Saturday, January 14, 2017

Weekly Commentary: Off to an Interesting Start

It’s been only two weeks, yet 2017 is off to an interesting start. It’s certainly quite a contrast to last year’s “worst market start in decades.” Fear and risk aversion held sway a year ago. The great Chinese Bubble was at risk of imploding, and such a cataclysmic event could have pulled global markets and the economy right along with it. Moreover, central banks were running low of ammunition.

New year 2017 begins with an astonishing degree of optimism and risk embracement. The S&P 500 has advanced 1.6% in the first two weeks of the year, although those gains are overshadowed by the higher-risk NDX (up 4.0%), Morgan Stanley High Tech index (up 4.4%), biotechs (up 5.7%) and broker/dealers (up 4.0%). From the FT: “‘Fang’ stocks add $83bn to their market value over 7 days.” Facebook sports a 2017 gain of 11.6%, Apple 2.8%, Netflix 8.0% and Google 4.7%.

Enthusiasm goes beyond just a bout of central bank-induced market euphoria. Confidence at this point has made strong inroads throughout the real economy – consumers, small business and company management. It’s been awhile since I’ve heard such positive sentiments conveyed during big bank quarterly conference calls. Inflationism has worked its magic, for now. Folks have really bought in.

Bubble analysis for a while now has highlighted the divergence between inflating securities prices and deflating economic prospects. A case could be made these days that this gap is in the process of narrowing. I would counter that economic prospects have brightened only due to prolonged extraordinary global monetary inflation and resulting asset inflation.

It’s an especially challenging period to put into perspective. From the Bubble (global government finance – Granddaddy of All Bubbles) perspective, all the pieces are fitting into place. Things certainly do turn crazy near the end – and 2016 was consistent with such a thesis. Record stock prices were spurred by central bank responses to early-2016 market fragilities. Brexit and the Trump phenomenon arose from deep public dissatisfaction. Today’s confidence may have notable breadth, yet I question its depth.

Global markets are unstable, economies are unstable, societies are unstable, democracies are unstable and the geopolitical backdrop is unstable. Yet for going on nine years (incredible or what?) instabilities have been harnessed by the powerful triad of low borrowing costs, central bank electronic printing presses and literally Trillions of “money” with apparently no other purpose than to inflate securities and asset prices. Moreover, monetary disorder on such an unprecedented global scale has been around for so long that it passes as normal. And with so much uncertainty in the world the only thing certain is that global central banks will soldier on with QE and near zero rates. That’s been enough for the markets, trumping myriad uncertainties and fragilities.

January 11 – CNBC (Patti Domm): “The corporate debt market is kicking off the new year with a bang. Companies have issued a whopping $65 billion in high-grade debt so far since Jan. 2, the most ever for this time of year. The beginning of the year is normally an active period, but the amount issued so far is already more than half the $125.6 billion issued during the full month of January 2016 — and that was also a record… As of last Friday, the first week of the year saw $52 billion in investment-grade issuance, a record first week. ‘It was led by financials,’ said Informa analyst Chris Reich. ‘Financials accounted for 85% of the total of weekly volume.’”

It’s not that markets are oblivious to risk. After only two trading weeks, the Turkish lira is already down 5.4%, the Mexican peso 3.5% and the British pound 1.3%. Turkey and Mexico confront difficult geopolitical challenges, and both are on the list of EM economies with large quantities of dollar-denominated debt. For the most part, however, EM has maintained the momentum it enjoyed later in 2016. In general, and despite king dollar, EM is viewed as benefitting from heightened global inflationary impulses.

It’s only been a couple weeks, but things have already turned intriguing in China. The bursting of the Chinese Bubble was held at bay by record 2016 Credit expansion (December growth in total social financing a stronger-than-expected $236bn). Such reckless late-cycle (“Terminal Phase”) excess comes with dire consequences – a perilous real estate Bubble, “shadow banking” pandemonium, deeper economic maladjustment and acute currency vulnerability. Chinese officials have some very tough decisions to make.

January 8 – Bloomberg: “As China’s top leaders tallied the cost of another year of debt-fueled growth at a December meeting, the imperative for stability as a leadership reshuffle loomed later this year prompted an unexpected conclusion. The price was too high, the leaders agreed, according to a person familiar with the situation. The buildup of debt used to fuel smokestack industries from steel to cement had helped win the short-term battle for growth, but the triumph itself undermined the foundations of long-term expansion, the leaders decided… What followed was an order to central and local government officials that if they are forced to choose this year, stability must be the priority while everything else, including the growth target and economic reform, is secondary, said another four people familiar with the situation.”

