Thursday, August 17, 2017

Thursday Evening Links

[Bloomberg] Asia Stocks to Drop on Spain Attack, Trump Turmoil: Markets Wrap

[Bloomberg] Markets Roiled as Tension Mounts Over Trump Stance: Markets Wrap

[CNBC] Dow drops 200 points, led by Cisco; concerns grow Republican agenda will be derailed

[Bloomberg] ECB Searches for Stimulus Flexibility as End of QE Approaches

[WSJ] The ECB’s Good-News Problem: the Euro

[FT] Cautious markets focus on Trump and central banks

[FT] Tillerson says US is prepared to use force against North Korea

[Bloomberg] July Was the 2nd Hottest Month in Recorded History

Thursday's News Links

[Bloomberg] Stocks Fall, Bonds Gain Amid Rising Policy Concern: Markets Wrap

[Bloomberg] Fed Starts to Wonder If Cornerstone Inflation Model Still Works

[Bloomberg] ECB Officials Expressed Concern Over Risk of Euro Overshoot

[Bloomberg] The 48 Frantic Hours Before CEOs Broke With Trump

[Bloomberg] The Growing List of Money Managers Cutting Their Exposure to Junk Bonds

[Bloomberg] World's Biggest Money-Market Fund to Get Even Bigger, Fitch Says

[Reuters] South Korea's Moon says North Korean nuclear-tipped ICBM is a 'red line'

[CNBC] Forget North Korea — here's the other Asia flashpoint that has analysts worried

[Reuters] U.S. says joint S.Korea war games not on the negotiating table

[Reuters] China military criticizes 'wrong' U.S. moves on Taiwan, S.China Sea

[WSJ] Trump’s Remarks Rattle His Staff, Threaten Agenda

[WSJ] Fed Officials Split Over Timing of Next Rate Increase

[WSJ] ECB Worried by Euro Strength, Toyed With Changing Forward Guidance

[FT] Prominent China debt bear warns of $6.8tn in hidden losses

[FT] The perils of calling the peak of the equities bull run

Wednesday, August 16, 2017

Wednesday Evening Links

[Bloomberg] U.S. Stocks Pare Gains, Dollar Falls on CEO Rebuke: Markets Wrap

[Bloomberg] Trump Ends Business Councils as CEOs Turn Against President

[Reuters] Fed policymakers grow more worried about weak inflation: minutes

[CNBC, Cox] Fed minutes: Central bank split over path of rate hikes

[Reuters] Fed's Mester says U.S. rate hikes should continue despite weak inflation

[Bloomberg] Chinese Demand Pushes the Market for Asia's Dollar Bonds Toward $1 Trillion

[FT] Fed divided on start to balance sheet unwinding

Wednesday's News Links

[Bloomberg] U.S. Stocks Rise as Investors Await Fed Minutes: Markets Wrap

[Bloomberg] Fed Minutes May Show Battle Lines Hardening Over Soft Inflation

[CNBC] This is what the markets are looking for from the Fed Wednesday

[Reuters] ECB's Draghi will not deliver fresh policy steer at Jackson Hole: sources

[Bloomberg] U.S. Housing Starts Fell in July on Apartment Building Slowdown

[Reuters] As NAFTA talks begin, Trump's 'America First' agenda looms large

[Bloomberg] Iron Ore Risks Keeling Over as Slowing China Drives Reversal

[Reuters] India, China soldiers involved in border altercation: Indian sources

[Politico] The Real Reason North Korea Is Threatening Guam

[WSJ] Trump’s Loyal Sidekick on North Korea: Japan’s Shinzo Abe

[FT] Fed’s Fischer attacks moves to unwind regulations

[FT] Emerging-market assets ‘increasingly influenced’ by ETF investors – Citi

Tuesday, August 15, 2017

Tuesday Evening Links

[Bloomberg] Asian Shares Mixed, Korea Advances as Calm Returns: Markets Wrap

[Bloomberg] U.S. Stocks Dip Slightly as Korea Threat Recedes: Markets Wrap

[Reuters] Americans' debt level notches a new record high

[CNBC] As housing affordability weakens, more buyers are left out in the cold

[Bloomberg] ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone

[Bloomberg] Homebuilder Sentiment in U.S. Reaches Three-Month High in August

[Bloomberg] ‘Ominous’ Sign for Stocks Seen by Bank of America in Fund Survey

[Bloomberg] Canadian Home Prices Tumble the Most Since 2008 Recession

[Reuters] Iran could quit nuclear deal in 'hours' if new U.S. sanctions imposed: Rouhani

[FT] Central banks holding a fifth of their governments’ debt

[FT] IMF warns China over ‘dangerous’ levels of debt

[FT] German judges refer case on ECB’s QE stimulus to European court

Tuesday's News Links

[Bloomberg] Dollar Extends Gain After Retail Data; Bonds Drop: Markets Wrap

[Bloomberg] Broad-Based Advance in U.S. Retail Sales Shows Solid Spending

[Reuters] U.S. import prices rebound after two straight monthly declines

[Bloomberg] ECB's QE Questioned by German Judges Asking for EU Review

[Reuters] Schaeuble: ECB to quit ultra-loose monetary policy in foreseeable future

[Reuters] China says it will defend interests if U.S. harms trade ties

[Reuters] North Korea's Kim holds off on Guam missile plan; Seoul says will prevent war by all means

[Bloomberg] As China's Shadow Banking Takes a Hit, the Cash Flows Elsewhere

[CNBC] Domestic demand keeps Germany driving euro zone economy in Q2

[Bloomberg] Australia's Central Bank Renews Alert on Mounting Household Debt

[WSJ] The ‘Fire and Fury’ Crisis: Trump Risks a Backfire Over China and North Korea

Monday, August 14, 2017

Monday Evening Links

[Bloomberg] Stocks Surge, Havens Retreat as Korea Fears Wane: Markets Wrap

[CNN] Kim reviews Guam strike plan as Mattis issues stark warning

[Reuters] North Korea's Kim puts army on alert; U.S. warns it can intercept missile

[CNBC] Trump signs measure on Chinese trade practices, says it's 'just the beginning'

[Reuters] Trump orders China IP probe as business groups urge caution

[Bloomberg] Fed's Dudley Says He Still Favors Another Rate Hike in 2017

[Bloomberg] U.S. Stock Buybacks Are Plunging

[Bloomberg] China's Stability at Stake as the Next Generation of Money Men Rises

[Bloomberg] China's Economic Speed Bump May Reignite Corporate Bond Defaults

[Bloomberg] Wanda's Bonds Trade Like They're Junk Despite AAA China Rating

[Reuters] Korea tensions ease slightly as U.S. officials play down war risks

[WSJ] Trump Signs Order Increasing Trade Pressure on China

[FT, Wilbur Ross] American genius is under attack from China

[FT] Japan’s ETF addiction stores up risk for the future

Monday's News Links

[Bloomberg] Stocks Bounce and Havens Drop as Korea Fears Abate: Markets Wrap

[Bloomberg] After a Summer Bond Binge, Signs of Angst Are Growing in the Market

[Bloomberg] China's Economic Growth Dials Back

[Reuters] US tax change proposals anger builders, real estate agents, charities

[Bloomberg] China's Property Slowdown Means Peak of Growth Cycle Has Passed

[Bloomberg] China Home Sales Grow at Slowest Pace in More Than Two Years

[Reuters] Chinese state newspaper says Trump trade probe will 'poison' relations

[Reuters] China's real estate investment growth slowed in July from June, as government curbs continued

[WSJ] Skepticism Mounts (Again) About the Next Fed Rate Hike

[WSJ] China Sets Its Banks on Scramble for Funding

[WSJ] Margin Pressure Ahead for U.S. Companies

[FT] Trump aides seek to placate China ahead of trade move

Saturday, August 12, 2017

Saturday's News Links

[Bloomberg] Trump Is Ready to Turn Up the Heat on China Over IP Transfers

[Bloomberg] China's Xi Seeks to Calm North Korea Tensions in Call With Trump

[Politico] Trump's China trade crackdown coming Monday

[Reuters] Trump reportedly plans to call for China intellectual property probe on Monday

[Reuters] In call with Trump, China's Xi urges restraint over North Korea

[Reuters] Minutes from missiles, Guam islanders get to grips with uncertain fate

[Bloomberg] India's Military Said to Increase Alert Along Tense China Border

Weekly Commentary: Doubled-Down

The real trouble with this world of ours in not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.” G.K Chesterton

The S&P500 rose to a record 2,490.87 during Tuesday’s session at about the same time the VIX was trading down to 9.52. The DJIA reached a record 22,179 during Tuesday trading. At 5,973, the Nasdaq100 (NDX) was on track mid-day Tuesday for a record close. Tuesday saw the bank index (BKX) trade to a five-month high, with the broker/dealers (XBD) just shy of all-time highs.

"North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen. He has been very threatening ... and as I said they will be met with fire, fury and, frankly, power, the likes of which this world has never seen before."

The initial market reaction to President Trump’s Tuesday afternoon “fire and fury” comment was anything but dramatic. Market players have grown accustomed to bombast – apparently even when it concerns potential nuclear war. The S&P500 ended the session down about one-quarter of a percent. The VIX rose but only to 11.5. The bond market barely budged, though the already jittery currencies showed some instability.

Instead of dialing back his comments, the President Doubled-Down. The markets took notice. By Thursday the VIX had surged about 70% to trade above 17 (“Biggest weekly gain since December 2015”). U.S. and global stocks were under pressure. Junk bonds were getting hit (worst two-day decline of 2017), and even investment-grade corporates were under some pressure. In a rather unbullish development, U.S. bank stocks (BKX) sank 3.6% for the week. Broader U.S. equities indices were under pressure, with the mid-caps down 2.3% and the small-caps 2.7% lower.

All in all, it was an interesting – perhaps enlightening – week in the markets. At least for the week, the U.S. dollar was notable for weakness in the face geopolitical uncertainty. The yen (up 1.4%) and Swiss franc (up 1.1%) enjoyed some of their traditional safe haven appeal. Speaking of safe havens, Gold surged $31, or 2.4%. European equities trade poorly. German stocks dropped 2.3%, with previous high-flyers Spain (down 3.5%) and Italy (down 2.7%) under significant pressure. Italian 10-year sovereign spreads (to bunds) widened 10 bps.

August 9 – Wall Street Journal (Colin Barr): “Ten years ago this Wednesday, the first glimpses of the global financial crisis came into view. The French bank BNP Paribas froze three investment funds, saying a lack of trading in subprime securities made valuing them impossible. The bond market seized up, rattling investors and central bankers who previously soft-pedaled the notion that the U.S. housing bust would hit the economy. Aug. 9, 2007, marked the beginning of the most far-reaching economic disruption since World War II. The events that Thursday made clear that subprime-lending excesses wouldn’t be ‘contained,’ as Ben Bernanke, then Federal Reserve chairman, had predicted just months earlier. Yet few people appreciated the scope of the disaster that would unfold over the next 18 months.”

It’s simply difficult to believe 10 years have passed since the beginning of the so-called “worst financial crisis since the Great Depression.” It’s not beyond imagination to believe historians might look back to this week’s “fire and fury” as the start of the worst crisis in generations.

August 7 – Financial Times (John Authers and Alan Smith): “After the credit crisis began to unfold in the summer of 2007, many on Wall Street and in the City of London complained it was unprecedented and had been impossible to see coming. They were wrong. Speculative bubbles are rooted deep in human nature, and have been widely studied. History’s most famous bubble took root in the Netherlands almost four centuries ago — for tulips. The common elements to speculative bubbles are: An exciting and new ‘disruptive’ technology that is difficult to value in the short term, and whose long-term value is uncertain. Easy liquidity of markets so that shares or other securities can change hands quickly. The provision of cheap credit to pay for it. These classic elements were visible in, for example, canals and railroads, which both enjoyed speculative bubbles in the 19th century: In the 20th century, economic history was marked by a series of huge bubbles in critical markets. All followed almost identical patterns, and had a serious economic impact.”

