk on trade during the campaign will carry over to his new administration. The action came as China and other emerging economies are seeking to increase their leverage in global affairs, seizing on America’s turn inward. Mexico’s President Enrique Peña Nieto declared Monday that his country hopes to bolster trade with other nations and limit its reliance on the United States. Chinese state media derided Western democracy as having ‘reached its limits’…”