If reports are accurate, Chinese officials have decided to (at least somewhat) bite the bullet and (again) attempt to get their financial Bubble under control. This would typically have global markets (stocks, Credit, commodities and currencies) on edge. Yet we’ve heard it all before – repeatedly. A broken record: “talk tough and lose nerve.” And they could very well be seriously determined this round to stick with tough measures. Perhaps they finally accept that timid not only doesn’t work – it makes things worse. But after last year’s panicky heavy-handed government interventions, markets are understandably skeptical. Does the Chinese government have the stomach for the type of dislocation that reining in excess at this stage of the Bubble would entail?

They’re going to have to do something. Curiously, Chinese officials ushered in the new year with a decent currency short squeeze (echoes of Thailand, June 1997?). After ending the year at 6.945 and trading as high as 6.964 on January 3, the renminbi (vs. dollar) rallied 1.3% to 6.869 on January 4th. The renminbi closed this week at 6.90, up 0.6% y-t-d.

January 8 – Bloomberg: “China’s foreign currency holdings fell for a sixth month in December, bringing last year’s drop to $320 billion as the yuan posted its steepest annual slide in more than two decades. Reserves decreased $41.1 billion to a fresh five-year low of $3.01 trillion… The central bank’s effort to stabilize the yuan was the main reason for the drop last year, the State Administration of Foreign Exchange said… The world’s largest stockpile has fallen for 10 straight quarters from a record $4 trillion in June 2014…”

January 12 – Bloomberg: “China has asked some banks to stop processing cross-border yuan payments until they balance inflows and outflows, people familiar with the matter said, as authorities step up a campaign to curb a record amount of money leaving the nation in the local currency. The directions, given verbally on Wednesday, require the lenders to show at the end of every month that the amount of outgoing yuan matches the sum that comes in… The People’s Bank of China guidance will apply to transactions involving both companies and individuals, the people said.”

Chinese officials are tiptoeing guardedly toward capital controls. Chinese international reserves will fall below $3.0 TN this month, and it’s just very difficult to see what will cool the desire to get “money” out of the country. Money and Credit continue their historic inflation, leading to only deeper maladjustment while creating added liquidity for outflows. And while the Chinese economic expansion for now continues to feed off record Credit growth and asset inflation, their entire system is acutely vulnerable to any slowing of lending and speculative leveraging.

Chinese officials appear to understand the gravity of tolerating ongoing financial excess, though I’m not convinced they appreciate the degree of lurking fragility. They must look with dismay at the monthly drawdown in their international reserve position. Beijing would prefer a weaker currency to stimulate their vast export engine, but they must increasingly fear an avalanche of destabilizing outflows and speculation against the renminbi. There’s increasing chatter of a “free-floating yuan.” A surprise major devaluation – along with capital controls – may look increasingly tempting compared to the ineffective gradual devaluation approach. But Chinese leadership has the new Trump Administration – that is already aghast with the current level of the renminbi - to contend with.

January 8 – Bloomberg (Narae Kim): “Donald Trump wasn't the first U.S. presidential candidate since the century began to blast China for manipulating its currency for trade advantage, but it's increasingly likely he'll be the first to follow through on the threat… That's the perspective of economists at Bank of America Merrill Lynch, led by Helen Qiao, chief Greater China economist at the bank in Hong Kong… ‘It has been increasingly difficult to dismiss concerns that President-elect Trump will adopt protectionist trade policies that may hurt trading partners as well as the U.S. itself,’ Qiao and her colleagues wrote… While designating China an official manipulator of its exchange rate for the first time since 1994 poses some technical hurdles… it may be a more appealing option than some of the alternatives. Trump once broached the idea of a 45% tariff on imports from the largest Asian economy, something the president has the power to do…”

January 12 – Bloomberg (David Tweed): “China’s state media rebuffed a suggestion by President-elect Donald Trump’s nominee for secretary of state that Beijing must be denied access to reclaimed reefs in the disputed waters of the South China Sea. ‘Unless Washington plans to wage a large-scale war in the South China Sea, any other approaches to prevent China access to the islands will be foolish,’ the Communist Party-run Global Times newspaper wrote… The English-language China Daily took a similar line: ‘It is certainly no small matter for a man intended to be the U.S. diplomat in chief to display such undisguised animosity toward China.’"

The media may be fixated on some Trump and Putin bromance, but the key relationship for 2017 is that of President Trump and President Xi Jinping. China is uncharacteristically vulnerable. Trump is emboldened. China will surely be even more belligerent than usual. Does Trump ever back down? Early indications have the Trump Administration taking a hard line on both Chinese trade and the South China Sea islands. I fully expect China to push back hard. Taiwan, the South China Sea and trade are hot buttons, surely to stoke rising nationalism. And while the Chinese media somewhat erupted this week, Chinese officials have thus far reacted cautiously.