The opening quote above – one of my old favorites – comes from Peter Bernstein’s classic “Against the Gods – The Remarkable Story of Risk.” The view that financial innovation and enlightened policymaking had tamed risk grew stronger throughout the nineties and then the mortgage finance Bubble period. Each crisis surmounted only emboldened New Age thinking. Monetary stimulus coupled with derivatives and sophisticated financial engineering ensured that virtually any type of risk could supposedly be hedged away. And as the mortgage Bubble began inflating precariously, a powerful view took hold that “Washington would never allow a national housing bust.” The GSEs, MBS, ABS, repo, CDOs and derivatives, Credit insurance – all things mortgage finance Bubble - enjoyed implicit government backing.

The 2008/09 financial crisis should have concluded an incredible era of dangerous risk misperceptions and flawed calculations. But the Federal Reserve and global central bankers Doubled-Down. Instead of the markets reverting back to more traditional (stable) views of risk, massive QE liquidity injections, zero rates and aggressive market liquidity backstops pushed risk analysis and perceptions only deeper into New Age Fallacy.

These days there’s virtually little in the way of risk that central bankers and government policymakers can’t address. Central banks became willing to fight risk aversion by directly inflating risk market prices, while simultaneously devaluing safe haven assets (with zero rates and inflationary policies). They could eradicate liquidity risk with promises of open-ended QE and the willingness to “push back against a tightening of financial conditions.” Policymakers also learned the value of concerted efforts to manage liquidity, manipulate prices, backstop markets and stabilize currency markets on a global basis.

Over time, markets began to appreciate the even political and geopolitical risks had been tamed. The 2012 “European” crisis demonstrated the new post-crisis reality that financial, economic and political risks would be met first and foremost by “whatever it takes” from central bankers and their electronic printing presses. Essentially any potential risk would ensure lower rates and more “money” printing for longer. It became clear that there was only one way to bet in the markets: with central bankers.

Yet one festering risk remained seemingly outside the purview of our inflationist central banks: geopolitical uncertainty. But even here things became clouded by a world inundated with “money” and surging securities markets. The global Bubble championed cooperation. With economic and financial fragility a global phenomenon, it was basically in each country’s interest to act in ways supportive of the global recovery. Of course, promote the securities markets! And it was also not the time to embark on geopolitically risky endeavors. Indeed, a global consensus developed to use economic/financial sanctions to dissuade countries from unconstructive behavior (i.e. Russia and Iran).

A relatively benign geopolitical backdrop unfolded – with economic expansion the focal point for most leading developed and developing nations. The focus on investment, trade and attracting global flows spurred a generally cooperative post-crisis backdrop, with nations seeking active participation within the global community. Of course, the major central banks were dominating the New Global Order. And with the monetary bonanza train having left the station, it was imperative not to be left behind. In their efforts to inflate securities markets and economies, global central bankers as well fostered a relatively quiescent period geopolitically. There were small countries that refused to participate, but they were irrelevant to the global financial and geopolitical backdrop.

With finance, the markets, economies and geopolitics so well-controlled, there should be little mystery surrounding meager risk premiums, record global stock prices and a VIX index below 10. It was certainly not sustainable, yet central bankers had succeeded in almost fully harnessing risk.

Let me try to explain why North Korea is potentially a huge market issue. It’s a small and irrelevant country financially and economically. Not only does it choose not to cooperate in the New Global Order, it would take great pride in being disruptive. And, most importantly, it has nukes as well as having made major strides recently in ICBM technologies.

Risks associated with North Korea are well outside the comfortable purview of central bank monetary management/manipulation – and they’re potentially catastrophic. The big problem is that market perceptions, behaviors, structures and prices have for going on a decade now been distorted by central bank’s dominance over all things risk. Disregarding risk has been consistently rewarded to the point where markets have been forced to disregard potentially catastrophic risks, including a nuclear confrontation with North Korea. Moreover, years of market risk distortions have deeply impacted the structure of the marketplace (i.e. the ETF complex, derivatives and speculating directly on risk metrics).

Going into the Presidential election, I believed markets would face significant selling pressure in the event of a surprising Donald Trump victory. It was clear from the campaign that a President Trump would be unconventional and not bound by traditional mores and behavior. He would be unpredictable like no President in modern times. And Trump was going to be tough, and likely bombastic and impulsive. No matter what, he would take great pains in doing things his way. For an already divided nation and a world of festering geopolitical instability, a Trump presidency came with extraordinary uncertainty and risk. As it turned out, over-liquefied and speculative markets were in the mood to disregard risk.

Let’s pray there’s a very low probability of a military confrontation with North Korea. Hopefully, over time some diplomatic solution will be found where North Korea halts development of nuclear and ICBM technologies. But I would argue that even this best-case scenario is problematic for the markets.

Key market vulnerabilities are being exposed. There’s always a major problem for highly inflated and speculative markets when it comes to hedging against risk – especially this type of undefinable risk. Indeed, this week provided a wake-up call for those that have been making a fortune writing variations of risk (“flood”) insurance during a period of over-liquefied financial markets (a risk “drought”). And the upshot of this mania in the “insurance” market has created a seemingly endless supply of cheap risk protection – readily available hedging vehicles that have kept players aggressively speculating throughout the markets.

I appreciated a Friday article by Gillian Tett of the Financial Times: “The Next Crash Risk is Hiding in Plain Sight.”

Sometimes, market shocks occur because investors have taken obviously risky bets — just look at the tech bubble in 2001. But other crises do not involve risk-seeking hedge funds, or products that are evidently dangerous. Instead, there is a ticking time bomb that is hidden in plain sight, in corners of the financial system that seem so dull, safe or technically complex that we tend not to focus attention on them. In the 1987 stock market crash, for example, the time bomb was the proliferation of so-called portfolio insurance strategies — a product that was supposed to be boring because it appeared to protect investors against losses. In the 1994 bond market shock, the shocks were caused by interest rate swaps, which had previously been ignored because they were (then) considered geeky.”

Tett doesn’t believe the “financial system faces an imminent threat of another ‘boring’ time bomb causing havoc.” Her article did, however, mention the $4.0 TN ETF industry. And Marko Kolanovic, a senior JPMorgan strategist, estimates that “passive and quantitative investors now account for about 60% of the US equity asset management industry, up from under 30% a decade ago.”

When it comes to today’s global government finance Bubble, I would argue that “ticking time bombs” are more associated with risk misperceptions and “moneyness” (on an unprecedented global scale) rather than exotic debt instruments and egregious leverage. The collapse in the mortgage finance Bubble was not about subprime – but with the unappreciated risks embedded within Trillions of perceived pristine “AAA” mortgage securities and derivatives. The subprime crisis was in full bloom ten years ago today. Yet the S&P500 went on to all-time highs, with the systemic crisis not unfolding until about a year later.

Importantly, subprime tumult was the upshot of initial de-risking and de-leveraging behavior. The more sophisticated market operators began to respond to a deteriorating macro backdrop and escalating risk. Their moves to de-risk altered the market liquidity and pricing backdrops that led eventually to systemic crisis. As is typically the case, full-fledged systemic crisis erupted where price and liquidity risks were perceived to be minuscule – with a crisis of confidence in the money markets. In the case of 2008, panic unfolded in (the belly of the beast) the “repo” market.

Hopefully the North Korean situation will be resolved relatively quickly – perhaps mediated by the Russians and Chinese. A quick resolution would allow the markets to remain in this phenomenal backdrop of risk ignorance. But the longer this drags out the more problematic it becomes for the markets. This unfolding geopolitical crisis illuminates a major type of risk that’s been disregarded in the marketplace. If this illumination initiates de-risking/de-leveraging dynamics, this could mark an important inflection point for the risk markets. Rather than just waiting to see how this plays out, I would expect the more sophisticated players to take some risk off the table.

It’s worth noting that safe haven Treasury bonds rallied little in the face of a bout of “Risk Off” behavior. Not much “hedging” value left there. And in the event of a major military escalation, I’m not convinced that derivatives markets will function effectively. Reducing risk may (for a change) require liquidating holdings - stocks and corporate debt. And losses in equities and corporates would test the unprecedented trend-following flows that have chased inflating securities markets.

For a number of years now, I’ve referred to the “Moneyness of Risk Assets” issue – the perception of central bank-ensured safety and liquidity - that has been instrumental in Trillions of flows into ETFs and other “passive” strategies. It is Here Where the Wildness Lies in Wait. I wouldn’t bet on a continuation of low market volatility.


For the Week:

The S&P500 declined 1.4% (up 9.0% y-t-d), and the Dow fell 1.1% (up 10.6%). The Utilities slipped 0.3% (up 9.5%). The Banks sank 3.6% (up 2.1%), and the Broker/Dealers lost 2.9% (up 10.9%). The Transports declined 0.8% (up 1.7%). The S&P 400 Midcaps dropped 2.3% (up 3.0%), and the small cap Russell 2000 sank 2.7% (up 1.3%). The Nasdaq100 lost 1.2% (up 19.9%), and the Morgan Stanley High Tech index fell 1.7% (up 23.3%). The Semiconductors declined 1.2% (up 17.6%). The Biotechs dropped 2.9% (up 24.7%). With bullion surging $31, the HUI gold index rallied 3.2% (up 8.5%).

Three-month Treasury bill rates ended the week at 102 bps. Two-year government yields declined six bps to 1.30% (up 11bps y-t-d). Five-year T-note yields dropped seven bps to 1.74% (down 18bps). Ten-year Treasury yields fell seven bps to 2.19% (down 26bps). Long bond yields declined six bps to 2.79% (down 28bps).

Greek 10-year yields rose 10 bps to 5.51% (down 151bps y-t-d). Ten-year Portuguese yields slipped a basis point to 2.85% (down 89bps). Italian 10-year yields added a basis point to 2.03% (up 22bps). Spain's 10-year yields dipped three bps to 1.46% (up 8bps). German bund yields dropped nine bps to 0.38% (up 18bps). French yields fell seven bps to 0.68% (unchanged). The French to German 10-year bond spread widened two to 30 bps. U.K. 10-year gilt yields sank 11 bps to 1.06% (down 17bps). U.K.'s FTSE equities index sank 2.7% (up 2.3%).

Japan's Nikkei 225 equities index declined 1.1% (up 3.2% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.06% (up 2bps). France's CAC40 dropped 2.7% (up 4.1%). The German DAX equities index fell 2.3% (up 4.6%). Spain's IBEX 35 equities index sank 3.5% (up 10%). Italy's FTSE MIB index lost 2.7% (up 11%). EM equities were mostly lower. Brazil's Bovespa index added 0.7% (up 11.8%), while Mexico's Bolsa declined 1.3% (up 11%). South Korea's Kospi sank 3.2% (up 14.5%). India’s Sensex equities index dropped 3.4% (up 17.2%). China’s Shanghai Exchange lost 1.6% (up 3.4%). Turkey's Borsa Istanbul National 100 index fell 1.5% (up 36.9%). Russia's MICEX equities index slipped 0.4% (down 12.9%).

Junk bond mutual funds saw inflows of $124 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped three bps to 3.90% (up 45bps y-o-y). Fifteen-year rates were unchanged at 3.18% (up 42bps). The five-year hybrid ARM rate slipped a basis point to 3.14% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.03% (up 45bps).

Federal Reserve Credit last week increased $2.2bn to $4.428 TN. Over the past year, Fed Credit expanded $0.5bn. Fed Credit inflated $1.618 TN, or 58%, over the past 248 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt expanded $2.9bn last week to $3.316 TN. "Custody holdings" were up $136bn y-o-y, or 4.2%.

M2 (narrow) "money" supply last week declined $8.7bn to $13.612 TN. "Narrow money" expanded $695bn, or 5.4%, over the past year. For the week, Currency increased $2.0bn. Total Checkable Deposits fell $6.8bn, and Savings Deposits declined $5.1bn. Small Time Deposits added $0.7bn. Retail Money Funds increased $0.8bn.