Considering the major issues that China must confront, perhaps top leadership will see some potential advantage in confronting the Trump Administration. For a while now they’ve been laying the groundwork to point fingers at Japan, the U.S. and the “West”. Blame the foreigners! A trade war initiated by Donald Trump, or perhaps even a skirmish in the South China Sea, might actually play well in China. The rising nationalistic tide in China coupled with a seemingly small U.S. constituency advocating the importance of the China/America relationship leaves me concerned that this is a flash-point in the making.

But similar to rising rates and waning QE, a potential confrontation with China (trade and/or otherwise) is something ebullient markets are happy to disregard for now. With highly speculative markets currently over-liquefied, the focus is on opportunities and all things Trump. Still, this week saw an initial crack in market confidence in the Trump agenda (or at least his unconventional approach). Traders will certainly tune in whenever our new President nears a microphone. Will President Trump continue to tweet? How often and how inflammatory? No President has ever enjoyed such a bully pulpit. Powerful.

Markets prefer stability, predictability and the status quo. They, at least traditionally, loath uncertainty. The markets were fearful of Trump for a reason. Change, perhaps even radical change. Drain the swap. Make America Great Again – My Way. Incredible unpredictability. So many issues that come with such a personality.

Dow futures were down about 1,000 points election night. Trump said kind things about Hillary and emphasized a major infrastructure spending plan. Markets took off, and the bullish narrative immediately turned to de-regulation, tax cuts and a comprehensive pro-growth agenda. You either turned optimistic or were run over. The view took hold that securities markets would hold the same sway (or more!) under Trump as they did under Obama, Bush and Clinton.

For a while now I’ve believed that to make America great again would for starters require a rebuilding of our nation’s depleted manufacturing base. Decades of trading new financial claims for imports has been a recipe for economic maladjustment, serial boom and bust cycles and societal restiveness. Over time it passed for sustainable only through monetary inflation the likes the world had never experienced.

I have expected financial and economic crisis would likely be the impetus for major economic restructuring. I hope the Trump plan works, rather than my expectations coming to fruition. But markets are delusional if they believe there will be a free lunch. Trump’s focus will be on the real economy, rather than the financial economy that has risen to incredible prominence throughout this prolonged period of deindustrialization and inflationism. To make America Great Again will require the U.S. retaking a bigger slice of the global pie. Not coincidently, countries around the globe are as well keenly focused on the size of their respective slices. And decades of inflationism and maladjustment ensure that the pie is not expanding as it once did.

Trump is surely tickled that markets have rallied on his election win. But I’ll assume he senses that it’s unsustainable. Team Trump at this point seems to have a real determination to do what they said they’d do. Candidate Trump often referred to the “Bubble”. He is clearly no fan of Yellen or Federal Reserve monetary policies more generally. They’re a big part of the problem he’s endeavoring to fix.

And today none of this matters a lick to the markets. The marketplace assumes they’ll hold Trump hostage just like they did those before him. If he wants infrastructure, he needs the bull market. If he wants growth and jobs… The threat of financial crisis has for some time now hamstrung Presidents, central bankers and policymakers more generally on a global basis. But my hunch is that Trump and his inner-circle are determined to move forward whether the markets like it or now.

It could be a short honeymoon. Things will get interesting when the markets decide to protest or throw a tantrum. I wouldn’t be surprised if Team Trump believes a crisis-type backdrop might even provide an environment more conducive to radical change, but let’s not get ahead of ourselves. I’m ready for a fascinating year.


For the Week:

The S&P500 was little changed (up 1.6% y-t-d), while the Dow slipped 0.4% (up 0.6%). The Utilities declined 0.7% (down 0.4%). The Banks added 0.4% (up 1.4%), while the Broker/Dealers slipped 0.4% (up 4.0%). The Transports gained 1.1% (up 1.8%). The S&P 400 Midcaps (up 1.6%) and the small cap Russell 2000 (up 1.1%) each gained 0.3%. The Nasdaq100 rose 1.0% (up 4.0%), and the Morgan Stanley High Tech index added 0.9% (up 4.4%). The Semiconductors jumped 1.8% (up 2.0%). The Biotechs declined 1.0% (up 5.7%). With bullion jumping $24, the HUI gold index gained 1.4% (up 9.3%).

Three-month Treasury bill rates ended the week at 52 bps. Two-year government yields slipped two bps to 1.19% (unchanged y-t-d). Five-year T-note yields declined two bps to 1.90% (down 3bps). Ten-year Treasury yields fell two bps to 2.40% (down 4bps). Long bond yields declined two bps to 2.99% (down 8bps).

Greek 10-year yields gained 11 bps to 6.89% (down 13bps y-t-d). Ten-year Portuguese yields fell 15 bps to 3.91% (up 16bps). Italian 10-year yields declined seven bps to 1.90% (up 8bps). Spain's 10-year yields dropped 11 bps to 1.43% (up 5bps). German bund yields rose four bps to 0.34% (up 13bps). French yields increased three bps to 0.80% (up 12bps). The French to German 10-year bond spread widened one to 46 bps. U.K. 10-year gilt yields gained two bps to 1.36% (up 13bps). U.K.'s FTSE equities index gained 1.8% (up 2.7%).

Japan's Nikkei 225 equities index lost 0.9% (up 0.9% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.05% (up one basis point). The German DAX equities index added 0.3% (up 1.3%). Spain's IBEX 35 equities index was unchanged (up 1.7%). Italy's FTSE MIB index fell 0.9% (up 1.5%). EM equities were mixed. Brazil's Bovespa index jumped 3.2% (up 5.7%). Mexico's Bolsa increased 0.2% (up 1.2%). South Korea's Kospi rose 1.4% (up 2.5%). India’s Sensex equities index gained 1.8% (up 2.3%). China’s Shanghai Exchange dropped 1.3% (up 0.3%). Turkey's Borsa Istanbul National 100 index jumped 5.7% (up 4.3%). Russia's MICEX equities index declined 0.8% (down 1.7%).

Junk bond mutual funds saw inflows of $564 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped eight bps to 4.12% (up 20bps y-o-y). Fifteen-year rates fell seven bps to 3.37% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.24% (up 31bps).

Federal Reserve Credit last week slipped $0.7bn to $4.414 TN. Over the past year, Fed Credit contracted $37.3bn (down 0.8%). Fed Credit inflated $1.603 TN, or 57%, over the past 218 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week to $3.182 TN. "Custody holdings" were down $95.3bn y-o-y, or 2.9%.

M2 (narrow) "money" supply last week added $7.0bn to a record $13.267 TN. "Narrow money" expanded $965bn, or 7.8%, over the past year. For the week, Currency increased $3.3bn. Total Checkable Deposits declined $12.1bn, while Savings Deposits rose $13.6bn. Small Time Deposits gained $2.4bn. Retail Money Funds were little changed.

Total money market fund assets dropped $22.5bn to $2.691 TN. Money Funds declined $52bn y-o-y (1.9%).

Total Commercial Paper gained $9.3bn to $959bn. CP declined $85bn y-o-y, or 8.2%.

Currency Watch:

January 11 – Reuters (Miguel Angel Gutierrez, Paulina Osorio and David Alire Garcia): “The Mexican peso weakened to a historic low of 22.04 per dollar and the country's stock index fell on Wednesday, after U.S. President-elect Donald Trump warned U.S. auto companies would face a high tax for products made south of the border. Speaking at a news conference in New York, Trump also reiterated that the United States would start building a southern border wall after he took office next week. He said Mexico would reimburse the cost either through a tax or a payment.”

January 12 – Bloomberg (Justina Lee): “As China’s yuan swings back into the global spotlight, it might seem like an odd time for authorities in Beijing to loosen their grip on the tightly-managed currency. Yet for a growing number of analysts and investors, the prospect of a freely floating yuan -- a Chinese exchange rate wholly determined by market forces -- is no longer a distant possibility. Advocates include a government-backed researcher and a former central bank adviser, while bond-market powerhouse Pacific Investment Management Co. says the chances of a free float are rising.”

The U.S. dollar index dropped 1.0% to 101.18 (down 1.2% y-t-d). For the week on the upside, the Australian dollar increased 2.8%, the New Zealand dollar 2.5%, the Japanese yen 2.2%, the South African rand 1.8%, the Swedish krona 1.6%, the South Korean won 1.5%, the euro 1.1%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Norwegian krone 0.4% and the Brazilian real 0.1%. For the week on the downside, the Mexican peso declined 1.2% and the British pound fell 0.9%. The Chinese yuan declined 0.1% versus the dollar (up 0.6% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.5% (up 0.3% y-t-d). Spot Gold jumped 2.1% to $1,198 (up 3.9%). Silver rose 1.9% to $16.84 (up 5.4%). Crude fell $1.33 to $52.37 (down 2.7%). Gasoline slipped 0.9% (down 3.5%), while Natural Gas rose 4.8% (down 8.6%). Copper jumped 5.7% (up 7.3%). Wheat increased 0.6% (up 4.4%). Corn was little changed (up 1.8%).

Trump Administration Watch:

January 12 – Bloomberg: “China said it had the right to act in its own territory in the disputed South China Sea, pushing back after President-elect Donald Trump’s nominee for secretary of state said Beijing must be denied access to reclaimed reefs. While China’s foreign ministry issued a relatively measured response to the remarks, the threat from former Exxon Mobil Corp. chief Rex Tillerson raises the prospect of a more antagonistic U.S. approach to Beijing’s military buildup in the area. In recent years China has reclaimed thousands of acres of land and shooed away boats from other claimant states like the Philippines and Vietnam. Hours into a confirmation hearing before the Senate Foreign Relations Committee, Tillerson compared China’s actions to those of Russia in Crimea, saying a failure to respond had allowed it to ‘keep pushing the envelope’ in the South China Sea. ‘We’re going to have to send China a clear signal that first the island-building stops and second your access to those islands is also not going to be allowed.’”