Total money market fund assets jumped $33.05bn to $2.693 TN. Money Funds fell $51.3bn y-o-y (1.9%).

Total Commercial Paper jumped $10.6bn to $980.2bn. CP declined $43bn y-o-y, or 4.2%.

Currency Watch:

August 9 – New York Times (Peter S. Goodman): “It is the closest thing to a certainty in the global economy. When trouble flares and anxiety mounts, people who manage money traditionally entrust it to a seemingly indomitable refuge, the American dollar. Yet on Wednesday, in the hours after President’s Trump’s threat to unleash ‘fire and fury’ on North Korea if it continued to menace the United States, global investors sold the dollar. The same dynamic played out in June, as Saudi Arabia and other Arab nations imposed an embargo on Qatar, delivering a fraught crisis to the oil-rich Persian Gulf. And the dollar dipped in July after President Vladimir V. Putin of Russia expelled 755 American diplomats, ratcheting up tensions between the two nuclear powers. Since the beginning of the year, the dollar has surrendered nearly 8% against a basket of major currencies.”

The U.S. dollar index declined 0.5% to 93.069 (down 9.1% y-t-d). For the week on the upside, the yen increased 1.4%, the Swiss franc 1.1%, the euro 0.4%, the Swedish krona 0.3%, the Mexican peso 0.3% and the Norwegian krone 0.2%. On the downside, the Brazilian real declined 1.9%, the South Korean won 1.6%, the New Zealand dollar 1.3%, the Australian dollar 0.4%, the Canadian dollar 0.3%, the British pound 0.2% and the South African rand 0.1%. The Chinese renminbi increased 1.0% versus the dollar this week (up 4.22% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.4% (down 3.9% y-t-d). Spot Gold jumped 2.4% to $1,289 (up 11.9%). Silver rallied 5.0% to $17.07 (up 6.8%). Crude fell 76 cents to $48.82 (down 9%). Gasoline dropped 2.0% (down 4%), while Natural Gas rallied 7.5% (down 20%). Copper added 0.9% (up 16%). Wheat rallied 2.7% (up 15%). Corn declined 1.6% (up 7%).

Trump Administration Watch:

August 8 – Bloomberg (Jeff Daniels): “President Donald Trump's ‘fire and fury’ warning on Tuesday may contribute to mixed messages to North Korea and U.S. allies in Asia — increasing the risk of miscalculation on the Korean Peninsula, according to U.S. experts. National security and foreign policy experts say it is critical for the administration to maintain a consistent message on North Korea since wavering on different viewpoints risks alienating key allies South Korea and Japan. ‘You have a danger of miscalculation and a danger of escalation,’ said Bruce Klingner, former deputy division chief for Korea at the Central Intelligence Agency…”

August 8 – CNBC (Sarah O’Brien): “Despite facing September deadlines to increase the debt ceiling and pass a new federal budget, Republican congressional leaders have made it clear that tax reform will be their legislative priority when they return from their August recess. Yet exactly what's in their plan remains unclear. And based on a joint White House-GOP statement — which outlines a philosophical approach to changing the U.S. tax code but includes no specifics — even lawmakers are unsure what they will begin debating next month with the goal of passing a bill before the end of the year. ‘One big challenge they face is that there's no clear starting point,’ said Kyle Pomerleau, director of federal projects for the Tax Foundation.”

August 7 – New York Times (Edward D. Kleinbard): “Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling… The debt ceiling is politically imposed, and the decision not to raise it, and therefore to choose to default, is also political. It’s something America has avoided in the past. This time, though, will be different. This country has hit the debt ceiling once, in 1979, and then largely by accident and only to a minor extent. But even that foot fault was estimated to cost the United States about 0.6% in higher interest costs for an indefinite period. More recently, congressional debt ceiling brinkmanship in 2011 led Standard & Poor’s to downgrade the credit rating of the United States. An increase in Treasury interest rates of just 0.2% a year would cost the government about $400 billion over the next 10 years.”

China Bubble Watch:

August 8 – Bloomberg: “China’s much-vaunted campaign to tackle its leverage problem has captured headlines this year. But to understand why they’re taking on the challenge -- and the threat it could pose to the world’s second-largest economy -- you need to dig into the mountain. Characterized in state media as the ‘original sin’ of China’s financial system, leverage has swelled over the past decade -- partly because policy makers were trying to cushion a slowdown in growth from the old normal of 10% plus. What’s fueled the leverage has been a rapid expansion in household and corporate wealth looking for higher returns in a system where bank interest rates have been held down. The unprecedented stimulus unleashed since 2008 effectively brought to life the ‘monster’ China’s leadership is now trying to tackle, says Andrew Collier, managing director of Orient Capital Research Ltd. in Hong Kong and author of ‘Shadow Banking and the Rise of Capitalism in China.’”

August 7 – Financial Times (Gabriel Wildau): “China’s capital flow turned positive in the first half of 2017, a reversal from unprecedented outflows during the previous two years that sparked worries over financial stability. Data… indicate that Beijing’s support for the renminbi and a crackdown on foreign dealmaking and other outflow channels have largely succeeded in curtailing capital flight. China ran a $16bn surplus over the first half of this year… compared with a $417bn deficit in 2016… The figures also showed that China added to its foreign exchange reserves on a valuation-adjusted basis in the second quarter for the first time since early 2014.”

August 7 – Bloomberg: “China’s foreign-exchange reserves posted a sixth straight monthly increase as the yuan strengthened and economic growth remained robust. The foreign currency stockpile climbed $23.9 billion to $3.081 trillion in July…”

August 8 – Bloomberg: “China’s producer price gains held steady on surging commodity prices, as demand stayed resilient and the government’s drive to reduce industrial capacity takes hold. Producer price index rose 5.5% in July from year earlier versus estimated 5.6%... The consumer price index increased 1.4%, versus forecast of 1.5%...”

August 9 – Financial Times (Lucy Hornby): “For China’s ruling Communist party, its foreign exchange reserves are a symbol of national strength and are a crucial buffer against economic shocks. So the alarming announcement that forex reserves had fallen below $3tn in January marked a shift in political faultlines that is only being felt this summer. As more than $1tn left the country over the previous 18 months… Technocrats in Beijing had already prepared the ground to take action. In December, they had managed to link the phrase ‘national security’ to the concept of financial risk at the annual agenda-setting economic work conference. Backed with the reserves figures, they were poised to strike against what they saw as the leading culprit — the new generation of highly acquisitive private Chinese companies. These tensions within the system have exploded into the open in the past two months with the humiliation of some of China’s best-known and most well-connected private companies…”

Central Bank Watch:

August 8 – Bloomberg (Carolynn Look): “A decade ago, the European Central Bank took its first step to becoming the euro area’s firefighter-in-chief. Its 95 billion-euro ($112bn) emergency loan to banks on Aug. 9, 2007, was the initial response to a financial crisis that would force the… institution to expand its balance sheet by trillions of euros. The ECB -- together with international peers such as the Federal Reserve and the Bank of England -- took center stage in an unprecedented battle against bank failures, recessions and sovereign-debt turmoil that changed the economic landscape and forced a complete rethink of what monetary policy can and should do. The ECB’s job was additionally hampered by an incomplete currency zone weighed down by infighting and paralysis. But with the recovery finally holding up after years of stimulus and hard-fought economic reforms, central bankers have started to contemplate a return to more normal policies. One of many milestones on that path is expected in the fall, when ECB President Mario Draghi may offer an outline of a gradual exit from a 2.3 trillion euro bond-buying plan.”

Global Bubble Watch:

August 10 – Bloomberg (Cecile Gutscher and Sid Verma): “Bitcoin and other ‘cryptocurrencies’ are big money, virtually as big as Goldman Sachs and Royal Bank of Scotland combined. The price of a single bitcoin hit an all-time high of above $3,500 this week, dragging up the value of hundreds of newer, smaller digital rivals in its wake. Now some investors fear a giant crypto-bubble may be about to burst. It has been a year of unprecedented growth for the largely unregulated market, with dozens of new currencies appearing every month in ‘Initial Coin Offerings’ or ICOs. They have achieved value almost instantly, drawing in those who are eager to get in and make a quick buck. At the start of 2017, the total value - or market cap - of all cryptocurrencies in existence was about $17.5 billion, with bitcoin making up almost 90%... It is now around $120 billion… and bitcoin makes up only 46%.”

August 9 – Financial Times (Kate Allen): “Nations have historically been the world’s best credits — but since the global financial crisis a decade ago they have been joined by a burgeoning group of supranational organisations. Syndicated debt issuance by supranationals has more than doubled in the past decade, hitting $265bn last year, according to… Dealogic. These borrowers, such as the European Investment Bank, the EU and the International Bank for Reconstruction and Development, are backed by multiple countries and so enjoy the highest possible credit ratings. Their ranks are set to increase further with the forthcoming entry into the capital markets of the Asian Infrastructure Investment Bank — dubbed by some as China’s answer to the World Bank — and the World Bank’s own planned expansion in fundraising…”

August 8 – Bloomberg (Adam Haigh and Eric Lam): “The Chinese leadership has this year made its strongest commitment yet to curb financial risks and rein in spendthrift local officials, yet the campaign has spurred barely a ripple of concern among global investors. In a recent survey, China hardly registered on the list of dangers eyed by fund managers and strategists that could threaten the ‘Goldilocks’ boom in stocks and credit around the world. That’s a big change from two years ago, when a surprise devaluation of the yuan spooked markets, all the more because it came just weeks after China’s equity bubble had started to burst.”

August 8 – Bloomberg (Natasha Rausch): “Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said investors have become too complacent as markets rallied and need to be prepared for the possibility that the Federal Reserve will follow through on its plans to raise interest rates. ‘I’m nervous about pretty much everything,’ Shepherdson said…, when asked where investors are being well-compensated for their risks. ‘There comes a point in most investment cycles where you’ve got to start thinking the return on capital is rather less important than the return of capital -- just keeping your money. Not losing anything becomes important.’ The economist acknowledged his view has been unfashionable lately as U.S. equities extended their years-long rally…”

August 9 – Bloomberg (Justina Lee): “The Hong Kong dollar carry trade, which has produced steady returns for seven straight months, suffered a rare setback on Wednesday as the currency abruptly strengthened the most since February 2016. Its 0.1% gain against the U.S. dollar may have been tiny by global standards, but it jolted investors who had positioned for declines by borrowing in Hong Kong to invest in higher-yielding American assets. The trade had been a consistent winner this year after interest rates in the U.S. rose and those in the former British colony held near rock-bottom levels. But now the tightly-managed exchange rate is turning more volatile…”

August 9 – Bloomberg (Catherine Bosley): “The Swiss National Bank’s U.S. equity holdings gained almost 5% in value to hit a fresh record in the second quarter, thanks to a buoyant stock market. The portfolio increased to $84.3 billion from $80.4 billion at the end of March…”

Fixed Income Bubble Watch:

August 8 – Bloomberg (Claire Boston): “Subprime auto loans may be suffering from higher delinquencies, but investors are still clamoring for bonds backed by the debt, according to Wells Fargo analysts. An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations… since 2014… The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. Insatiable demand for investment-grade and junk bonds has sent investors searching for better deals in the market for asset-backed securities. The newfound interest means risk premiums for structured bonds are plummeting too.”

August 10 – Bloomberg (Cecile Gutscher and Sid Verma): “When Alan Greenspan warned about a bond bubble in a recent interview, he may well have been thinking about European junk bond yields. The former Federal Reserve chairman, who famously coined the term ‘irrational exuberance,’ would find ample grist for worry looking at the average rates of euro-denominated debt rated ‘BB.’ For the first time ever, bonds issued by junk-rated companies with weaker balance sheets are trading in line with debt from the U.S. government. Meanwhile, more than 20 billion euros ($23bn) of Italian government bonds pay less than their U.S. counterparts. Bank of America Merrill Lynch strategists call it a bubble, echoing investors from Deutsche Asset Management and JPMorgan Asset Management who are scaling back their exposure to euro junk.”