January 12 – Reuters (Phil Stewart and Patricia Zengerle): “Donald Trump's pick to lead the Pentagon put Russia at the top of a list of threats to U.S. interests on Thursday and told Congress that America must be ready to confront Moscow where necessary, even as he backed Trump's bid for better relations. The remarks by retired Marine General James Mattis were the latest by one of Trump's Cabinet picks that veered away from the president-elect's campaign rhetoric…”

January 12 – Financial Times: “Global investors sold the dollar and sought security in government bonds and gold on Thursday as the Trumpflation rally that has dominated global markets since early November soured. In the wake of Mr Trump becoming president-elect in November, global markets have seen one of the best post-election rallies in history. Plans to cut taxes, ease regulation and deliver infrastructure spending invigorated an ageing bull market and sent stock indices to fresh highs. However, the tone in some of the best performing areas of markets has shown signs of fatigue in recent weeks and Mr Trump’s tumultuous briefing with the media on Wednesday ignited a stronger reaction across currencies, equities, gold and bonds that was still resonating 24 hours later.”

January 12 – Bloomberg (Robert Langreth, Caroline Chen and Jared S Hopkins): “In a hallway of a San Francisco luxury hotel, investors huddled around a computer screen watching dozens of drug stocks plummet as President-elect Donald Trump lit into pharma companies, declaring that ‘they’re getting away with murder.’ As for Obamacare, he said, ‘it’ll be repeal and replace.’ The mood was shock and disbelief as thousands of health-care investors, bankers and executives gathered at the cramped Westin St. Francis Hotel. Many had paid thousands of dollars to attend the industry’s biggest investing get-together of the year, the four-day J.P. Morgan Healthcare Conference. And they had spent the last days speculating about what policies Trump would push in health care. Then the bomb dropped. ‘It’s horrible,’ David MacCallum of Outer Islands Capital, a small hedge fund in New York, said over the phone to his wife as he watched the tickers tilt downward.”

January 9 – Reuters (Brenda Goh, J.R. Wu in Taipei and Michael Martina): “State-run Chinese tabloid Global Times warned U.S. President-elect Donald Trump that China would ‘take revenge’ if he reneged on the one-China policy, only hours after Taiwan's president made a controversial stopover in Houston. Taiwan President Tsai Ing-wen met senior U.S. Republican lawmakers during her stopover in Houston on Sunday en route to Central America, where she will visit Honduras, Nicaragua, Guatemala and El Salvador.”

January 11 – Reuters (Davie Graham): “Mexico said… it would throw its relationship with the United States wide open in talks with the incoming Trump administration, putting security, migration and trade on the table as it seeks to avoid a major economic shock. U.S. President-elect Donald Trump has threatened to tear up a trade agreement that underpins Mexico's export model if he cannot renegotiate its terms in his favor, battering the peso currency and fueling uncertainty over foreign investment. President Enrique Pena Nieto said Mexico would take a broad approach to the challenge, seeking a settlement that would benefit both Mexico and the United States as he looks to carve out a platform that gives him room for maneuver in talks. ‘All the issues that define our bilateral relationship are on the table, including security, migration and trade,’ Pena Nieto said…”

China Bubble Watch:

January 12 – Bloomberg: “China’s broadest measure of new credit expanded faster than expected, bringing the total of new loans extended last year to roughly equal the size of Italy’s $1.8 trillion economy. Aggregate financing remained robust at 1.63 trillion yuan ($236bn) in December, compared with a median estimate of 1.3 trillion yuan… and 1.74 trillion yuan the prior month. New yuan loans stood at 1.04 trillion yuan, exceeding all 37 estimates in the survey. The broad M2 money supply increased 11.3% from a year earlier after climbing 11.4% in November.”

January 11 – Reuters (Engen Tham and Samuel Shen): “China's forex regulator is telling banks to keep its instructions about curbing capital outflows secret and to ensure that research analysts keep any negative views about the yuan's prospects to themselves, several bankers said. Both demands are seen as an attempt by the authorities to prevent alarm that could trigger further declines in the yuan, the bankers from local and foreign banks said… In a statement.., SAFE's Shanghai branch said it had not adopted new measures to control forex conversions and cross-border payments, but had urged banks to strengthen checks on compliance and deal authenticity. SAFE also said a media report about it telling banks to keep its instructions secret was ‘inaccurate, and is misleading public opinion and disturbing normal operations of the Forex market’.”