August 6 – Bloomberg (Tracy Alloway): “Trading in an obscure corner of the credit-derivatives market shows that some investors are preparing for a looming sell-off in corporate bonds. About $10.3 billion worth of options on Markit’s CDX North American Investment Grade Index -- a basket of credit default swaps on 125 North American companies -- have been switching hands daily over the past week… About 80% of the volume is in put options, a bearish bet against the performance of corporate credit. The figure is more than twice the $4.9 billion in average credit-index options traded over the past year, when bearish put options averaged 65% of total volume, the bank said.”

August 8 – Bloomberg (Jennifer Surane): “Jamie Dimon is siding with the bond-market bears. ‘I do think that bond prices are high,’ the chief executive officer of JPMorgan Chase & Co. said… ‘I’m not going to call it a bubble, but I wouldn’t personally be buying 10-year sovereign debt anywhere around the world.’”

Federal Reserve Watch:

August 8 – Bloomberg (Steve Matthews and Matthew Boesler): “Two Federal Reserve officials said soft U.S. inflation was a problem as they played down the risk of market disruption when the central bank starts shrinking its balance sheet. The comments on Monday by St. Louis Fed President James Bullard and Minneapolis’s Neel Kashkari, two of the Fed’s more dovish policy makers, line up with expectations that officials will keep interest rates on hold when they meet next month and announce the start of a gradual process to trim their holdings of Treasuries and mortgage-backed securities. ‘I am ready to get going in September,’ Bullard said… arguing that the balance-sheet unwind ‘is going to be very slow and I don’t think there will be a lot of impact on the markets.’”

U.S. Bubble Watch:

August 8 – Financial Times (Robin Wigglesworth): “The inexorable uptick in the US national debt clock in midtown Manhattan, first erected in 1989 by real estate magnate Seymour Durst, will soon accelerate sharply again. The US budget deficit has been gradually crimped since the financial crisis, thanks to the economic recovery and the government reining in spending since a 2011 budget stand-off. But it has begun widening again this year, and Goldman Sachs forecasts it will top $1tn by 2020. That would be more than double the $439bn deficit in 2015. Combined with the Federal Reserve’s plans to begin pruning its balance sheet, gradually removing one of the biggest buyers of US government debt from the market, this will challenge the US Treasury’s borrowing plans.”

August 6 – Bloomberg (Cecile Vannucci): “Bets against volatility are back. Never mind strategists warning of a potential VIX rebound, or historical data showing the index tends to jump the most in August. The number of short positions on VIX futures has hit a fresh peak, and an exchange-traded fund that benefits when volatility falls just saw its biggest weekly inflows since June… That’s even as the CBOE Volatility Index hovers within 1 point of its record-low close.”

August 8 – Bloomberg (Sid Verma): “The markets are alive with the sound of ‘zzzzzz’ as the latest trading session marks yet another record low for volatility gauges. Bank of America’s MOVE Index, which gauges volatility in the U.S. Treasury market, has tumbled to an unprecedented 46.9 at the close of Monday’s trading session. The move means investors in the world’s largest bond market are shrugging off the potential for price swings, even as two titans of the industry up their bets on an uptick in U.S. inflation.”

August 7 – New York Times (Nathaniel Popper): “The cautionary words of American regulators have done little to chill a red-hot market for new virtual currencies sold by start-ups. The Securities and Exchange Commission late last month issued its first warning for the many entrepreneurs who have been raising money by creating and selling their own virtual currencies… At that point, hundreds of projects had raised more than $1 billion. Yet even after the commission said it was looking closely at projects that may violate its rules, programmers are still embarking on new offerings at a torrid pace. Most of the offerings have little legal oversight… ‘The broader detail and the silences in the report should give many people pause and that doesn’t seem to have happened yet,’ said Emma Channing, the general counsel at the Argon Group… ‘I don’t understand why everyone isn’t as concerned as I am.’ Since the guidance was released on July 25, 46 new coin offerings have been announced and an additional 204 are moving toward fund-raising…”

August 8 – Bloomberg (Martin Z Braun): “Seven years ago, California was ‘the next Greece.’ Today, the state’s bonds are trading better than AAA. As the Golden State benefits from record-breaking stock prices, Silicon Valley’s boom and a resurgent real estate market, demand for tax-exempt debt in the state with the highest top income tax rate in the U.S. is ‘insatiable,’ said Nicholos Venditti, a portfolio manager for Thornburg Investment Management. Spreads are so tight that Venditti has stopped buying California bonds for his national fund. ‘They’ve gone to a level that just seems ridiculous,’ Venditti said. ‘It just seems unsustainable for any long period of time.’ … An investor Tuesday bought about $1.1 million of state general obligation bonds maturing in six years at a yield of 1.33%, or 4.3 bps below AAA rated bonds with the same maturity. California bonds are rated AA- by S&P Global Ratings and Fitch Ratings and Aa3 by Moody’s…”

August 10 – Bloomberg (Oliver Renick): “A yawning divide is opening between the stock market’s biggest players when it comes to risk tolerance. On one side are long-only mutual fund managers, burdened with keeping up with the S&P 500 as it marched to 30 different records this year. Measured by their ownership of stocks with the highest volatility, they’re sitting on some of the most aggressive bets in three years… On the opposite end are long-short hedge funds, paid as much to dodge bear markets as they are to pile on gains. Using a value known as net leverage that counts up bets that shares will rise, they’re plumbing depths of defensiveness rarely seen since 2005. A divergence this wide has occurred just twice in the last decade…”

August 8 – New York Times (Binyamin Appelbaum): “It’s basically the opposite of a major government infrastructure program. Government spending on transportation and other public works is in decline as federal funding stagnates and state and local governments tighten their belts. Such spending equaled 1.4% of the nation’s economic output in the second quarter of 2017, the lowest level on record... In West Virginia, where President Trump on Thursday touted a vague $1 trillion infrastructure plan, public works spending has fallen for five straight years.”

August 9 – Wall Street Journal (Alison Sider): “Investors are getting nervous about the Permian. The problem? Too much natural gas. The west Texas oilfield is the epicenter of U.S. drilling activity and is expected to drive the country’s growth in oil production in the coming years. Investors have grown accustomed to companies reliably beating expectations there–producing ever greater amounts of oil and slashing costs. So they became alarmed when a handful of Permian producers reported more lackluster results last week.”

August 8 – Bloomberg (Sarah Jones): “With private equity firms sitting on a record amount of cash they’re struggling to invest, their clients are turning to exchange-traded funds for relief. BlackRock Inc. and State Street Corp., two of the world’s biggest providers of ETFs, say an increasing number of institutional investors are using their products to park money earmarked for private funds. These investors -- pension plans, foundations and endowments that are under pressure to meet obligations -- are trying to eke out an extra return on cash that would otherwise languish in a money market fund.”

Brexit Watch:

August 6 – Bloomberg (Hannah George and Cat Rutter Pooley): “U.K. consumers cut back on spending for a third month in July as house-price growth slowed sharply, dealing yet another blow to the economy… The latest figures leave both household expenditure and the property market at their weakest in more than four years. A report from IHS Markit and Visa showed that consumer spending dropped 0.8% year-on-year… Home-price increases weakened to an annual 2.1% in the past three months…”

Japan Watch:

August 7 – Reuters (Leika Kihara): “The Bank of Japan should dial back its massive stimulus before inflation hits its 2% target, a leading candidate to become the next governor said, raising questions about the efficacy of the BOJ's radical approach… The proposal by former BOJ Deputy Governor Kazumasa Iwata goes against the central bank's pledge that it will maintain its stimulus program until its elusive inflation goal is met. Calling for a change of strategy by the BOJ, Iwata criticized the central bank's price forecasts as too optimistic… His comments, the strongest criticism on the BOJ's policies to date by a former deputy governor, underscore growing concern over the strains the BOJ's prolonged ultra-easy policy is putting on the country's banks and financial market.”

EM Bubble Watch:

August 6 – Bloomberg (Ben Bartenstein): “The case against emerging markets is gaining steam in one corner of the bond world. Investors yanked out $680 million from the iShares JPMorgan USD Emerging Markets Bond exchange-traded fund last month, the biggest-ever flows reversal. Traders are concerned that after an 18-month rally, rising yields in developed markets from the U.S. to Germany could wreak havoc across emerging markets similar to the taper tantrum of 2013…”

August 7 – CNBC (Fredi Imbert): “Venezuela could face a full-fledged civil war if military support for dictator Nicolas Maduro erodes. Venezuelan authorities arrested seven men over the weekend whom they claimed took part in an attack on a military base outside of Valencia… The strike took place after a video made the rounds on social media Sunday featuring men in military fatigues calling for a rebellion against Maduro.”

Leveraged Speculation Watch:

August 9 – Bloomberg (Dani Burger): “For computerized strategies that are supposed to be making people obsolete, quants are looking decidedly human in 2017. Program-driven hedge funds are stumbling, a promising startup has closed, and once-reliable styles are showing weakening returns. A handful of investment factors, the wiring of smart-beta funds, have gone dormant. This isn’t just normal volatility confined to a single month, according to Neal Berger, the founder and chief investment officer of Eagle’s View Asset Management… Returns have been decaying for a year, suggesting the rest of the market has figured out what the robots are doing and started taking evasive action, Berger said. June was the worst month on record for Berger’s fund, as usually robust strategies lost their footing and the firm fell 2.4%. The worst pain has been among quants in the market-neutral equity space…”

Geopolitical Watch:

August 8 – CNBC (Jacob Pramuk): “North Korea has successfully created a miniaturized nuclear weapon designed to fit inside its missiles, NBC News confirmed Tuesday, citing a U.S. intelligence official… The development marks a major step in the isolated nation's push to become a nuclear power. Miniaturizing a weapon does not necessarily mean that North Korea has an accurate nuclear-equipped intercontinental ballistic missile, yet. It raises the stakes for President Donald Trump and other world leaders, who already faced difficult and limited options in dealing with Pyongyang's aggression.”

August 9 – CNBC (Christine Wang): “The Department of Defense would deploy B-1B bombers in a pre-emptive attack on North Korea if the commander-in-chief ordered such a strike, NBC News reported… The officials told NBC that the attack would originate from the Andersen Air Force Base in Guam. Multiple people told NBC that the strike would target roughly two dozen missile-launch sites in North Korea. On Tuesday, President Donald Trump said that the rogue state would face ‘fire and fury’ if it continued to threaten the United States. NBC's report comes after a state-media outlet said Pyongyang was ‘seriously considering’ an attack on Guam.”

August 9 – Reuters (Idrees Ali and Ben Blanchard): “A U.S. Navy destroyer carried out a ‘freedom of navigation operation’ on Thursday, coming within 12 nautical miles of an artificial island built up by China in the South China Sea, U.S. officials told Reuters. The operation came as President Donald Trump's administration seeks Chinese cooperation in dealing with North Korea's missile and nuclear programs and could complicate efforts to secure a common stance… China has territorial disputes with its neighbors over the area. It was the third ‘freedom of navigation operation’ or ‘fonop’ conducted during Trump's presidency.”

August 5 – PTI: “China is planning a small-scale military operation to push back Indian troops from the Doklam area within two weeks, according to a report in a state-run daily… The two countries have been locked in a standoff in the Sikkim sector since June 16 after Chinese troops began constructing a road near the Bhutan tri-junction. ‘China will not allow the military standoff between China and India in Doklam to last for too long, and there may be a small-scale military operation to expel Indian troops within two weeks,” Hu Zhiyong, a research fellow at the Institute of International Relations… was quoted… Bhutan has opposed the road saying the area belongs to Thimpu and has accused Beijing of violating agreements that aim to maintain the status quo until disputes over boundary are resolved. India says the Chinese action to construct the road was unilateral. The Sikkim sector is the only gateway to India’s northeastern states and New Delhi fears the road would allow China to cut off that access.”

Friday, August 11, 2017

Friday Evening Links

[Bloomberg] Signs of Junk Seepage in Biggest Weekly S&P 500 Drop Since March

[Bloomberg] Gold Surges to Highest Since Early June on Tame U.S. Inflation

[Bloomberg] August, When All the Traders Take Off and Drama Hits the Markets

[Bloomberg] Tesla Boosts Bond Sale to $1.8 Billion for Model 3

[Reuters] Russia says bellicose rhetoric on North Korea is 'over the top'

[WSJ] Trump Warns North Korea ‘Military Solutions’ Are ‘In Place, Locked and Loaded’

Friday's News Links

[Bloomberg] U.S. Stocks Stabilize, Dollar Slips on Price Data: Markets Wrap

[Reuters] Global stocks, dollar extend slide as U.S., North Korea tensions intensify

[Reuters] Trump: military solutions 'locked and loaded' against North Korea threat

[Bloomberg] U.S. Inflation Remains Subdued as Core Index Misses Forecasts

[Bloomberg] Trump Doubling Down on Rhetoric Rattles South Korean Markets

[Bloomberg] War Threats Deliver Worst Blow in a Year to Europe Credit: Chart

[Bloomberg] Fed Taper Plan Brings Risk to Mortgage Debt Unseen in Treasuries

[CNBC] China's economic problems are exactly why its global influence is expanding

[FT, Tett] The next crash risk is hiding in plain sight

[WSJ] North Korea, Trump’s ‘Fire and Fury’ Leave Beijing With Few Options

[FT] North Korea steps closer to end-game in nuclear quest

[FT] How Silicon Valley rediscovered LSD

Thursday, August 10, 2017

Thursday Evening Links

[Bloomberg] Stocks Drop Most Since May, Bonds Rally on Tension: Markets Wrap

[Bloomberg] VIX's Highest Close Since Election Sparks Record Rush to Protect

[Bloomberg] A 47% VIX Surge Isn't How Bulls Hoped August Would Start

[Bloomberg] Junk Bonds Slump as Morgan Stanley Sees a Bigger Unwind Ahead

[Bloomberg] Dudley Says Inflation Will ‘Take Some Time’ to Reach Fed's Goal

[Reuters] Exclusive: Foundations for post-Libor system sliding into place

[Bloomberg] Consumer Comfort Reaches 16-Year High on U.S. Economic Optimism

[Bloomberg] U.S. Inflation Is Finally Picking Up. Probably

[Bloomberg] Vancouver Housing Posts Biggest Price Gains Since 1990

[WSJ] Today’s Financial Crisis: We Forgot the Financial Crisis of 2007

[FT] Chinese top official warns economy ‘kidnapped’ by property bubble

[Reuters] Trump issues stern warning to North Korea and its leader

[Reuters] Any new Korean war could quickly escalate to catastrophe

Thursday's News Links

[Bloomberg] U.S. Stocks Slump, Volatility Spikes on Korea Spat: Markets Wrap

[Bloomberg] Gold Beats U.S. Stocks as North Korea Worries Drive Haven Demand

[Reuters] U.S. producer prices record biggest drop in 11 months

[Bloomberg] Junk Yields Lining Up With Treasuries Sign of Bubble for BofA

[Reuters] Buoyant bitcoin stirs crypto-bubble fears

[CNBC] China may be hurting its own banks by forcing them to drop risky assets

[NYT] A Missing Tycoon’s Links to China’s Troubled Dalian Wanda

[CNBC] Pentagon plan for pre-emptive strike on North Korea would reportedly launch from base in Guam

[Reuters] North Korea details Guam missile plan, calls Trump's warning a 'load of nonsense'

[Reuters] China seethes on sidelines amid latest North Korea crisis

[Reuters] Exclusive: U.S. destroyer challenges China's claims in South China Sea

[FT] Supranational debt issuance more than doubles in a decade

Wednesday, August 9, 2017

Wednesday Evening Links

[Bloomberg] Asia Stems Equity Drop as Angst Fades; Gold Drops: Markets Wrap

[Bloomberg] U.S. Stocks Slip, Treasuries Rise on Korea Tension: Markets Wrap

[Bloomberg] Gold Rises Along With North Korea Tensions

[Bloomberg] Long-Only Mutual Funds Have Turned Into the Stock Market's Daredevils

[Bloomberg] The Quant Fund Robot Takeover Has Been Postponed

[Bloomberg] Hong Kong's Crowded Currency Trade Enters Dangerous Territory

[Bloomberg] SNB's U.S. Stock Portfolio Hit Record $84.3 Billion in June

[WSJ] Aug. 9, 2007: The Day the Mortgage Crisis Went Global

[FT] Chinese crackdown on dealmakers reflects Xi power play

[WSJ] Has Permian Peaked? Wall Street Worries About Its Sure Thing

[WSJ] Canadian Private-Equity Giant Catalyst Accused of Fraud by Whistleblowers

[Reuters] U.S. Defense Secretary issues stark warning to North Korea

[Bloomberg] What the U.S. Military Does on Guam and Why North Korea Cares: Q&A

Wednesday's News Links

[Bloomberg] Havens Jump Amid North Korea Threats; Stocks Slide: Markets

[Bloomberg] South Korea Stocks, Won Drop After Trump's `Fire, Fury' Warning

[Reuters] Yen hits 8-week high vs dollar on latest bout of Korean tensions

[Bloomberg] U.S. Productivity Gains Accelerate While Pace Remains Tepid

[Bloomberg] Ten Years of Firefighting Leaves ECB Poised to Exit Stimulus

[Bloomberg] China Factory Inflation Holds Up on Steady Demand, Capacity Cuts

[Bloomberg] With $1 Trillion Chasing Deals, Investors Park Cash in ETFs

[CNBC] Increasing 'danger of miscalculation' on the Korean Peninsula, former CIA official says

[Bloomberg] What War Between North Korea and the U.S. Might Look Like: Quicktake Q&A

[FT] Bond investors ponder implications of growing US budget deficit

[WSJ] North Korea Threat Comes After Trump Vows ‘Fire and Fury’

[NYT] In the Age of Trump, the Dollar No Longer Seems a Sure Thing

Tuesday, August 8, 2017

Tuesday Evening Links

[Bloomberg] Stocks Fall on Trump Threat as Haven Assets Climb: Markets Wrap

Bloomberg] Trump Headline Sticks This Time as S&P 500 Falls Most in Month

[Bloomberg] China Is Taking on the ‘Original Sin’ of Its Mountain of Debt

[Bloomberg] Risk Premiums on Subprime Auto Debt Are Sinking Near Record Lows

[Bloomberg] Shepherdson Nervous About Everything, Sees Market Tipping Point

[Bloomberg] Dimon Sides With Bears, Says Sovereign Bonds Are Too Pricey

[Bloomberg] California, Once Compared to Greece, Is Now Trading Better Than AAA

[Reuters] Trump warns North Korea will be met with 'fire and fury' if threatens U.S.

[CNBC] North Korea makes a nuclear weapon that can fit in its missiles, US intelligence says

[WSJ] Trump to North Korea: U.S. Ready to Respond With ‘Fire and Fury’

Tuesday's News Links

[Bloomberg] Dollar Drops After Dovish Fed Comments; Gold Rises: Markets Wrap

[CNBC] It's full-steam ahead on tax reform ... with no details

[CNBC] Jeff Gundlach says 'highest-conviction trade' is a bet against the S&P 500: Report

[Bloomberg] China's Debt Crackdown Gets a Big Shrug From Global Investors

[Bloomberg] Volatility Gauges Tumble to New Lows Amid Complacency Fears

[Bloomberg] Fed Officials Keen to Shrink Balance Sheet Despite Low Inflation

[Bloomberg] U.S. Credit-Card Debt Surpasses Record Set at Brink of Crisis

[Reuters] China's July exports, imports weaker than expected, cloud global outlook

[Bloomberg] China's Trade Surplus Widens for Fifth Month as Imports Moderate

[Bloomberg] Beijing's Mighty Grip May Pull Plug on Property Binge

[Bloomberg] Rand Set to Surge If Zuma Loses Secret No-Confidence Ballot

[Reuters] BOJ should dial back stimulus before inflation hits 2 percent: ex-BOJ deputy governor Iwata

[Bloomberg] Investors Jump Back Into the Euro as Going Short Proves 'Lethal'

[NYT] Despite S.E.C. Warning, Wave of Initial Coin Offerings Grows

[NYT] Public Works Funding Falls as Infrastructure Deteriorates

[WSJ] Who Ultimately Pays for Corporate Taxes? The Answer May Color the Republican Overhaul

[CNBC] After military base attack, Venezuela could be on the brink of a civil war

[Reuters] Diplomacy to defuse India, China border crisis slams into a wall: sources

Saturday, August 5, 2017

Saturday's News Links

[MarketWatch] Beneath the glow of stock-market records, darkly bearish trends are lurking

[CNBC] While big bills have failed, Wall Street sees opportunity in Trump's massive deregulation movement

[Bloomberg] Beijing For Small-Scale Military Offensive Against India: Chinese Daily

Weekly Commentary: Data and a Carefree Bond Market

July non-farm payrolls gained 209,000 versus estimates of 180,000. June payrolls were revised 9,000 higher to 231,000. It’s worth noting that manufacturing added 16,000 jobs (est. 5,000) in July, the strongest gains since March. So far in 2017, manufacturing employment has been expanding at the briskest pace in years, with y-t-d gains of 82,000 dwarfing comparable 2016’s zero and 2015’s 12,000. The unemployment rate dipped a tenth in July to 4.3%. Unemployment bottomed at 4.4% during the previous cycle low back in 2007. In fact, the unemployment rate has not been lower than the July level since February 2001.

The recent narrative holds that the economy has been in an extended “soft patch”. In general, economic data have somewhat missed expectations. “US Car Sales Continue to Skid, Drop 5.7% in July.” The decline in automobile sales was viewed as confirmation of a slowing manufacturing sector. Ongoing travails in retail also support the view of economic stagnation. The labor participation rate remains a dismal 62.9%.

The narrative of a weakening in both economic activity and inflationary pressures serves the markets well. With Fed funds now near the Federal Reserve’s “neutral rate,” rate normalization has apparently about run its course. Even after Friday’s stronger-than-expected job gains, the market places the probability of another 2017 hike at less than 40%. What could be more bullish than so-called rate “normalization” that avoids any tightening of financial conditions whatsoever? The Carefree Bond Market has been cruising along the PCH with the top down in a slick new autonomous sports car.

It’s my view that U.S. and global economic maladjustment has become extreme after years of policy-induced monetary disorder. The U.S. economy is structurally unsound, though this grim reality remains well-masked by the artistry of low rates, liquidity over-abundance, inflated securities markets and record household net worth. More succinctly, deep structural impairment ensures central bankers remain wedded to loose financial conditions.

On a more cyclical basis, however, economic activity is not that weak. Data aggregation definitely smooths an extraordinarily unbalanced economy, with some segments booming and others mired in stagnation. And, importantly, ongoing monetary stimulus will do anything but resolve imbalances and structural maladjustment. At this point in the cycle – after nine years of historic monetary stimulus - the Fed should focus policy attention on cyclical indicators and err on the side of reducing accommodation. There are perilous risks associated with pushing a structurally marred economic system to the limits.

July average earnings were up 0.3% m-o-m, with one-year gains of 2.5%. Tepid wage growth is viewed as a major factor keeping inflation (CPI) stubbornly below the Fed’s 2.0% target. Yet stagnant wages are clearly a structural issue. U.S. manufacturing workers must compete against labor from around the globe. Less appreciated, the massive U.S. service sector – that flourished in the backdrop of deindustrialization, aggressive monetary stimulus and asset inflation – has created tens of millions of low skill jobs. Moreover, it is increasingly difficult for the overbuilt service sector (i.e. retail, restaurant, hotels, etc.) to afford higher compensation expenses. And let’s not forget the enormous cost – and ongoing inflation – in healthcare and insurance.