January 11 – Bloomberg (Sarah McBride): “China's bond market is facing more turbulence as banks scramble to avoid losses on wealth management products that raised US$3.8 trillion from the nation's savers. The investment plans typically use leverage to boost returns on the 56% of their holdings parked in fixed-income securities. That model is under threat after Chinese corporate notes plunged the most in nine years in the fourth quarter. Banks may have to use their own money to repay holders of maturing WMPs because it will be hard to sell bond holdings during an extended rout or to raise cash by issuing new products, Citigroup wrote… The risk of a vicious cycle of bond losses, cash shortages, payment failures and further debt-market declines has prompted China's policy makers to step in… What makes such products particularly risky are their short time frames. Chinese company bonds have an average maturity of 7.7 years, while the most-recent government data show a typical WMP matures in 127 days. China International Capital Corp estimates such plans hold more than 50% of all outstanding Chinese corporate bonds.”

January 11 – Bloomberg (Chris Anstey, Cynthia Li and Narae Kim): “Call it China’s Great Ball of Money, Whac-a-Mole Finance, or simply a whole lot of liquidity. Whatever term you use for the excess credit trapped in China’s financial system, few would deny that predicting its sometimes erratic movements can be a money-maker for analysts, traders and investors. After a string of market bubbles in recent years, China will again see assets threatened in 2017 by prices detaching from fundamentals. That’s the opinion of all but one of 14 economists surveyed by Bloomberg late last month. Half penciled in the risk of a real-estate bubble inflating, despite efforts by policy makers in recent months to avoid exactly that outcome. An additional four saw the corporate bond market as most vulnerable to becoming a bubble, again even as officials take steps to raise costs and reduce a build-up in debt.”

January 10 – Bloomberg: “China’s producer price index rose at the fastest pace in more than five years in December as the factory to the world swings from being a drag on global inflation to another potential force pushing prices higher. PPI jumped 5.5% last month from a year earlier, compared to the median estimate of 4.6% in a Bloomberg survey and the 3.3% gain in November. Consumer-price index rose 2.1%...”

January 12 – Bloomberg: “China’s exports remained subdued as soft global demand weighed on sales, raising uncertainties for the nation’s external sector as it braces for potential trade frictions with the U.S. under a Donald Trump presidency. Overseas shipments dropped 6.1% from a year earlier in December, the customs administration said Friday. Imports rose 3.1%, leaving a $40.8 billion trade surplus.”

January 7 – Reuters (Winni Zhou, Yawen Chen and Alexandra Harney): “Municipal authorities in Shanghai suspended sales of commercial office projects from Jan. 6, in the latest move to crack down on irregularities in the property market amid concerns about soaring prices. The suspension came after the municipality's housing and urban-rural development committee received increasing complaints about ‘illegal sales and unauthorized alterations’ to commercial housing projects, it said…”

Europe Watch:

January 12 – Wall Street Journal (Nina Adam and Andrea Thomas): “Germany’s economy grew strongly in 2016, propelled by a buoyant labor market and a pickup in government spending, likely making it one of the fastest-growing of the Group of Seven industrialized nations. Gross domestic product expanded 1.9% in 2016 in inflation-adjusted terms… This is the highest rate since 2011, beating the government’s own prediction of 1.8% growth. There was a pickup in economic activity late in the year.”

January 12 – Reuters (Gernot Heller and Madeline Chambers): “German Finance Minister Wolfgang Schaeuble told The European magazine that he favoured a normalisation of the inflation rate so that the European Central Bank could gradually withdraw from its 'unusual monetary policy'. Schaeuble said it would be better if Europeans increased competitiveness by introducing structural reforms. ‘A normalisation of the inflation rate is also desirable so that we gradually get out of the 'unusual monetary policy',’ Schaeuble told the magazine…”

Fixed-Income Bubble Watch:

January 11 – Bloomberg (Alex Morales): “Jeffrey Gundlach said the 10-year Treasury yield topping 3% would signal the end of the three-decade long rally in bonds. ‘Almost for sure we’re going to take a look at 3% on the 10-year during 2017,’ Gundlach, the chief executive officer of DoubleLine Capital, said… ‘And if we take out 3% in 2017, it’s bye-bye bond bull market. Rest in peace.”

January 12 – Reuters (John Geddie): “U.S. President-elect Donald Trump's plans to slash taxes could threaten the country's triple-A credit rating over the medium term, the head of EMEA sovereign ratings at the Fitch agency said… We do see increasing medium-term pressures (on the U.S. rating),’ Ed Parker said… ‘Even before elections the U.S had the highest level of government debt of any triple-A country. If we add on top of that Trump's plans to cut taxes by $6.2 trillion over the next 10 years that could add around 33% to U.S. government debt,’ he added.”

Global Bubble Watch:

January 10 – Financial Times (Nicholas Megaw): “S&P downgraded almost three times as many countries’ sovereign credit ratings as it upgraded in 2016, and the ratings agency has predicted that the trend is likely to accelerate this year. Of the 130 countries with a rating from S&P, 30 started 2017 with a ‘negative’outlook compared with only seven with a positive outlook.”