Over recent months, there has been some focus on the divergence between robust “soft” and lagging “hard” data. The Bloomberg Consumer Comfort Index rose last month to 49.6, a level just below the previous cycle peak in 2006/07. One must go all the way back to 2001 to beat 2017 readings for the Bloomberg Weekly National Economy Index. July’s 113.4 reading for the University of Michigan Current Economic Conditions Index was the highest since July 2005 - and the second highest going all the way back to November 2000. Last month’s 147.8 reading for the Conference Board Consumer Confidence Present Situation Index was the highest since July 2001. The CEO Confidence Index has declined only slightly from the March level - which was the highest going back to December 2004.

These various confidence indices - in conjunction with a 4.3% unemployment rate and stock prices surging further into uncharted record territory - would have traditionally been viewed as indications of loose monetary conditions. But the Yellen Fed has hung its hat on the consumer price index (and, to a lesser extent, wage growth). And it matters little to the Fed that inflation is clearly a global structural issue – one arguably associated with a prolonged period of monetary mismanagement.

And it’s not as if “hard” data is all that weak. July’s 56.3 reading in the PMI Manufacturing Index compares to 52.3 from one year ago. Looking back to 2007, the high that year was 52.6 – with the 2006 peak (February) at 55.8. June Durable Goods Orders (up 6.5%) surprised on the upside. And Q2 GDP rose to 2.6%, up from Q1’s 1.2%. The Atlanta Fed forecasts 4% Q3 GDP growth.

And despite all the talk of heightened disinflationary pressures, the ISM Manufacturing Price Index jumped seven points in July to 62. The ISM Non-Manufacturing Price index rose 3.6 points in July to 55.7. Crude and most commodities have rallied sharply over the past six weeks, certainly bolstered by dollar weakness.

A lot of attention has been paid recently to weakening auto sales. July sales were reported at a weaker-than-expected (seasonally adjusted and annualized) 16.69 million units. This compares unfavorably to the year ago pace of 17.75 million. But before we get too carried away, sales averaged 16.35 million annualized during the 2006-2007 period. In fact, July sales were just slightly below the monthly average from the eight-years 2000-2007. Sure, sales have moderated from the 2015-2016 boom – a period stoked by booming subprime lending. But, for now, I don’t see the slowing auto sector as part of a general downturn in economic activity.

Housing starts jumped back in June to a stronger-than-expected 1.215 million pace. This was the strongest reading since February and compares to the year earlier 1.190 million. Over recent months, housing starts have been running at the strongest level since 2007. Building permits also popped higher in June. Existing Home Sales are running at the highest level since early 2007. At $263,800, June Median Existing Home Prices were a record and compare to the year ago $247,600. The supply of inventory at 4.3 months of sales, while up from January’s extreme 3.5 reading, remains significantly below the average 6.0 months over the period going back to 1999. The Case-Shiller National Price index increased to a record 190.61 in May (up 5.6% y-o-y).

Friday’s smaller-than-expected Trade Deficit was the result of a 1.2% m-o-m jump in exports (up 5.8% y-o-y), to the strongest level since December 2014. U.S. exports have recovered strongly from the 2015/16 pullback, reflecting a global trade revival. The jump in U.S. exports is consistent with recent data from China, Europe, Japan and elsewhere.

For now, it’s difficult for me to take a negative short-term view on U.S. economic activity so long as the housing and export sectors continue to boom. It’s remains a Bubble Economy and, while vulnerable, the Bubble is still expanding.

At this point, the bond market is content to disregard a lot of data, that is, so long as there are no upside surprises in consumer price indices or wages (the two data sets stuck deepest in the structural muck). This works to keep market yields artificially depressed – and mortgage rates extraordinarily low. With after-tax borrowing costs remaining significantly below the rate of housing appreciation (in many areas), the backdrop is favorable for a strengthening of an already potent housing market inflationary bias. The unusually low levels of housing inventory – and an expanding list of overheated local markets – coupled with the Fed’s fixation on CPI sow the seeds for Housing Bubble 2.0.

August 1 – Bloomberg (Alfred Liu): “China has made progress in slowing leverage in the economy, but still needs to do more with the total amount of financing expected to rise 13% this year, according to Autonomous Research analyst Charlene Chu. Total outstanding credit is expected to grow to 223 trillion yuan ($33 trillion) by December from 196.8 trillion yuan at the end of 2016, analysis by Chu shows. The estimated increase will be lower than last year’s 19% gain as the government’s campaign against leverage starts to bite, she said. Her estimates are far higher than the latest official figure of 167 trillion yuan in June, which she says doesn’t accurately represent the true state of financing as it doesn’t include items like local government bond issuance and some forms of off-balance sheet lending.”

Charlene Chu is one of the preeminent analysts of Chinese Credit. She currently forecasts almost $4.0 TN of Chinese Credit growth this year, with total Credit approaching 300% of GDP. It’s somewhat of a challenge to be negative on short-term global GDP trends with record Chinese Credit expansion, enormous ongoing global QE and booming securities markets. At the same time, there’s a strong case that we’re getting awfully close to peak QE, peak Chinese Credit and peak global securities Bubble. Things would get more interesting if economic data begins to surprise on the upside, forcing the Fed and other central banks to again rethink the meaning of “normalization”. That would awaken bonds. July payrolls could have been a start.


For the Week:

The S&P500 added 0.2% (up 10.6% y-t-d), and the Dow gained 1.2% (up 11.8%). The Utilities rose 1.3% (up 9.8%). The Banks jumped 2.1% (up 5.9%), and the Broker/Dealers added 0.2% (up 14.2%). The Transports increased 0.5% (up 2.6%). The S&P 400 Midcaps declined 0.6% (up 5.5%), and the small cap Russell 2000 fell 1.2% (up 4.1%). The Nasdaq100 slipped 0.2% (up 21.3%), while the Morgan Stanley High Tech index was unchanged (up 25.4%). The Semiconductors declined 1.2% (up 19.1%). The Biotechs fell 1.0% (up 28.4%). With bullion down $11, the HUI gold index dropped 2.3% (up 5.2%).

Three-month Treasury bill rates ended the week at 105 bps. Two-year government yields were unchanged at 1.35% (up 16bps y-t-d). Five-year T-note yields slipped two bps to 1.82% (down 11bps). Ten-year Treasury yields declined three bps to 2.26% (down 18bps). Long bond yields fell five bps to 2.84% (down 22bps).

Greek 10-year yields rose eight bps to 5.41% (down 161bps y-t-d). Ten-year Portuguese yields fell six bps to 2.87% (down 88bps). Italian 10-year yields dropped 10 bps to 2.02% (up 21bps). Spain's 10-year yields declined four bps to 1.48% (up 10bps). German bund yields dropped seven bps to 0.47% (up 26bps). French yields fell six bps to 0.75% (up 7bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields declined four bps to 1.18% (down 6bps). U.K.'s FTSE equities index rallied 1.9% (up 5.2%).

Japan's Nikkei 225 equities index was unchanged (up 4.4% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.065% (up 3bps). France's CAC40 gained 1.4% (up 7.0%). The German DAX equities index recovered 1.1% (up 7.1%). Spain's IBEX 35 equities index gained 1.2% (up 14%). Italy's FTSE MIB index surged 2.4% (up 14%). EM equities were mostly higher. Brazil's Bovespa index rose 2.1% (up 11.1%), and Mexico's Bolsa added 0.2% (up 12.5%). South Korea's Kospi slipped 0.2% (up 18.2%). India’s Sensex equities index was unchanged (up 21.4%). China’s Shanghai Exchange increased 0.3% (up 5.1%). Turkey's Borsa Istanbul National 100 index gained 0.8% (up 38.9%). Russia's MICEX equities index rose 0.8% (down 12.5%).

Junk bond mutual funds saw inflows of $195 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.93% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 3.18% (up 44bps). The five-year hybrid ARM rate declined three bps to 3.15% (up 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.05% (up 43bps).

Federal Reserve Credit last week declined $9.2bn to $4.426 TN. Over the past year, Fed Credit contracted $8.7bn. Fed Credit inflated $1.615 TN, or 58%, over the past 247 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0bn last week to $3.333 TN. "Custody holdings" were up $113bn y-o-y, or 3.5%.

M2 (narrow) "money" supply last week rose $12.2bn to a record $13.620 TN. "Narrow money" expanded $727bn, or 5.6%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits jumped $55.9bn, while Savings Deposits slumped $44.9bn. Small Time Deposits gained $2.6bn. Retail Money Funds declined $2.9bn.

Total money market fund assets jumped $20.47bn to $2.660 TN. Money Funds fell $78.3bn y-o-y (2.9%).

Total Commercial Paper declined $8.2bn to $969.6bn. CP declined $57bn y-o-y, or 5.5%.

Currency Watch:

August 1 – Financial Times (Jennifer Hughes): “The Hong Kong dollar has fallen to its weakest level since the China-inspired turmoil of January 2016 as abundant liquidity continues to create a widening interest rate gap with the US. The move pushed the Hong Kong currency further into the weaker half of its tightly pegged trading range against the US dollar — in a shift from its position for most of the past decade of trading near the stronger end. Wednesday’s weakness took the currency to HK$7.8171 against the greenback — a level not seen since January 2016 when fears about China’s weakening economy sent shockwaves through global markets.”

The U.S. dollar index recovered 0.3% to 93.542 (down 8.7% y-t-d). For the week on the upside, the euro increased 0.2%. On the downside, the South African rand declined 3.1%, the Canadian dollar 1.7%, the New Zealand dollar 1.4%, the Australian dollar 0.8%, the British pound 0.7%, the Mexican peso 0.6%, the Swiss franc 0.4%, the Norwegian krone 0.4%, the Swedish krona 0.3%, the Singapore dollar 0.3%, and the South Korean won 0.2%. The Chinese renminbi added 0.12% versus the dollar this week (up 3.21% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.5% (down 3.5% y-t-d). Spot Gold declined 0.9% to $1,259 (up 19.2%). Silver dropped 2.7% to $16.252 (up 1.7%). Crude slipped 13 cents to $49.58 (down 8%). Gasoline fell 1.8% (down 2%), and Natural Gas sank 5.7% (down 26%). Copper added 0.3% (up 15%). Wheat sank 5.5% (up 12%). Corn lost 1.8% (up 8%).

Trump Administration Watch:

August 3 – Wall Street Journal (Del Quentin Wilber and Byron Tau): “Special Counsel Robert Mueller has impaneled a grand jury in Washington to investigate Russia’s interference in the 2016 elections, a sign that his inquiry is growing in intensity and entering a new phase, according to people familiar with the matter. The grand jury, which began its work in recent weeks, signals that Mr. Mueller’s inquiry will likely continue for months. Mr. Mueller is investigating Russia’s efforts to influence the 2016 election and whether President Donald Trump’s campaign or associates colluded with the Kremlin as part of that effort.”

August 1 – New York Times (Keith Bradsher): “The Trump administration is preparing a broad move against China over trade, according to people with knowledge of its plans, amid growing worries in the United States over a Chinese government-led effort to make the country a global leader in microchips, electric cars and other crucial technologies of the future. The move, which could come in the next several days, signals a shift by the administration away from its emphasis on greater cooperation between Washington and Beijing, in part because administration officials have become frustrated by China's reluctance to confront North Korea over its nuclear and ballistic missile programs. The two sides have also struggled in trade negotiations despite claiming modest progress earlier this year, while American companies have complained they face pressure to share trade secrets with Chinese partners. The trade case will focus on alleged Chinese violations of American intellectual property, according to three people with a detailed knowledge of the administration's plans.”

July 31 – Wall Street Journal (Gerald F. Seib): “When folks here in Washington end a summer filled with White House hijinks and an epic but inconclusive health-care debate, they will look up and discover something unsettling: The world has become a more dangerous place while everybody has been distracted. That’s most obviously true in North Korea, where its rogue weapons program has leapt so far forward that the nation now has a missile with the range to reach much of the U.S…. Meanwhile, American relations with China, the country most able to cooperate in slowing down Pyongyang, are deteriorating amid presidential recriminations—delivered via Twitter—about Beijing’s behavior. Relations with Russia are sliding backward as well… Both sides agree that ties now are at their lowest point since the Cold War.”

July 30 – Wall Street Journal (Siobhan Hughes and Thomas M. Burton): “President Donald Trump’s tumultuous past week has widened rifts in his party, between those who vocally support the president’s combative style and others who bridle at it, according to interviews… Mr. Trump has long been a polarizing force among members of his party, but for the first several months of his tenure, the GOP was largely united by a shared desire to make the most of his election and the party’s total control of the government for the first time in a decade. After a week that included the president attacking his attorney general, the collapse of a GOP health bill, a surprise effort to bar transgender people in the military and a White House staff shakeup, divisions that were largely set aside at the start of 2017 have emerged anew.”

August 2 – Reuters (David Lawder and Lesley Wroughton): “Three top Democratic senators, in a rare show of bipartisanship, on Wednesday urged U.S. President Donald Trump to stand up to China as he prepares to launch an inquiry into Beijing's intellectual property and trade practices in coming days. Senate Democratic leader Chuck Schumer pressed the Republican president to skip the investigation and go straight to trade action against China. ‘We should certainly go after them,’ said Schumer in a statement. Senators Ron Wyden of Oregon and Sherrod Brown of Ohio also urged Trump to rein in China.”

July 30 – Wall Street Journal (Kate Davidson): “Republicans are leaving town for an August recess after a failed attempt to repeal the Affordable Care Act. When they return in September, they’ll have just 12 working days to avert another big problem. In a letter to lawmakers Friday, U.S. Treasury Secretary Steven Mnuchin said the federal borrowing limit, or debt ceiling, needed to be raised by Sept. 29 or the government risked running out of money to pay its bills. The Treasury Department has been employing cash-conservation measures since March, when borrowing hit the formal ceiling of nearly $20 trillion.”

China Bubble Watch:

July 30 – New York Times (Chris Buckley): “China’s president, Xi Jinping, has opened a public campaign to deepen his grip on power in a coming leadership shake-up, using a huge military parade on Sunday, speeches and propaganda, along with a purge in the past week, to warn officials to back him as the nation’s most powerful leader in two decades. Wearing his mottled green uniform as commander in chief of the People’s Liberation Army, Mr. Xi watched as 12,000 troops marched and tanks, long-range missile launchers, jet fighters and other new weapons drove or flew past in impeccable arrays. Mao famously said political power comes from the barrel of a gun, and Mr. Xi signaled that he, too, was counting on the military to stay ramrod loyal while he chooses a new leading lineup to be unveiled at a Communist Party congress in the autumn.”

August 2 – Bloomberg: “President Xi Jinping’s top economic adviser commissioned a study earlier this year to see how China could avoid the fate of Japan’s epic bust in the 1990s and decades of stagnation that followed. The report covered a wide range of topics, from the Plaza Accord on currency to a real-estate bubble to demographics that made Japan the oldest population in Asia… While details are scarce, the person revealed one key recommendation that policy makers have since implemented: The need to curtail a global buying spree by some of the nation’s biggest private companies. Communist Party leaders discussed Japan’s experience in a Politburo meeting on April 26… State media came alive afterward, with reports trumpeting Xi’s warning that financial stability is crucial in economic growth.”

August 1 – BloombergBusinessweek (Kevin Hamlin): “For the past couple of years, Chinese companies roamed the world in an unprecedented $343 billion cross-border takeover spree. Among the splashiest deals: Dalian Wanda Group, whose founder, Wang Jianlin, is China’s second-richest executive, bought Hollywood production and finance company Legendary Entertainment for $3.5 billion in 2016. Anbang Insurance Group bought the Waldorf Astoria. Fosun International Ltd. purchased Club Méditerranée SA and Cirque du Soleil. But as the binge seemed ready to go on, China’s banking regulator in June ordered lenders to scrutinize their exposure to four high-­flying private conglomerates that have announced $75 ­billion-plus in deals at home and abroad since the start of 2016: Dalian Wanda, Anbang, Fosun, and aviation and shipping giant HNA Group Co.”

August 1 – Bloomberg: “China’s crusade against capital outflows and leverage has ensnared some of the nation’s largest property investors, including Anbang Insurance Group Co… The crackdown is rippling across the world, and will likely spur an 84% slump in Chinese overseas property investment this year, and a further 18% drop in 2018, according to… Morgan Stanley. The most vulnerable real-estate markets are those in the U.S., U.K., Hong Kong and Australia, with office properties the most exposed, analysts including economist Robin Xing wrote. Manhattan is a particular worry, with about 30% of transactions in the borough that’s home to Wall Street involving Chinese parties in 2017.”

August 1 – Bloomberg: “China’s foreign-exchange regulator is examining how some of the country’s biggest dealmakers used their domestic assets as collateral to get loans overseas, people familiar with the matter said. The State Administration of Foreign Exchange recently began reviewing loan guarantees for Anbang Insurance Group Co., Dalian Wanda Group Co., Fosun International Ltd., HNA Group Co. and the Chinese owner of the AC Milan soccer team, the people said…”

July 31 – Reuters (Kevin Yao): “China's central bank will continue to force financial institutions to cut debt but ensure the process is smooth and orderly to limit its impact on market liquidity, an assistant central bank governor said… Higher short-term funding costs, driven by a regulatory crackdown on banks' riskier financing, have started to spill over into the real economy, a risk to economic stability ahead of a five-yearly leadership transition later this year. The drive to force financial institutions to deleverage… could affect the stability in market supply and demand of funding, Zhang Xiaohui wrote in the bank's China Finance magazine.”

July 31 – Reuters (Elias Glenn): “Growth in China's manufacturing quickened in July, a private survey showed on Tuesday, as output and new orders rose at the fastest pace since February on strong export sales. But even as firms boosted purchasing in anticipation of more business, employment levels at factories fell at the fastest pace in 10 months and a reading on business outlook was the lowest since last August… The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) rose to 51.1 in July… well ahead of the 50.4 in June which was also the median figure forecast…”

July 31 – Financial Times (Yuan Yang): “Multinationals in China are bracing to be cut off from the global internet as Beijing begins to shut down their only way of accessing uncensored foreign content. Companies offering virtual private network services, which bypass the country’s ‘Great Firewall’, have had their operations closed or obstructed in recent weeks — a blow to foreign groups that rely on VPN services to connect their staff to services such as Google-provided email and uncensored news. International companies are now preparing for an extended crackdown, according to Carolyn Bigg, senior lawyer at DLA Piper in Hong Kong. ‘The time for businesses to ignore these restrictions is over. The environment is changing weekly at the moment,’ she said.”

August 2 – Financial Times (Gabriel Wildau): “China’s finance ministry has acknowledged that public-private partnerships for infrastructure investment have become a vehicle for ‘disguised borrowing’ by local governments, as Beijing targets systemic risk from rising regional debt. The central government has sought to rein in runaway debt at local governments, a legacy of China’s post-2008 economic stimulus. But local officials have continued to exploit loopholes in local borrowing rules to keep infrastructure projects cashed up. The clampdown on PPP investment could add to growth headwinds for China’s economy. Infrastructure comprised 21.2% of urban fixed-asset investment in the first half — the highest share since 2010.”

July 30 – Financial Times (Louise Lucas and Sherry Fei Ju): “China’s pending regulatory crackdown on the $120bn peer-to-peer lending industry has claimed its first scalp before it has even begun, with one of the biggest players saying it will wind up its business in an industry full of bad loans and no profits. P2P lending, in which borrowers are matched with investors via online platforms, has mushroomed in the past five years, with China boasting more than 2,100 such platforms, but so too have scandals. Last year was marked by multibillion-dollar scams in China and a governance scandal that rocked New York-listed LendingClub. Beijing this month said it would delay regulations that will bar online lenders from guaranteeing principal or interest on loans they facilitate, cap the size of loans at Rmb1m for individuals and Rmb5m for companies, and force lenders to use custodian banks — a requirement only a fraction of the industry has met so far.”

Europe Watch:

July 29 – Reuters (Joseph Nasr): “The European Central Bank should start thinking about how it wants to return to normal monetary policy and when it wants to wind down it bond purchases, governing council member Sabine Lautenschlaeger said… ‘The expansionary monetary policy has both advantages and side effects. As time passes, the positive effects get weaker and the risks increase,’ she told the Mannheimer Morgen newspaper. ‘So it's important to prepare for the exit in good time. What's crucial in that context is a stable trend in the rate of inflation towards our objective of just under 2%. It's not quite there yet.’”

August 1 – Bloomberg (Catherine Bosley): “The euro-area economy expanded apace in the second quarter, a sign the bloc’s upswing is becoming increasingly robust and self-sustaining. Gross domestic product in the 19-country region rose 0.6% in the three months through June, after increasing 0.5% at the start of the year.”

August 3 – Bloomberg (Nikos Chrysoloras): “Public support for the euro rose to a 12-year high among citizens of the currency bloc, according to the… latest Eurobarometer survey… Almost three-quarters of respondents in the poll support the ‘economic and monetary union with one single currency, the euro,’ the highest reading since the fall of 2004. Adding to signs of increasing optimism, against the backdrop of a strengthening economic recovery, 56% of Europeans are now confident about the future of the EU -- an increase of six percentage points from fall 2016.”

Central Bank Watch:

August 3 – Bloomberg (David Goodman and Jill Ward): “Mark Carney said Brexit is casting the biggest shadow over the U.K.’s economic outlook, as his confidence in an orderly departure from the European Union starts to fade. The Bank of England governor’s comments follow slow progress in the initial round of exit talks after Prime Minister Theresa May lost her parliamentary majority in June. Carney said that there’s only so much monetary policy can do as the central bank cut its forecasts for economic growth and wages.”

Global Bubble Watch:

August 4 – Bloomberg (Theophilos Argitis): “Canada’s labor market continued its stellar performance in July, with the jobless rate falling to the lowest since before the financial crisis. The unemployment rate fell to 6.3%, the lowest since October 2008, as the labor market added another 10,900 jobs during the month, Statistics Canada reported from Ottawa. The total increase over the past year of 387,600 is the biggest 12-month gain since 2007.”

August 2 – Bloomberg (Katia Dmitrieva and Erik Hertzberg): “Home prices in Canada’s largest city posted their biggest monthly drop in at least 17 years in July and sales plunged as government efforts to cool the market and the near-collapse of a mortgage lender made buyers leery. The benchmark Toronto property price, which tracks a typical home over time, dropped 4.6% to C$773,000 ($613,000) from June.”

Fixed Income Bubble Watch:

August 2 – Wall Street Journal (Paul J. Davies): “The last financial crisis cleared out an alphabet soup of complex credit products. One type, however, has returned in droves in recent years, although popularity is now threatening their viability. This product is collateralized loan obligations, or CLOs, which buy portfolios of risky, leveraged loans often used by private-equity firms in buyouts. In the U.S., new CLO volumes have outstripped pre-crisis totals since 2014, while Europe is catching up to its previous levels fast. But returns from the loans they buy are getting squeezed as money from retail and institutional investors rushes in alongside CLOs to snap up loans. That could bring CLOs to a painful halt again.”