U.S. Bubble Watch:

January 10 – Bloomberg (Vince Golle): “Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election. The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4.”

January 9 – Bloomberg (Cecile Vannucci): “Anxiety in financial markets just keeps on waning. A Bank of America Corp. risk gauge tracking hedging demand and investor flows across global asset classes has fallen to levels not seen since China’s devaluation of the yuan in August 2015 set off a wave of risk aversion.”

January 11 – Financial Times (Mamta Badkar and Adam Samson): “Facebook, Amazon, Netflix and Google-parent Alphabet — the so-called Fang stocks — have collectively added $83.4bn to their market value over the first seven trading days this year… Fang stocks hit the ground running, advancing, on average, 6.6%, compared with a 4% drop over the same period in 2016 as fears of a US recession and skittishness about the Chinese economy drove broader US equities and the Fangs lower at the start of last year.”

January 12 – Bloomberg (Dani Burger): “Stock exchanges are increasingly getting out of the stock trading business. As weird as it may seem, individual shares no longer are the most actively traded securities in the market. That distinction goes to exchange-traded funds, which took in a record $400 billion in the past year to become a $3.8 trillion industry… Each day, a vast majority of trades are in ETFs, such as the SPDR Financial Select Sector Fund, or XLF, which has an average daily volume of 105 million shares, making it fifth-most traded fund. That’s 24% more than the second-most traded stock, Chesapeake Energy Corp. Of the 15 most heavily traded securities in 2016, only three were stocks…”

January 8 – CNBC (Jeff Cox): “Professional stock pickers just wrapped up one of their worst years ever, and the look ahead doesn't seem a whole lot better. By now it's becoming a familiar refrain: This will be the year of the stock picker, right along with the ‘Great Rotation’ of investor money from bonds to stocks. Neither has happened during the course of the bull market, however, and 2016 was no exception. Fewer than 1 in 5 large-cap active managers… produced returns that beat the Russell 1000 market index, according to Bank of America Merrill Lynch. The average fund had an 8.4% return for the full year; the index rose 9.7%.”

January 11 – Bloomberg (Dani Burger): “What happens when you take the ‘short’ out of a long-short trading strategy? Some hedge funds are about to find out. Equity long-short fund managers, the biggest category in hedge funds, hold the fewest bearish stock bets on record, data compiled by Credit Suisse Group AG show. The shift reflects their abysmal performance in 2016, when the S&P 500 advanced 9.5% as the long-short managers tracked by Credit Suisse fell 4.3%, their worst year since 2011. With the market continuing to rally, many hedge funds have decided to toss the short side of these pairs and stick with the long side to avoid getting singed in a hot market.”

January 11 – Bloomberg (Sarah McBride): “Venture capital funds in the U.S. received the most money since the heady dot-com days, but they’re moving more cautiously as their investments are slow to realize returns. The U.S. venture industry raised $41.6 billion last year, the highest since 2001… However, startup investing slowed last year, while the number of venture-backed businesses that were acquired or went public fell to the lowest level since 2010…”

January 12 – Reuters (Sharon Bernstein): “Foreclosure proceedings affected nearly a million U.S. homes and other real estate last year, down 14% from 2015 and down 70% from the worst of the housing crisis in 2009… Foreclosures hit a 10-year low and property owners in all but 15 states experienced fewer of the early stages of foreclosure, usually begun after owners have missed four mortgage payments…”

January 12 – Reuters (Brenda Goh): “The U.S. government posted a $28 billion budget deficit in December, with both receipts and outlays falling from the same month a year earlier… The budget gap was $14 billion in December 2015…”

Federal Reserve Watch:

January 9 – Bloomberg (Rich Miller): “Potential candidates to head the Federal Reserve in 2018 suggested that monetary policy would be tighter if they were in charge. Speaking at the annual American Economic Association meeting that ended Sunday, Glenn Hubbard of Columbia University, along with Stanford University’s John Taylor and Kevin Warsh, criticized the central bank for trying to do too much to help an economy struggling with problems that monetary policy can’t solve.”

EM Watch:

January 11 – Wall Street Journal (Ira Iosebashvili and Robbie Whelan): “Global investors are fleeing Mexico’s financial markets, sending the peso to record lows on mounting concerns that Donald Trump’s trade policy could end the country’s privileged status among developing countries. The peso on Wednesday tumbled to another all-time low against the dollar as Mr. Trump pledged to change U.S. trade policy with Mexico. ‘Mexico has taken advantage of the United States,’ he said during his press conference. ‘It’s not going to happen anymore.’”