Federal Reserve Watch:

July 30 – Financial Times (Lena Komileva): “The US Federal Reserve raised rates for the third time in six months in June, even though inflation had stayed below its 2% target for much of the past decade. Why? The justification lies with the return to ‘economic normalisation’ (a more normal US growth and credit cycle), a reflationary global environment and easy financial conditions all combining to banish the extreme ‘tail risks’ of a deflationary slump that followed the financial crisis. Yet markets have been reluctant to heed the call of a return to more normal monetary conditions. Having lagged behind the Fed’s rate tightening and the discussion on shrinking its balance sheet this year, investors are still uncertain about the chances of another — well telegraphed — rate rise this year. A less than 40% probability is attached to this in the fed fund futures market. “

August 2 – Reuters (Richard Leong and Jonathan Spicer): “St. Louis Federal Reserve James Bullard is opposed to further U.S. interest rate increases by the central bank and warned that more hikes could hinder domestic inflation from achieving the Fed's 2-% goal… ‘Given the inflation outlook, which has deteriorated in 2017, I would not support further moves in the near term,’ Bullard told Market News… ‘It's possible data will turn around, but we'll have to see. I think for now we should remain on pause.’”

August 2 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester is keeping the faith that weak inflation will bounce back, even as she lowers her estimate for where unemployment begins to trigger higher prices. ‘My suspicion is it’s the idiosyncratic factors, it’s transitory and that the factors pushing down inflation are going to dissipate over time,’ Mester told reporters… ‘I still have a forecast for a gradual increase in inflation back to 2% over time.’”

August 2 – Wall Street Journal (Nick Timiraos): “Eric Rosengren, president of the Federal Reserve Bank of Boston, said increasingly tight labor markets should keep the U.S. central bank on its path to gradually raise rates and start slowly shrinking its portfolio of bonds and other assets, despite a surprising pause in inflation pressures this spring. In an interview, Mr. Rosengren said he sees ‘some reasonable risk’ that the unemployment rate drops below 4% in the next two years. ‘In my own view, that would not be sustainable,’ he said.”

U.S. Bubble Watch:

August 1 – CNBC (Diana Olick): “Home price gains are accelerating again, and in some cities those values are overheating. Four of the nation's largest cities are now considered overvalued, according to CoreLogic. Home prices in Denver, Houston, Miami and the Washington, D.C., metropolitan area now exceed sustainable levels. To determine if a market is overvalued, CoreLogic compares current prices to their long-run, sustainable levels, which are supported by local economic fundamentals like disposable income… ‘With no end to the escalation in sight, affordability is rapidly deteriorating nationally,’ said Frank Martell, president and CEO of CoreLogic.”

August 1 – Wall Street Journal (Sarah Krouse): “The fortunes of Wall Street’s cheapest and priciest funds are diverging fast. Exchange-traded funds held $1 trillion more in investor money than hedge funds globally for the first time ever at the end of June… Assets in ETFs, which trade on exchanges like stocks, first surpassed the amount of money in hedge funds two years ago and have continued to swell. Market-mimicking funds like ETFs have been helped by fresh market highs… Those gains have prodded investors already losing faith in star stock and bond pickers to plow even more money into the ultra low-cost funds.”

July 31 – CNBC (Fred Imbert): “Investors may be in for disappointing market returns in the decade to come with valuations at levels this high, if history is any indication. Analysts at Goldman Sachs Asset Management pointed out that annualized returns on the S&P 500 10 years out were in the single digits or negative 99% of the time when starting with valuations at current levels. In a chart, they point out that the S&P's cyclically adjusted price-to-earnings ratio (CAPE) is currently around its highest historical levels. CAPE is a widely followed valuation metric developed by Nobel Prize winners John Campbell and Robert Shiller.”

August 1 – CNBC (Tae Kim): “Mutual funds are piling into technology stocks to a record level, according to… Bank of America Merrill Lynch. But the overweighting may not be bullish for the sector going forward. In July ‘large cap active managers have yet again increased their positioning in tech, setting another record overweight of 25% (+5.8 percentage points) relative to the benchmark,’ strategist Savita Subramanian wrote… ‘This record overweight has helped managers beat their benchmarks so far this year, as tech continues to outperform all other sectors.’”

August 1 – Reuters (Joseph White and Paul Lienert): “U.S. carmakers said… they continued to slash low-margin sales to daily rental fleets in July as the overall pace of U.S. car and light truck sales fell for the fifth straight month. The annualized pace of U.S. car and light truck sales in July fell to 16.73 million vehicles, down from 17.8 million vehicles a year earlier…”

July 31 – Wall Street Journal (AnnaMaria Andriotis): “Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy. The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers… had increases for the quarter.”

EM Bubble Watch:

August 2 – Wall Street Journal (Julie Wernau and Carolyn Cui): “Investors have been bracing for a Venezuela debt default for more than a year, but fallout from the country’s widely criticized election last weekend could prove to be the tipping point. The government and state-owned oil company Petróleos de Venezuela SA, also known as PdVSA, together owe $5 billion in principal and interest payments due between now and the end of the year… The country has $725 million due this month alone… The problem: Venezuela only has about $3 billion of its foreign reserves in cash, according to S&P Global Ratings. That means the country is dependent on oil exports to make up the difference.”

July 31 – CNBC (Lucia Kassai, Laura Blewitt, and Nathan Crooks): “The specter of tighter U.S. sanctions is pushing up the perception that Venezuela is getting closer to defaulting on its bonds. Venezuela is awaiting possible further restrictions after the U.S., its largest trading partner, sanctioned President Nicolas Maduro after he held elections Sunday for a new assembly that will rewrite the constitution. U.S. Treasury Secretary Steven Mnuchin said in announcing the measures, including freezing Maduro’s assets in the U.S., that additional sanctions were ‘on the table.’”

July 29 – Reuters (Girish Gupta): “In a portend of steepening inflation in crisis-stricken Venezuela, money supply surged 10% in just one week earlier this month, its largest single-week rise in a quarter of a century. Venezuela is undergoing a major economic crisis, with millions suffering food shortages, monthly wages worth only the tens of U.S. dollars, and soaring inflation…”

August 2 – Bloomberg (Jeanette Rodrigues): “Business conditions in India have deteriorated the most since the global financial crisis as the roll out of a nationwide sales tax disrupted supply and distribution links just months after Prime Minister Narendra Modi’s cash ban roiled markets. The Nikkei India Composite PMI Output Index fell to 46 in July from 52.7 in June, the steepest drop since March 2009… Activity in the key services sector plunged to 45.9 from 53.1 -- the lowest since September 2013 -- after data showed manufacturing slumped the most since 2009.”

Leveraged Speculation Watch:

August 3 – Bloomberg (Simone Foxman): “Billionaire Paul Singer is warning of a growing and menacing threat: passive investing. ‘Passive investing is in danger of devouring capitalism,’ Singer wrote... ‘What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.’ Almost $500 billion flowed from active to passive funds in the first half of 2017. The founder of Elliott Management Corp. contends that passive strategies, which buy a variety of securities to match the overall performance of an index, aren’t truly ‘investing’ and that index fund providers don’t have incentive to push companies to change for the better and create shareholder value.”

August 3 – Bloomberg (Nishant Kumar, Javier Blas, and Suzy Waite): “If an oil trader so good that he was known as “God” can’t win in today’s markets, it’s hard to imagine who can. Andy Hall is closing down his main hedge fund after big losses in the first half of the year, according to people with knowledge of the matter. His flagship Astenbeck Master Commodities Fund II lost almost 30% through June… The capitulation of one of the best-known figures in the commodities industry comes after muted oil prices wrong-footed traders from Goldman Sachs Group Inc. to BP Plc’s in-house trading unit.”

August 1 – Bloomberg (Nishant Kumar and Suzy Waite): “Europe is on a mini-streak with hedge-fund investors as the prospect of faster economic growth and fading political risk help restore confidence in the region. Money pools investing across Europe attracted additional capital for the second straight month in June, following a 12-month stretch in which almost $16 billion was pulled out, according to… eVestment. The continent’s success contrasts with Asia and the U.S., where investors have pulled money from hedge funds.”

August 1 – Bloomberg (Saijel Kishan): “Paul Tudor Jones’ investors are increasingly deserting him. The billionaire macro manager who helped give rise to the hedge fund industry saw clients pull about 15% of their assets from his main fund in the second quarter… That’s left client assets at about $3.6 billion, almost half the value a year ago. The withdrawals are a blow to Jones… and exemplify the asset bleed hurting the biggest names in the business, including Alan Howard and John Paulson… Macro hedge funds have posted their worst first half since 2013, losing 0.7%, and on average returned about 1% annually in the past five years, according to Hedge Fund Research Inc.”

Geopolitical Watch:

July 31 – Reuters (Philip Wen and Ben Blanchard): “China loves peace but will never compromise on defending its sovereignty, President Xi Jinping said… while marking 90 years since the founding of the People's Liberation Army. China has rattled nerves around Asia and globally with its increasingly assertive stance in territorial disputes in the East and South China Seas and an ambitious military modernization plan. Relations with self-ruled Taiwan have also worsened since Tsai Ing-wen from the pro-independence Democratic Progressive Party won presidential elections there last year. China considers Taiwan a wayward province, to be brought under Beijing's control by force if necessary.”

August 2 – Financial Times (Emily Feng and Leo Lewis): “Xi Jinping has warned that China will not tolerate any infringement of its sovereignty or territory, in a speech delivered as the country finds itself embroiled in several territorial disputes with neighbours. ‘We will never seek aggression or expansion but we have the confidence to defeat all invasions,’ the Chinese president said in an hour-long speech on the 90th anniversary of the founding of the country’s army. ‘We will never allow any people, organisation or political party to split any part of Chinese territory out of the country.’ His comments came as Japan mounted a formal diplomatic protest to demand that China stop its renewed drilling operations in the East China Sea.”

August 4 – Associated Press: “Beijing is intensifying its warnings to Indian troops to get out of a contested region high in the Himalayas where China, India and Bhutan meet, saying China's ‘restraint has its limits’ and publicizing live-fire drills in Tibet. Indian troops entered the area in the Doklam Plateau in June after New Delhi's ally, Bhutan, complained a Chinese military construction party was building a road inside Bhutan's territory.”

July 31 – Reuters (Ben Blanchard and Elias Glenn): “China hit back on Monday after U.S. President Donald Trump tweeted he was ‘very disappointed’ in China following North Korea's latest missile test, saying the problem did not arise in China and that all sides need to work for a solution. China has become increasingly frustrated with American and Japanese criticism that it should do more to rein in Pyongyang. China is North Korea's closest ally, but Beijing, too, is angry with its continued nuclear and missile tests.”

July 29 – Reuters (James Pearson and Michelle Nichols): “The United States flew two supersonic B-1B bombers over the Korean peninsula in a show of force on Sunday and the U.S. ambassador to the United Nations said China, Japan and South Korea needed to do more after Pyongyang's latest missile tests. North Korea said it conducted another successful test of an intercontinental ballistic missiles (ICBM) on Friday that proved its ability to strike America's mainland, drawing a sharp warning from U.S. President Donald Trump. Trump's ambassador to the United Nations Nikki Haley said… that the United States was ‘done talking’ about North Korea, which was ‘not only a U.S. problem.’”

July 29 – Reuters (Babak Dehghanpisheh): “The Iranian Revolutionary Guards said… that U.S. Navy ships came close to their vessels in the Gulf and shot flares. The USS Nimitz and an accompanying warship drew close to a rocket-bearing Iranian vessel on Friday and sent out a helicopter near a number of Guards vessels… ‘The Americans made a provocative and unprofessional move by issuing a warning and shooting flares at vessels ...,’ the statement said. ‘Islam’s warriors, without paying attention to this unconventional and unusual behaviour from the American vessels, continued their mission in the area and the aircraft carrier and accompanying battleship left the area.’”

July 31 – Wall Street Journal (Julian E. Barnes, Laurence Norman and Felicia Schwartz): “The U.S. Pentagon and State Department have devised plans to supply Ukraine with antitank missiles and other weaponry and are seeking White House approval, U.S. officials said, as Kiev battles Russia-backed separatists and ties between Moscow and Washington fray. American military officials and diplomats say the arms, which they characterized as defensive, are meant to deter aggressive actions by Moscow, which the U.S. and others say has provided tanks and other sophisticated armaments as well as military advisers to rebels fighting the Kiev government.”