January 11 – Bloomberg (Mario Sergio Lima): “Brazil slashed its benchmark interest rate in a surprisingly aggressive move, as policy makers ratcheted up their efforts to jumpstart the country’s shrinking economy. The central bank… unanimously voted… to lower the benchmark Selic rate by three quarters of a point to 13% -- a move that was predicted by just four of 48 analysts…”

January 12 – Financial Times (Mehreen Khan): “Talking up the lira. OK, maybe shouting it up. Turkey’s president Recep Tayyip Erdogan has been in typically combative mood today, comparing foreign exchange traders to terrorists targeting the country after a record busting slide in the lira. Mr Erdogan, who has form when it comes to bombast over the exchange rate, said there was ‘no difference between people with weapons and those with foreign currency’, adding that speculators used the exchange rate ‘like a weapon’ against the country.”

January 8 – Financial Times (Paul McNamara): “The once-moderate Islamist AK Party, which came to power in 2002, won plaudits for a programme of economic reform and peace in restive Kurdish regions. Inflation fell from 68% in 2001 to 7.4% in 10 years, and stayed largely in single digits. Returns to investors were spectacular… Even the global financial crisis of 2008 constituted only a one-year setback. But Ankara enters 2017 little-loved by investors. A Bloomberg survey of investors in December named the country as by far the most popular underweight or short of the major emerging markets. “

Geopolitical Watch:

January 12 – Reuters (Brenda Goh): “China and Russia have agreed to take further unspecified ‘countermeasures’ in response to a U.S. plan to deploy an anti-missile system in South Korea, state news agency Xinhua reported… The countermeasures ‘will be aimed at safeguarding interests of China and Russia and the strategic balance in the region", Xinhua said, citing a statement released after a China-Russia security meeting.”

January 11 – Reuters (Idrees Ali and David Brunnstrom): “A Chinese H-6 strategic bomber flew around the Spratly Islands over the weekend in a new show of force in the contested South China Sea, a U.S. official said… It was the second such flight by a Chinese bomber in the South China Sea this year… The flight could be seen as a show of ‘strategic force’ by the Chinese, the official said. It comes after U.S. President-elect Donald Trump has signaled a tougher approach to China when he takes office…”

January 11 – Reuters (J.R. Wu and Faith Hung): “Taiwan scrambled jets and navy ships on Wednesday as a group of Chinese warships, led by its sole aircraft carrier, sailed through the Taiwan Strait, the latest sign of heightened tension between Beijing and the self-ruled island. China's Soviet-built Liaoning aircraft carrier, returning from exercises in the South China Sea, was not encroaching in Taiwan's territorial waters but entered its air defense identification zone in the southwest…”

January 8 – Financial Times (Lucy Hornby): “When Taiwan last year elected a president eager to reduce the island’s reliance on China, tens of thousands of Chinese netizens attacked Taiwanese websites in a co-ordinated action that was as much a surprise to Beijing as it was to its targets. In what they called a ‘sacred war’, online nationalists plastered pro-Chinese propaganda on Taiwanese Facebook pages. Now, as US President-elect Donald Trump shakes up international diplomatic pieties, the volatile reaction of Chinese nationalists and the ability of China’s assertive president Xi Jinping to keep them on his side is one of the many uncertainties facing Asia. In the past, a small group of hardcore nationalists in mainland China focused exclusively on Japan. Now a younger and more vocal generation is weighing in on new fronts, including relations with Taiwan, the US and the Muslim world. ‘There are lots of historic questions still unresolved but we can’t just look at Japan. We need to change US-China relations,’ says Sima Pingbang, a vocal ‘red’ or nationalist blogger. ‘The real problem is the US.’”

January 11 – Bloomberg (Alex Morales): “Rising inequality and social polarization are set to shape world developments for the next decade after contributing to Britain’s decision to leave the European Union and the ballot-box success of U.S. President-elect Donald Trump, the World Economic Forum said. Climate change was underlined as the third major global trend in the WEF’s annual assessment of global risks... It said world leaders must work together to avoid ‘further hardship and volatility in the coming decade.’ ‘There’s a wide array of potential threats; growing social and political turmoil, potential business interruptions which could stem from inter-state conflict, from social instability, terrorist attacks,’ John Drzik, president of global risk at Marsh USA Inc…’This whole social and political context creates the potential for disruption.’”

January 6 – Wall Street Journal (Greg Ip): “Late on a Sunday evening a little more than a year ago, Marine Le Pen took the stage in a depressed working-class town in northern France. She had just lost an election for the region’s top office, but the leader of France’s anti-immigrant, anti-euro National Front did not deliver a concession speech. Instead, Ms. Le Pen proclaimed a new ideological struggle. ‘Now, the dividing line is not between left and right but globalists and patriots,’ she declared… Globalists, she charged, want France to be subsumed in a vast, world-encircling ‘magma.’ She and other patriots, by contrast, were determined to retain the nation-state as the ‘protective space’ for French citizens. Ms. Le Pen’s remarks foreshadowed the tectonic forces that would shake the world in 2016.”